Document ID: SEC-2019-1136-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2019-08-08T04:00Z

[Federal Register Volume 84, Number 153 (Thursday, August 8, 2019)]
[Notices]
[Pages 39029-39037]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-16942]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86558; File No. SR-FINRA-2019-022]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
FINRA Rule 5130 (Restrictions on the Purchase and Sale of Initial 
Equity Public Offerings) and FINRA Rule 5131 (New Issue Allocations and 
Distributions)

August 2, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 26, 2019, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rule 5130 (Restrictions on the 
Purchase and Sale of Initial Equity Public Offerings) and FINRA Rule 
5131 (New Issue Allocations and Distributions) to exempt additional 
persons from the scope of the rules, modify current exemptions to 
enhance regulatory consistency, address unintended operational 
impediments and exempt certain types of offerings from the scope of the 
rules.
    Specifically, the proposed rule change would: (1) Incorporate the 
definitions of ``family member'' and ``family client'' under the 
Investment Advisers Act of 1940 (``Advisers Act'')\3\ and the rules 
promulgated thereunder \4\ into the definition of ``family investment 
vehicle'' under FINRA Rule 5130(i)(4); (2) exclude sovereign entities 
that own broker-dealers from the categories of restricted persons under 
FINRA Rule 5130(i)(10)(E); (3) exempt foreign employee retirement 
benefits plans that meet specified conditions from FINRA Rules 5130 and 
5131(b) (Spinning); (4) provide alternative conditions for satisfying 
the foreign investment company exemption under FINRA Rule 5130(c)(6); 
(5) exclude offerings that are conducted pursuant to Regulation S under 
the Securities Act of 1933 (``Securities Act'') \5\ and other offerings 
outside of the United States and its territories from the definition of 
``new issue'' in FINRA Rules 5130 and 5131; (6) align FINRA Rule 
5130(d) (Issuer-Directed Securities) with a similar provision in FINRA 
Rule 5131.01 (Issuer Directed Allocations); (7) exclude unaffiliated 
charitable organizations from the definition of ``covered non-public 
company'' in FINRA Rule 5131(e)(3); and (8) add an anti-dilution 
provision for purposes of FINRA Rule 5131(b), similar to the provision 
in FINRA Rule 5130(e) (Anti-Dilution Provisions).
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    \3\ 15 U.S.C. 80b-2(a)(11)(G).
    \4\ 17 CFR 275.202(a)(11)(G)-1.
    \5\ 17 CFR 230.901, et seq.
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    The text of the proposed rule change is available on FINRA's 
website at http://www.finra.org, at the principal office of FINRA and 
at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    FINRA Rule 5130 protects the integrity of the public offering 
process by ensuring that: (1) Members make bona fide public offerings 
of securities at the offering price; (2) members do not withhold 
securities in a public offering for their own benefit or use such 
securities to reward persons who are in a position to direct future 
business to members; and (3) industry insiders, including members and 
their associated persons, do not take advantage of their insider 
position to purchase new issues \6\ for their own benefit at the 
expense of public customers. Paragraph (a) of Rule 5130 provides that, 
except as otherwise permitted under the rule: (1) A member (or an 
associated person) may not sell a new issue to an account in which a 
restricted person \7\ has a beneficial interest; \8\ (2) a member (or 
an associated person) may not purchase a new issue in any account in 
which such member or associated person has a beneficial interest; and 
(3) a member may not continue to hold new issues acquired as an 
underwriter, selling group member, or otherwise.
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    \6\ ``New issue'' means any initial public offering (``IPO'') of 
an equity security as defined in Section 3(a)(11) of the Act, made 
pursuant to a registration statement or offering circular, subject 
to some exceptions. See FINRA Rules 5130(i)(9) and 5131(e)(7).
    \7\ The term ``restricted person'' includes the following 
categories of persons: (1) Broker-dealers; (2) broker-dealer 
personnel; (3) finders and fiduciaries; (4) portfolio managers; and 
(5) persons owning a broker-dealer. See FINRA Rule 5130(i)(10).
    \8\ ``Beneficial interest'' means any economic interest, such as 
the right to share in gains or losses. The receipt of a management 
or performance based fee for operating a collective investment 
account, or other fees for acting in a fiduciary capacity, is not 
considered a beneficial interest in the account. See FINRA Rule 
5130(i)(1).
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    FINRA Rule 5131 addresses abuses in the allocation and distribution 
of new issues. Among other things, the rule prohibits the practice of 
``spinning,'' which is the allocation of new issues by a firm to 
executive officers and directors of the firm's current, former or 
prospective investment banking clients.
    In April 2017, FINRA published Regulatory Notice 17-14 (Capital 
Formation) seeking comment on the effectiveness and efficiency of its 
rules, operations and administrative processes governing broker-dealer 
activities related to the capital-raising process and their impact on 
capital formation.\9\ In

[[Page 39030]]

