Who Is a Restricted Person under Finra Rule 5130

Family offices and family investment vehicles. The definition of “restricted persons” in FINRA Rule 5130 includes “portfolio managers” but excludes portfolio managers who are family investment vehicle advisors. A “portfolio manager” is defined as any person (or certain members of his or her immediate family) who is authorized to buy or sell securities on behalf of a bank, credit institution, insurance company, investment company, investment adviser or collective investment account. The rule changes align the definition of family investment vehicles with the concept of family offices in the Investment Advisers Act 1940, thereby broadening the definition of family investment vehicles. The advisors of these family investment vehicles are no longer considered “portfolio managers” within the meaning of Rule 5130 and are therefore no longer restricted persons. The amendments make a number of changes to the Terms and Exceptions to the Rules as follows: In the past, FINRA defined a “family investment vehicle” as a legal entity owned exclusively by immediate family members (largely parents, stepmother, spouse, sibling of a person, brother-in-law, son-in-law or daughter-in-law, children and any other person to whom the person provides material support.3). A person authorized to buy or sell securities for such a family investment vehicle was not considered a portfolio manager solely on the basis of that investment authorization and was therefore not considered a restricted person within the meaning of Rule 5130. The amendments expand what constitutes a family investment vehicle to more closely align with the definition of a family office under the Investment Advisers Act of 1940. FINRA Rule 5130 was introduced to ensure that an IPO is offered fairly to all public investors and does not confer any benefit on insiders or individuals in the financial sector.

FINRA Rule 5130 prohibits a member firm (broker-dealer) from selling shares of an IPO to an account in which a “restricted person” has an economic interest, subject to certain limited exceptions. PSPC. Currently, FINRA Rule 5130 excludes offers from business development corporations, direct equity programs and real estate investment funds from the definition of “new issuance.” The amendments add a new exclusion from the definition of “new issuance” for special purpose vehicle intellectual property offices (PSPCs). Prior to the amendments, the limitation on allowances to officers and directors (and persons physically supported by them) of non-listed entities covered by Rule 5131 covered officers and directors of charities. As these organisations pose a low risk of abusive spinning, the definition of “covered unlisted companies” has been amended to exclude “unaffiliated not-for-profit organisations” as defined in the rule. Accordingly, an officer or director of a tax-exempt entity organized under Section 501(c)(3) of the U.S. Internal Revenue Code and not affiliated with the FINRA member making the allocation decision is no longer subject to the restriction. The amendments extend the exemption for U.S.

employee pension plans and codify the previous relief for foreign pension plans[2] for both rules. The provision exempts an employee pension plan organized under and subject to U.S. or foreign law, provided that the plan or family of plans: (i) has at least 10,000 members and beneficiaries and $10 billion in assets; (ii) operates in a non-discriminatory manner (i.e., a wide range of employees, regardless of income or position, are eligible to participate without further change or action by the plan sponsor); (iii) is administered by a trustee or manager who has a fiduciary duty to administer the plan in the best interests of members and beneficiaries; and (iv) is not exclusively sponsored by a broker-dealer. Exclusion for foreign offers. The amended rules exclude offshore offerings from the definition of “new issue” securities under Regulation S of the Securities Act of 1933 (as well as other offerings outside the United States), unless the securities offered and sold pursuant to Regulation S or in any other form of offshore offering are made in an offering that is also registered in the United States as part of a concurrent IPO of a share. Security in the United States. Now that these changes have come into effect, dealers and asset managers must update their FINRA 5130 and 5131 rules questionnaires and/or underwriting agreements to reflect the changes resulting from the changes. In addition, investors who are invited to complete questionnaires or subscription agreements should first initiate a legal review to ensure that these documents comply with the updated requirements of the rule.

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