The Securities and Exchange Commission recently approved The Financial Industry Regulatory Authority’s (FINRA) proposed changes to NASD Rule 2790.
NASD Rule 2790 provides that, except as otherwise permitted under the Rule, (i) a member firm may not sell a new issue to an account in which a restricted person has a beneficial interest; (ii) a member firm may not purchase a new issue in any account in which such firm or associated person has a beneficial interest; and (iii) a firm may not continue to hold new issues acquired as an underwriter, selling group member, or otherwise. Rule 2790 exempts, for most purchasers, securities that are specifically directed by the issuer to be sold to that person. However, for securities directed to an account in which broker-dealer personnel, finders or fiduciaries, or certain members of their immediate family have a beneficial interest, the exemption is only applicable if such persons, or members of their immediate family, are employees or directors of the issuer, the issuer’s parent, or a subsidiary of the issuer or the issuer’s parent.
FINRA is now further limiting the exemption for issuer-directed securities in Rule 2790(d)(1) to exclude new issue securities directed to a broker-dealer.
To the extent that broker-dealer personnel have a beneficial interest in the broker-dealer, the broker-dealer would already be subject to the limitations in Rule 2790(d)(1); however, the amendments establish a much more direct prohibition against purchases of new issues by broker-dealers, even if the securities are directed by the issuer.
FINRA has also added new paragraph (d)(2) to Rule 2790, which provides that the prohibitions on the purchase and sale of new issues do not apply to securities that are specifically directed by the issuer to restricted persons, provided that a broker-dealer: (i) does not underwrite any portion of the offering; (ii) does not solicit or sell any new issue securities in the offering; and (iii) has no involvement or influence, directly or indirectly, in the issuer’s allocation decisions with respect to any of the new issue securities in the offering.
New paragraph (d)(2) would not prevent an issuer from engaging a broker-dealer to provide advisory services (such as rendering advice regarding capital structure and capital raising) or other limited services, so long as the conditions set forth in paragraph (d)(2) continue to be satisfied. In addition, for purposes of compliance with new paragraph (d)(2), a member firm or associated person that wishes to purchase new issues in such offerings may rely on a written representation obtained in good faith from the issuer that the conditions in paragraph (d)(2) are satisfied. However, the firm or associated person may not rely upon any representation from the issuer that it believes, or has reason to believe, is inaccurate.