response to the Notice, two commenters requested that FINRA consider 
amending Rules 5130 and 5131 to remove certain impediments to capital 
formation that are unnecessary to protect investors.\10\ In addition, 
based on FINRA's experience with the rules since their adoption, FINRA 
believes that amendments to Rules 5130 and 5131 are appropriate to 
address the impact of the rules on family offices, sovereign entities, 
foreign employee retirement benefits plans, foreign investment 
companies and executive officers and directors of charitable 
organizations. FINRA is proposing to amend Rules 5130 and 5131 in 
response to the comments it received based on Regulatory Notice 17-14 
as well as FINRA's experience with the rules.
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    \9\ The comment period closed on May 30, 2017. FINRA received 11 
comment letters in response to the Notice. The Notice and the 
comment letters are available at http://www.finra.org/industry/notices/17-14.
    \10\ Sean Davy, Managing Director, Capital Markets Division, 
Securities Industry and Financial Markets Association (``SIFMA'') 
and Sullivan & Cromwell LLP (``Sullivan & Cromwell'').
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Family Offices
    The definition of ``restricted person'' in FINRA Rule 5130 includes 
portfolio managers, who are persons with the authority to buy or sell 
securities for, among other entities, a collective investment 
account.\11\ The term ``collective investment account'' \12\ currently 
excludes a ``family investment vehicle,'' which, in turn, is defined as 
a legal entity that is beneficially owned solely by immediate family 
members.\13\ Accordingly, under the rule, a person with the authority 
to buy or sell securities for an account that is beneficially owned 
only by ``immediate family members,'' as defined, is not considered a 
portfolio manager based solely on that investment authority and, 
therefore, is not a restricted person. FINRA excluded such persons from 
the definition of ``portfolio manager'' because family investment 
vehicles are often established for tax and estate planning purposes and 
do not manage money for unrelated persons.\14\
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    \11\ See FINRA Rule 5130(i)(10)(D) (Portfolio Managers). The 
definition of ``portfolio manager'' also includes any immediate 
family member of a portfolio manager who materially supports, or 
receives material support from, the portfolio manager. The term 
``material support'' is defined as directly or indirectly providing 
more than 25 percent of a person's income in the prior calendar 
year. Members of the immediate family living in the same household 
are deemed to be providing each other with material support. See 
FINRA Rule 5130(i)(8).
    \12\ See FINRA Rule 5130(i)(2).
    \13\ See FINRA Rule 5130(i)(4). The term ``immediate family 
member'' is defined as a person's parents, mother-in-law or father-
in-law, spouse, brother or sister, brother-in-law or sister-in-law, 
son-in-law or daughter-in-law, and children, and any other 
individual to whom the person provides material support. See FINRA 
Rule 5130(i)(5).
    \14\ See Securities Exchange Act Release No. 42325 (January 10, 
2000), 5 FR 2656, 2660 (January 18, 2000) (Notice of Filing File No. 
SR-NASD-99-60) (``Notice of New Issue Rule Filing'').
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    FINRA is proposing to expand the definition of ``family investment 
vehicle'' under Rule 5130 to include entities that are beneficially 
owned solely by ``family members'' and ``family clients,'' which are 
terms used in the family office context and are defined in Advisers Act 
Rule 202(a)(11)(G)-1.\15\ FINRA believes that an expansion that will 
further regulatory consistency without undermining investor protection 
is appropriate. As a result, the proposed rule change will incorporate 
these definitions into the definition of ``family investment vehicle'' 
under Rule 5130, subject to some limitations.
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    \15\ See 17 CFR 275.202(a)(11)(G)-1.
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    Family offices are entities established by families to manage their 
wealth and provide other services to family members and are excluded 
from the definition of ``investment adviser'' and, thus, are not 
subject to regulation under the Advisers Act.\16\ The Advisers Act 
defines a ``family office'' as a company that, among other conditions, 
is wholly owned by family clients.\17\ The term ``family client'' \18\ 
includes, among other defined persons, ``family members'' \19\ as well 
as ``key employees'' \20\ of the family office.
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    \16\ See 15 U.S.C. 80b-2(a)(11)(G); Family Offices, Advisers Act 
Release No. 3220 (June 22, 2011), 76 FR 37983 (June 29, 2011).
    \17\ 17 CFR 275.202(a)(11)(G)-1(b)(2).
    \18\ 17 CFR 275.202(a)(11)(G)-1(d)(4).
    \19\ The term ``family member'' is defined as all lineal 
descendants (including by adoption, stepchildren, foster children, 
and individuals that were a minor when another family member became 
a legal guardian of that individual) of a common ancestor (who may 
be living or deceased), and such lineal descendants' spouses or 
spousal equivalents; provided that the common ancestor is no more 
than 10 generations removed from the youngest generation of family 
members. See 17 CFR 275.202(a)(11)(G)-1(d)(6).
    \20\ The term ``key employee'' is defined as any natural person 
(including any key employee's spouse or spouse equivalent who holds 
a joint, community property, or other similar shared ownership 
interest with that key employee) who is an executive officer, 
director, trustee, general partner, or person serving in a similar 
capacity of the family office or its affiliated family office or any 
employee of the family office or its affiliated family office (other 
than an employee performing solely clerical, secretarial, or 
administrative functions with regard to the family office) who, in 
connection with his or her regular functions or duties, participates 
in the investment activities of the family office or affiliated 
family office, provided that such employee has been performing such 
functions and duties for or on behalf of the family office or 
affiliated family office, or substantially similar functions or 
duties for or on behalf of another company, for at least 12 months. 
See 17 CFR 275.202(a)(11)(G)-1(d)(8).
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    Although they overlap in significant respects, differences exist 
between a family investment vehicle under FINRA Rule 5130 and the 
family office concept under the Advisers Act. These differences create 
inconsistencies, which do not further the purposes of FINRA Rule 5130, 
with respect to the treatment of family offices under the two regimes. 
For example, the definition of ``immediate family member'' under FINRA 
Rule 5130 includes a person's parents, mother-in-law or father-in-law, 
spouse, brother or sister, brother-in-law or sister-in-law, son-in-law 
or daughter-in-law and children, whereas the definition of ``family 
member'' under the Advisers Act includes lineal descendants of a common 
ancestor and the lineal descendants' spouses or spousal 
equivalents.\21\ As a result, and by way of example, the inclusion of 
grandchildren or grandparents in a collective investment account will 
not disqualify the account from the family office designation under the 
Advisers Act on that basis, but would cause such an account to fall 
outside of the definition of ``family investment vehicle'' under FINRA 
Rule 5130.
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    \21\ See 17 CFR 275.202(a)(11)(G)-1(d)(6); supra note 19.
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    Another difference is that the terms ``immediate family member'' 
and ``family client'' each address categories of non-family members; 
however, they do so in different ways. Specifically, the definition of 
``immediate family member'' under FINRA Rule 5130 includes any 
individual to whom the person provides material support, which could 
encompass non-family members.\22\ The definition of ``family client'' 
under the Advisers Act includes key employees of the family office, 
which may also cover non-family members but not necessarily only those 
non-family members who receive material support.\23\ As a result of 
this difference, a person who has the authority to buy or sell 
securities for an account that is beneficially owned by family clients 
could be considered a portfolio manager based exclusively on that 
investment authority, and thus a restricted person under FINRA Rule 
5130.
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    \22\ See supra note 13.
    \23\ See supra note 20.
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    Given the significant overlap between these concepts, and FINRA's 
belief that the differences do not serve the purposes of the rule, 
FINRA is proposing to incorporate the definitions of ``family member'' 
and ``family client'' under the Advisers Act into the definition of 
``family investment vehicle'' under Rule 5130, subject to

[[Page 39031]]

some limitations. Specifically, the proposed rule change would amend 
FINRA Rule 5130(i)(4) to define a ``family investment vehicle'' as a 
legal entity that is beneficially owned solely by one or more of the 
following persons: (1) ``Immediate family members'' as defined under 
FINRA Rule 5130(i)(5); (2) ``family members'' as defined under Advisers 
Act Rule 202(a)(11)(G)-1(d)(6); or (3) ``family clients'' as defined 
under Advisers Act Rule 202(a)(11)(G)-1(d)(4); \24\ provided, however, 
that where the beneficial owners of such an entity include family 
clients, the person who has the sole authority to buy or sell 
securities for such an entity is an ``immediate family member'' as 
defined in FINRA Rule 5130(i)(5) or a ``family member'' as defined in 
Advisers Act Rule 202(a)(11)(G)-1(d)(6).
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    \24\ As noted above, the term ``family client'' includes not 
only family members but others, including key employees. See 17 CFR 
275.202(a)(11)(G)-1(d)(4). Therefore, a family investment vehicle 
that is beneficially owned solely by family clients may include 
beneficial owners that are not family members.
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    The first category would preserve the current exception in FINRA 
Rule 5130 and would provide relief from portfolio manager status under 
the rule for a person who has the authority to buy or sell securities 
for an account that is beneficially owned only by immediate family 
members. The second category would provide relief from portfolio 
manager status under the rule for a person who has the authority to buy 
or sell securities for an account that is beneficially owned only by 
``family members,'' as defined in the Advisers Act. The third category 
would provide relief from portfolio manager status under the rule for a 
person who has the authority to buy or sell securities for an account 
that is owned only by ``family clients,'' as defined in the Advisers 
Act. In addition, the proposed rule change would provide relief to a 
legal entity that is beneficially owned by any combination of these 
categories.
    However, the proposed rule change contains an important caveat 
where the beneficial owners are not solely immediate family members or 
family members under FINRA Rule 5130(i)(5) or Advisers Act Rule 
202(a)(11)(G)-1(d)(6), respectively. Specifically, in such cases, the 
proposed rule change would only provide relief from portfolio manager 
status if the person who has the authority to buy or sell securities 
for the account is an ``immediate family member,'' as defined in FINRA 
Rule 5130, or a ``family member,'' as defined in the Advisers Act.\25\ 
FINRA believes that it is necessary to impose this condition to 
safeguard against the abuses the rule is designed to address and to 
ensure that, for purposes of Rule 5130, the person who has the 
authority to buy or sell securities for the account is more closely 
aligned with the family than with key employees or others associated 
with the family office. FINRA believes that the proposed rule change 
strikes the proper balance between the treatment of family investment 
vehicles in FINRA Rule 5130 and the recognition of the family office 
exemption under the Advisers Act.
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    \25\ Further, the proposed relief is only with respect to a 
person's status as a portfolio manager under FINRA Rule 5130. The 
proposed relief does not extend to a person who has a beneficial 
interest in a family investment vehicle and is a restricted person 
based on his or her other activities, such as an associated person 
of a member.
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Sovereign Entities
    The definition of ``restricted person'' in FINRA Rule 5130 
includes, among others, direct and indirect owners of broker-dealers 
that are listed, or required to be listed, on Schedules A and B of Form 
BD (Uniform Application for Broker-Dealer Registration) and that have 
an ownership interest above specified thresholds.\26\ The definition of 
``restricted person'' includes owners of broker-dealers because the 
prohibition on purchases of new issues by a broker-dealer could be 
circumvented if the owners of a broker-dealer were permitted to 
purchase new issues.\27\
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    \26\ See FINRA Rule 5130(i)(10)(E) (Persons Owning a Broker-
Dealer). FINRA Rule 5130 also provides an exception for an owner of 
a ``limited business broker-dealer,'' which is defined as a broker-
dealer whose authorization to engage in the securities business is 
limited solely to the purchase and sale of investment company/
variable contracts securities and direct participation program 
securities. See FINRA Rules 5130(i)(7) and 5130(i)(10)(E).
    \27\ See Securities Exchange Act Release No. 48701 (October 24, 
2003), 68 FR 62126, 62133 (October 31, 2003) (Order Approving File 
No. SR-NASD-99-60) (``New Issue Rule Approval Order'').
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    A sovereign wealth fund (``SWF'') is a pool of capital or an 
investment fund owned or controlled by a sovereign nation and created 
for the purpose of making investments on behalf of the sovereign 
nation.\28\ Occasionally, an SWF or sovereign nation (collectively, a 
``sovereign entity'') may acquire a direct or an indirect ownership 
stake in a registered broker-dealer, requiring the sovereign entity to 
be listed on Schedule A or B of Form BD. Moreover, the sovereign 
entity's ownership interest could exceed the specified thresholds in 
FINRA Rule 5130(i)(10)(E), which would make the sovereign entity a 
restricted person.
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    \28\ There is no standard definition of the term ``sovereign 
wealth fund,'' and the term is not defined under the federal 
securities laws. See, e.g., Celeste Cecelia Moles Lo Turco, 
Sovereign Wealth Funds: From Transparency to Sustainability, 
Sovereign Wealth Funds Law Centre, Bi-Annual Legal Report, October 
2013 (noting the absence of a commonly accepted definition of 
``sovereign wealth fund'').
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    Rule 5130(i)(10)(E) was not intended to encompass sovereign 
entities that acquire an ownership interest in a registered broker-
dealer. Instead, as discussed above, the inclusion of owners of broker-
dealers in the categories of restricted persons was intended to prevent 
circumvention of the prohibition on purchases of new issues by broker-
dealers. FINRA believes that sovereign entities are unlikely to 
circumvent the rule's prohibition by reallocating new issue shares to 
broker-dealers and are inherently not designed for such a purpose. 
Further, FINRA notes that significant investments by sovereign entities 
currently are subject to distinct legal and regulatory 
requirements.\29\
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    \29\ For example, specific investments by sovereign entities in 
the United States that raise national security concerns are subject 
to review by the Committee on Foreign Investment in the United 
States (CFIUS). CFIUS is an interagency committee of the federal 
government chaired by the Department of the Treasury and authorized 
to review transactions that could result in control of a U.S. 
business by a foreign person to determine the effect of such 
transactions on the national security of the United States. See 31 
CFR 800.
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    To address the unintended application of FINRA Rule 5130 to 
sovereign entities, the proposed rule change would exclude sovereign 
entities from the scope of owners of broker-dealers under Rule 
5130(i)(10)(E). The proposed exclusion would not apply to affiliates of 
sovereign entities that are otherwise restricted. Accordingly, while a 
sovereign entity that owns a broker-dealer would not be considered a 
restricted person under the proposed rule change, the broker-dealer 
would continue to be a restricted person under FINRA Rule 5130.
    The proposed rule change would also amend FINRA Rule 5130(i) 
(Definitions) to define the term ``sovereign entity'' for purposes of 
the rule as ``a sovereign nation or a pool of capital or an investment 
fund owned or controlled by a sovereign nation and created for the 
purpose of making investments on behalf of the sovereign nation.'' The 
proposed rule change would further define the term ``sovereign nation'' 
as ``a sovereign nation or its political subdivisions, agencies or 
instrumentalities.''
Foreign Employee Retirement Benefits Plans
    FINRA Rule 5130(c)(7) provides a general exemption from the rule's 
prohibitions for an Employee Retirement Income Security Act

[[Page 39032]]

(``ERISA'') benefits plan that is qualified under Section 401(a) of the 
Internal Revenue Code (``IRC''), provided that the plan is not 
sponsored solely by a broker-dealer. Employee retirement benefits plans 
that are organized under and governed by foreign laws, even when 
similar to qualifying ERISA plans in all material respect, are not 
subject to ERISA and do not qualify for the exemption in FINRA Rule 
5130(c)(7).\30\ Because foreign employee retirement benefits plans may 
invest in assets on behalf of potentially hundreds of thousands of 
participants and beneficiaries, such plans may be unable to determine 
whether persons with a beneficial interest are restricted persons under 
FINRA Rule 5130. As a result, such plans may find it impossible to 
assess whether they may permissibly invest in new issues. Currently, 
FINRA Rule 5130 does not include a general exemption for foreign 
employee retirement benefits plans, although FINRA has previously 
acknowledged that such an exemption may be appropriate.\31\
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    \30\ ERISA explicitly excludes from coverage employee benefit 
plans that are ``maintained outside of the United States primarily 
for the benefit of persons substantially all of whom are nonresident 
aliens.'' 29 U.S.C. 1003(b)(4).
    \31\ See Restrictions on the Purchase and Sale of Initial Equity 
Public Offerings Amendment No. 3, File No. SR-NASD-99-60 (March 19, 
2001), http://www.finra.org/sites/default/files/RuleFiling/p000150.pdf.
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    In recent years, FINRA staff has granted several requests for 
exemption from the rule for foreign employee retirement benefits 
plans.\32\ In each case, the foreign employee retirement benefits plans 
were organized under and governed by foreign laws, had an extensive 
number of participants and beneficiaries and significant assets in the 
employer's retirement fund or family of retirement funds, and were 
administered by trustees and managers that have a fiduciary obligation 
to administer the funds in the best interests of the participants and 
beneficiaries. Under these circumstances, the plans stated that the 
funds plainly could not serve as a conduit for restricted persons to 
purchase new issues. FINRA staff agreed that the concerns underlying 
the rule were not served in light of those circumstances and, as such, 
FINRA staff granted exemptions from FINRA Rule 5130 in connection with 
the foreign employee retirement benefits plans.
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    \32\ See Letter from Gary L. Goldsholle, FINRA, to Edward A. 
Kwalwasser, Proskauer Rose LLP, dated December 7, 2010, http://www.finra.org/industry/exemptive-letters/december-7-2010-1200am; 
Letter from Afshin Atabaki, FINRA, to Christopher M. Wells, 
Proskauer Rose LLP, dated November 2, 2012, http://www.finra.org/industry/exemptive-letters/november-2-2012-1200am; Letter from 
Meredith Cordisco, FINRA, to Amy Natterson Kroll, Morgan, Lewis & 
Bockius LLP, dated July 23, 2015, http://www.finra.org/industry/exemptive-letters/july-23-2015-1200am; and Letter from Meredith 
Cordisco, FINRA, to Amy Natterson Kroll, Morgan, Lewis & Bockius 
LLP, dated April 16, 2018, http://www.finra.org/industry/exemptive-letters/april-16-2018-1200am.
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    FINRA is proposing to codify this position by amending FINRA Rule 
5130(c) (General Exemptions) to provide an exemption for an employee 
retirement benefits plan organized under and governed by the laws of a 
foreign jurisdiction, provided that such a plan or family of plans: (1) 
Has, in aggregate, at least 10,000 participants and beneficiaries and 
$10 billion in assets; (2) is operated in a non-discriminatory manner 
insofar as a wide range of employees, regardless of income or position, 
are eligible to participate without further amendment or action by the 
plan sponsor;\33\ (3) is administered by trustees and managers that 
have a fiduciary obligation to administer the funds in the best 
interests of the participants and beneficiaries; and (4) is not 
sponsored by a broker-dealer. Under these conditions, FINRA believes 
that the plan(s) are not likely to serve as a conduit for circumventing 
the rule. In addition, FINRA believes that the rationale for exempting 
ERISA benefits plans applies equally to foreign benefits plans when 
these conditions are met, and such plans should be afforded similar 
treatment under the rule.
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    \33\ The definition of ``broad-based foreign retirement plan'' 
under Section 409A of the IRC includes a substantially similar 
condition. See 26 CFR 1.409A-1(a)(3)(v)(A). Section 409A imposes 
restrictions on the deferral of compensation by employees, directors 
and independent contractors. Section 409A provides an exemption for 
compensation deferred under certain broad-based foreign retirement 
plans.
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    Finally, FINRA Rule 5131(b)(2) sets forth the exemptions applicable 
to the spinning provision. The exemptions generally correspond to those 
under FINRA Rule 5130(c). Therefore, in conjunction with adding foreign 
employee retirement benefits plans to Rule 5130(c), FINRA is also 
proposing to amend Rule 5131(b)(2) to add a corresponding exemption to 
that rule. This proposed change will minimize unnecessary regulatory 
burdens without undermining the rule's stated objective, as the 
practice of spinning is unlikely to occur in connection with a covered 
person's beneficial interest in a foreign employee retirement benefits 
plan.
Alternative Conditions for Foreign Investment Company Exemption
    Paragraph (c)(6) of FINRA Rule 5130 currently exempts sales to and 
purchases by an investment company organized under the laws of a 
foreign jurisdiction, provided that: (1) The investment company is 
listed on a foreign exchange for sale to the public or authorized for 
sale to the public by a foreign regulatory authority; and (2) no person 
owning more than five percent of the shares of the investment company 
is a restricted person. The foreign investment company exemption is 
intended to apply to foreign investment companies that are similar to 
U.S. registered investment companies, which are currently exempt from 
FINRA Rule 5130's prohibitions.\34\
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    \34\ See FINRA Rule 5130(c)(1).
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    The purpose of the five percent condition is to prevent purchases 
of new issues by foreign investment companies with concentrated 
ownership interests of restricted persons.\35\ However, based on 
FINRA's experience with the rule, including informal discussions with 
industry groups and market participants in the years since the rule's 
adoption, FINRA understands that it is operationally impractical for a 
foreign investment company to determine whether an investor owns more 
than five percent of its shares where the investor acquires his or her 
interest through an intermediary that then holds the shares for 
multiple investors in an omnibus or nominee account as distinguished 
from an account that holds shares of a single investor. Further, an 
investor may acquire shares of a foreign investment company through 
multiple intermediaries or through multiple omnibus or nominee accounts 
at the same intermediary. In such cases, foreign investment companies 
are not able to satisfy the five percent condition.
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    \35\ See New Issue Approval Order, 68 FR at 62138.
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    When FINRA (then NASD) originally proposed the foreign investment 
company exemption as part of NASD Rule 2790 (Restrictions on the 
Purchase and Sale of Initial Equity Public Offerings), the exemption 
included an additional condition that required the foreign investment 
company to have 100 or more investors.\36\ During the rulemaking 
process, however, FINRA determined to simplify the exemption by 
eliminating the 100 investor requirement because the condition 
addressed the same concerns about concentration of ownership as the 
five percent condition.\37\
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    \36\ See Notice of New Issue Rule Filing, 5 FR at 2657.
    \37\ See New Issue Approval Order, 68 FR at 62137.
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    Given the operational issues raised by the five percent condition, 
FINRA is

[[Page 39033]]

proposing to amend Rule 5130(c)(6) to provide the following two 
alternative methods to establish that a foreign investment company is 
widely held for purposes of the rule: (1) The investment company has 
100 or more direct investors; or (2) the investment company has 1,000 
or more indirect investors.\38\ FINRA believes that satisfying either 
of these two conditions would also assuage concerns about concentration 
of ownership. The proposed rule change would also add a condition to 
paragraph (c)(6) to ensure that the foreign investment company is not 
formed for the specific purpose of investing in new issues.
---------------------------------------------------------------------------

    \38\ As noted above, in some jurisdictions, investors may invest 
through layers of intermediaries, with the legal ownership held by 
nominees. FINRA believes that a foreign investment company would be 
considered to be widely held on an indirect basis if it has 1,000 or 
more indirect investors.
---------------------------------------------------------------------------

    Therefore, as proposed, paragraph (c)(6) of FINRA Rule 5130 would 
exempt sales to and purchases by an investment company organized under 
the laws of a foreign jurisdiction, provided that: (1) The investment 
company is listed on a foreign exchange for sale to the public or 
authorized for sale to the public by a foreign regulatory authority; 
(2) no person owning more than five percent of the shares of the 
investment company is a restricted person, the investment company has 
100 or more direct investors, or the investment company has 1,000 or 
more indirect investors; and (3) the investment company was not formed 
for the specific purpose of investing in new issues.\39\
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    \39\ The proposed rule change also impacts an identical 
exemption cross referenced in paragraph (b)(2) of FINRA Rule 5131. 
The proposed rule change would not undermine the objectives of the 
spinning provision, as spinning would be unlikely to occur in 
connection with a foreign investment company when the proposed 
conditions are met.
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Exclusion for Foreign Offerings
    As noted above, for purposes of FINRA Rules 5130 and 5131, the term 
``new issue'' means any IPO of an equity security as defined in Section 
3(a)(11) of the Act, made pursuant to a registration statement or 
offering circular, subject to some exceptions.\40\ Currently, the 
definition is not expressly limited to domestic securities offerings. 
Accordingly, the rules could apply to foreign offerings, even if a safe 
harbor is available for those offerings under the Securities Act, to 
the extent that a member or an associated person is participating in 
the offering or receiving allocations of new issues as an investor.\41\
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    \40\ See Rules 5130(i)(9) and 5131(e)(7). The definition of 
``new issue'' does not include, among others, offerings made 
pursuant to an exemption under Section 4(1), 4(2) or 4(6) of the 
Securities Act, or Securities Act Rule 504 if the securities are 
``restricted securities'' under Securities Act Rule 144(a)(3), or 
Rule 144A or Rule 505 or Rule 506 adopted thereunder. See Rule 
5130(i)(9)(A).
    \41\ See Notice to Members 03-79 (December 2003) at n.13.
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    In connection with Regulatory Notice 17-14, SIFMA and Sullivan & 
Cromwell requested that FINRA expressly exclude from Rules 5130 and 
5131 offerings that are conducted pursuant to Regulation S, which 
provides a safe harbor from the registration requirements of the 
Securities Act for offshore offers and sales of securities. SIFMA 
suggested that FINRA's goals of investor protection and fostering fair 
public capital markets are not present when members are participating 
in transactions conducted wholly offshore, and Sullivan & Cromwell 
stated that such a carve-out would provide clarity to the industry.\42\ 
Some foreign jurisdictions may not restrict market participants, such 
as broker-dealers, from purchasing IPO shares for their own account. By 
prohibiting members and associated persons from purchasing IPO shares 
in foreign offerings, the current rule may indirectly impede the 
capital formation process in those foreign jurisdictions. Further, 
Regulation S offerings are currently excluded from the definition of 
``public offering'' for purposes of FINRA Rules 5110 (Corporate 
Financing Rule--UnderwritingTerms and Arrangements) and 5121 (Public 
Offerings of Securities With Conflicts of Interest). FINRA believes 
that an exclusion from Rules 5130 and 5131 for Regulation S offerings 
is also appropriate. In addition, FINRA believes that the exclusion 
should be extended to other offerings made outside of the United States 
or its territories and not just those that are expressly designated as 
Regulation S offerings.
---------------------------------------------------------------------------

    \42\ See SIFMA at 8; Sullivan & Cromwell at 7-8.
---------------------------------------------------------------------------

Issuer-Directed Securities
    FINRA Rules 5130(d) and 5131.01 each contain exemptive provisions 
for new issue allocations that are directed by an issuer, when 
specified conditions are met, because the regulatory concerns that the 
rules are designed to address are not present with respect to 
allocations of securities that are not controlled by an underwriter. 
However, these exemptions are not identical, in that FINRA Rule 5131 
exempts allocations directed by affiliates and selling shareholders, 
while FINRA Rule 5130 does not.
    In response to Regulatory Notice 17-14, SIFMA requested better 
alignment of these provisions.\43\ FINRA agrees that a conforming 
change to FINRA Rule 5130(d) to more closely align the rule with the 
issuer-directed provision in FINRA Rule 5131.01 will provide regulatory 
consistency without negatively impacting investor protection or the 
integrity of the market for new issues and would not impact the 
spinning provision of Rule 5131. Specifically, the proposed rule change 
would amend paragraphs (d)(1) and (d)(2) of Rule 5130 to expand the 
exemption for issuer-directed securities to allocations directed by 
affiliates and selling shareholders of the issuer. The change will also 
clarify that the exemption applies to shares that are specifically 
directed in writing by the issuer.
---------------------------------------------------------------------------

    \43\ See SIFMA at 7, n.10.
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Exclusion for Unaffiliated Charitable Organizations
    As noted above, paragraph (b) of FINRA Rule 5131 prohibits the 
practice of ``spinning,'' which is the allocation of new issues to 
executive officers and directors of current and certain former or 
prospective investment banking clients. The spinning provision provides 
that no member or person associated with a member may allocate shares 
of a new issue to any account in which an executive officer or director 
of a public
    company \44\ or a covered non-public company,\45\ or a person 
materially supported \46\ by such executive officer or director, has a 
beneficial interest: \47\ (1) If the company is currently an investment 
banking services client of the member or the member has received 
compensation from the company for investment banking services in the 
past 12 months; (2) if the person responsible for making the allocation 
decision knows or has reason to know that the

[[Page 39034]]

member intends to provide, or expects to be retained by the company 
for, investment banking services within the next three months; or (3) 
on the express or implied condition that such executive officer or 
director, on behalf of the company, will retain the member for the 
performance of future investment banking services.
---------------------------------------------------------------------------

    \44\ FINRA Rule 5131(e)(1) defines ``public company'' as ``any 
company that is registered under Section 12 of the Exchange Act or 
files periodic reports pursuant to Section 15(d) thereof.'' See 
FINRA Rule 5131(e)(1).
    \45\ The term ``covered non-public company'' means any non-
public company satisfying the following criteria: (1) Income of at 
least $1 million in the last fiscal year or in two of the last three 
fiscal years and shareholders' equity of at least $15 million; (2) 
shareholders' equity of at least $30 million and a two-year 
operating history; or (3) total assets and total revenue of at least 
$75 million in the latest fiscal year or in two of the last three 
fiscal years. See FINRA Rule 5131(e)(3).
    \46\ Similar to the definition in FINRA Rule 5130(i)(8), FINRA 
Rule 5131 defines ``material support'' to mean directly or 
indirectly providing more than 25 percent of a person's income in 
the prior calendar year. Persons living in the same household are 
deemed to be providing each other with material support. See FINRA 
Rule 5131(e)(6).
    \47\ The term ``beneficial interest'' has the same meaning as in 
FINRA Rule 5130. See FINRA Rule 5131(e)(2).
---------------------------------------------------------------------------

    Because executive officers and directors are often in a position to 
hire members on behalf of the companies they serve, allocating new 
issues to such persons creates the appearance of impropriety and has 
the potential to divide the loyalty of the executive officers and 
directors from the company on whose behalf they must act. Industry 
groups and market participants have noted that these same concerns are 
not implicated in the case of executive officers and directors of 
charitable organizations. However, due to their asset size, some 
charitable organizations fall within the definition of a covered non-
public company, making executives or directors of such organizations 
the subject of the rule's prohibition. FINRA believes that charitable 
organizations are not likely to generate significant investment banking 
business and, thus, there is a low risk, if any, that improper 
incentives would motivate a member's or an associated person's decision 
to allocate shares to the account of executive officers or directors of 
such organizations.
    FINRA is proposing to amend paragraph (e)(3) of Rule 5131 
(Definitions) to exclude unaffiliated charitable organizations, as that 
term is elsewhere defined in the rule,\48\ from the definition of 
``covered non-public company.'' As a result of this proposed amendment, 
an executive officer or director of a charitable organization that is 
not affiliated with the member allocating IPO shares would not become 
the subject of the rule's spinning provision solely on the basis of 
that service.
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    \48\ An ``unaffiliated charitable organization'' is a tax-exempt 
entity organized under Section 501(c)(3) of the IRC that is not 
affiliated with the member and for which no executive officer or 
director of the member, or person materially supported by such 
executive officer or director, is an individual listed or required 
to be listed on Part VII of Internal Revenue Service Form 990 (i.e., 
officers, directors, trustees, key employees, highest compensated 
employees and certain independent contractors). See FINRA Rule 
5131(e)(9).
---------------------------------------------------------------------------

Addition of Anti-Dilution Provision to FINRA Rule 5131
    FINRA Rule 5130 allows restricted persons that are existing equity 
owners of an issuer to purchase shares of the issuer in a public 
offering in order to maintain their equity ownership position. However, 
FINRA Rule 5131 currently does not include a similar anti-dilution 
provision for executive officers and directors who are subject to the 
prohibition on spinning set forth in Rule 5131(b). In response to 
Regulatory Notice 17-14, SIFMA urged FINRA to create symmetry between 
the rules by adding an anti-dilution provision for purposes of Rule 
5131(b).\49\ FINRA agrees that executive officers and directors of 
public companies and covered non-public companies who are subject to 
Rule 5131's spinning provision should be able to maintain the same 
equity ownership level that they held prior to the offering. 
Accordingly, the proposed rule change would amend Rule 5131 to add an 
anti-dilution provision to the rule similar to the one in Rule 5130(e), 
and would thus allow an executive officer or director of a public 
company or a covered non-public company (or a person materially 
supported by such a person) to retain the percentage equity ownership 
in the issuer at a level up to the ownership interest as of three 
months prior to the filing of the registration statement, provided that 
the other conditions are met.
---------------------------------------------------------------------------

    \49\ See SIFMA at 7, n.10. In addition, SIFMA requested that 
FINRA consider amending Rule 5131(d)(3) (Agreement Among 
Underwriters) relating to the treatment of returned shares to allow 
members the option of selling such shares in the secondary market 
and donating profits anonymously to an unaffiliated charity when a 
syndicate short position exists, consistent with a similar option 
when no syndicate short position exists. See SIFMA 8-9. FINRA 
considered this comment and has determined not to proceed with any 
changes to Rule 5131(d)(3).
---------------------------------------------------------------------------

    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice to be published no later than 60 days following Commission 
approval. The effective date will be no later than 30 days following 
publication of the Regulatory Notice announcing Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\50\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the proposed rule change will 
further these purposes by promoting capital formation and aiding member 
compliance efforts, while maintaining the integrity of the public 
offering process and investor confidence in the capital markets.
---------------------------------------------------------------------------

    \50\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.
Economic Impact Assessment
    FINRA has undertaken an economic impact assessment, as set forth 
below, to further analyze the regulatory need for the proposed rule 
change, the economic baseline of analysis, the economic impact and the 
alternatives considered.
1. Regulatory Need
    Based upon FINRA's experience with Rules 5130 and 5131, as well as 
input from industry groups and market participants regarding practical 
and operational issues relating to the rules, FINRA is proposing 
amendments to reduce the regulatory burden on firms and remove certain 
impediments to capital formation without impacting investor protection. 
The proposed rule change aims to foster capital formation and to bring 
regulatory clarity and consistency. Specifically, FINRA is proposing to 
exempt additional persons from the scope of the rules, modify current 
exemptions to enhance regulatory consistency, address unintended 
operational impediments and exempt certain types of offerings from the 
scope of the rules.
2. Economic Baseline
    The economic baseline for the proposed rule change is the current 
requirements and provisions of FINRA Rules 5130 and 5131, which are 
intended to protect the integrity of the public offering process. To 
this end, Rule 5130 sets forth categories of persons that are 
restricted from purchasing new issues. In addition, Rule 5131 places 
restrictions on the allocation of new issues to executive officers and 
directors of a member's current, former or prospective investment 
banking clients.
    To assess the current economic baseline, FINRA has analyzed the 
current groups potentially affected by the various aspects of the 
proposed rule change. FINRA believes that there are thousands of family 
offices that, along with the family members and family clients served 
by those offices, are potentially impacted by the proposed

[[Page 39035]]

rule change.\51\ With respect to sovereign entities, there are 
approximately 195 independent states in the world,\52\ many of which 
operate one or more sovereign wealth funds, and the number is believed 
to be on the rise.\53\ FINRA understands that there are thousands of 
foreign pension plans (including both state- and privately-operated 
foreign plans) as well as millions of beneficiaries and participants of 
those plans. Similarly, FINRA understands that there are thousands of 
foreign investment companies and millions of investors in such 
companies. As of 2013, there were over one million organizations with 
Section 501(c)(3) status in the United States, though the number of 
charitable organizations that are large enough to fall within the 
current definition of ``covered non-public company'' in Rule 5131(e)(3) 
is likely smaller than that figure.\54\
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    \51\ The exact number of family offices in the United States is 
not known; however, it is estimated that there are between 3,000 and 
5,000 single family offices operating in the United States. See, 
e.g., Mary Pollack, Family Office Exchange, https://www.familyoffice.com/insights/how-many-family-offices-are-there-united-states.
    \52\ See U.S. Department of State, Fact Sheet, Bureau of 
Intelligence and Research, Independent States in the World, https://www.state.gov/s/inr/rls/4250.htm.
    \53\ See Sovereign Wealth Fund Institute, Sovereign Wealth Fund 
Rankings, http://www.swfinstitute.org/sovereign-wealth-fund-rankings/.
    \54\ See National Center for Charitable Statistics, http://nccs.urban.org.
---------------------------------------------------------------------------

3. Economic Impact
    For purposes of this discussion, FINRA has identified the 
potentially material impacts of the proposed amendments on the affected 
parties.
    FINRA believes that the proposed amendments to Rules 5130 and 5131 
will remove unnecessary impediments to capital formation and lessen 
burdens in the public offering process. The proposed amendments will 
generally have a beneficial impact on issuers, underwriters and selling 
group members and certain categories of investors.
    FINRA believes that a significant impact of the proposed amendments 
will be a reduction in both the costs and uncertainty in determining 
whether an investor is subject to the restrictions of Rules 5130 and 
5131. The proposed rule change also may increase the pool of investors 
eligible to purchase new issues and, thus, encourage capital formation. 
FINRA believes that the proposed amendments would not alter the 
original purpose of Rules 5130 and 5131 in ensuring the integrity of a 
public offering.
    FINRA Rule 5130 restricts members and associated persons from 
purchasing new issues for their own account or selling new issues to an 
account in which other restricted persons have a beneficial interest. 
Currently the definition of ``restricted person'' in Rule 5130(i)(10) 
captures certain persons that were not intended to be included in the 
definition. To address this issue, the proposed rule change would 
exempt from the definition of ``restricted person'': (1) A person with 
the authority to buy or sell securities for an account beneficially 
owned by a family office, subject to specified conditions; and (2) 
sovereign entities that acquire an ownership interest in a registered 
broker-dealer. These persons would benefit from the proposed rule 
change by eliminating their restrictions from purchasing new issues, 
thus increasing their set of potential investments. To the extent that 
new issues provide a unique risk-return profile from other types of 
securities investments, the inclusion of them in these persons' 
portfolios would be value enhancing. The proposed rule change would 
also better align with the Advisers Act's treatment of family offices.
    FINRA Rule 5130 currently does not include a general exemption for 
foreign employee retirement benefits plans. Rather, FINRA staff has 
granted exemptive relief to certain foreign employee retirement 
benefits plans that have demonstrated that they cannot serve as a 
conduit for restricted persons to purchase new issues. The proposed 
rule change codifies the criteria upon which the staff granted 
exemptive relief. The proposed rule change would allow plans that meet 
specified criteria to invest in new issues without having to determine 
the eligibility of hundreds of thousands of participants and 
beneficiaries. By providing such plans additional flexibility to invest 
in new issues, the proposed rule change would enhance the investment 
options for their equity portfolios. The codification of the criteria 
would also improve regulatory uniformity and reduce compliance costs.
    The foreign investment company exemption in FINRA Rule 5130(c)(6) 
is intended to apply to foreign investment companies that are similar 
to U.S. registered investment companies, which are currently exempt 
from FINRA Rule 5130's prohibitions. In order to satisfy the current 
exemption, the foreign investment company, among other conditions, must 
establish that no person owning more than five percent of the shares of 
the investment company is a restricted person. However, where an 
investor acquires his or her interest in a foreign investment company 
through an intermediary that then holds the shares for multiple 
investors in an omnibus or nominee account, the foreign investment 
company may not be able to determine whether the investor owns more 
than five percent of its shares. The proposed rule change would address 
this operational issue and create two alternative conditions that the 
foreign investment company have 100 or more direct investors or 1,000 
or more indirect investors. The proposed alternative conditions would 
provide additional flexibility to foreign investment companies to 
demonstrate their eligibility for the exemption, and thereby enhance 
their ability to purchase new issues.
    FINRA Rules 5130 and 5131 are primarily concerned with fostering 
fair public capital markets within the United States. However, because 
the definition of ``new issue'' is not expressly limited to domestic 
offerings, the rules could apply to foreign offerings, even if a safe 
harbor is available for those offerings under the Securities Act, if a 
member or an associated person is participating in the offering or 
receiving allocations as an investor. The proposed rule change would 
clarify the scope of Rules 5130 and 5131 by excluding Regulation S 
offerings and other offerings made outside of the United States or its 
territories from the scope of the rules. The proposed rule change would 
also harmonize Rules 5130 and 5131 with other FINRA rules relating to 
securities offerings, FINRA Rules 5110 and 5121, which currently 
exclude foreign offerings. FINRA believes that the proposed rule change 
will remove the burdens associated with complying with both U.S. and 
foreign regulatory regimes relating to public offerings and will lead 
to an increase in the pool of eligible investors for offshore offerings 
of new issues without undermining the fairness of U.S. public capital 
markets. Further, an increase in the pool of eligible investors could 
lead to a lower cost of capital for issuers engaged in foreign 
offerings.
    The issuer-directed provisions in FINRA Rules 5130 and 5131 are 
similar, but have differences that do not further the purposes of the 
rules. The proposed rule change would better align the issuer-directed 
provisions of Rules 5130 and 5131, provide regulatory consistency 
across the rules and remove the compliance costs of applying different 
standards, without negatively impacting the purposes of the rules.
    Charitable organizations may not generate significant investment 
banking business. However, due to their asset size, some charitable 
organizations may fall within the definition of a ``covered non-public 
company'' under FINRA

[[Page 39036]]

Rule 5131, making executives or directors of such organizations the 
subject of the rule's prohibition. FINRA believes that the concerns 
addressed by the rule are not implicated with respect to executive 
officers or directors of charitable organizations that are not 
affiliated with a member. The proposed rule change, therefore, would 
exclude ``unaffiliated charitable organizations,'' as currently defined 
in Rule 5131, from the definition of ``covered non-public company.'' 
FINRA believes that this proposed change will ease the burden on firms 
as they will no longer be required to consider whether an investment 
banking relationship exists vis-[agrave]-vis the member and an 
unaffiliated charitable organization when an individual with a 
beneficial interest in an account is an executive officer or director 
(or materially supported by such a person) of such an organization. 
FINRA believes that the proposed rule change would provide benefits by 
reducing the uncertainty of whether a particular relationship is 
problematic and by reducing the time and costs associated with making 
that determination. The proposed rule change will also impact 
individuals who are executive officers or directors of unaffiliated 
charitable organizations (and those materially supported by such 
individuals) as they will no longer be subject to the rule's 
prohibitions on that basis. Finally, the proposed rule change will 
benefit issuers by increasing the pool of prospective investors, thus 
potentially leading to a lower cost of capital for the issuers.
    Finally, the anti-dilution provision of FINRA Rule 5130 allows 
restricted persons to maintain the equity ownership interest they had 
before a public offering, but FINRA Rule 5131 has no similar provision. 
An unintentional result of this is that officers or directors of public 
companies and covered non-public companies may experience diminished 
ownership interest upon a public offering and a transfer of wealth from 
them to those investors that are able to purchase shares in the new 
offering. The proposed rule change would add an anti-dilution provision 
to Rule 5131 similar to that of Rule 5130 and ameliorate this 
inconsistency. This would reduce the regulatory uncertainty and create 
a level playing field for all investors.
4. Alternatives Considered
    FINRA considered various alternatives to the proposed rule change. 
When assessing foreign pension plans, FINRA considered whether to 
impose a requirement that the plan, or family of plans, have a greater 
number of participants and beneficiaries than the proposed 10,000. 
However, the 10,000 participants and beneficiaries figure is 
appropriate, particularly when viewed along with the condition that the 
plan have at least $10 billion in assets, and exceeds participant 
thresholds contained in other parts of the rule.\55\
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    \55\ See, e.g., Rule 5130(c)(3)(A) (exempting sales to and 
purchases of new issues by an insurance company general, separate or 
investment account, provided that, among other conditions, the 
account is funded by premiums from 1,000 or more policyholders).
---------------------------------------------------------------------------

    With respect to the foreign investment company exemption, FINRA 
considered allowing foreign investment companies to establish dilution 
of the fund solely by satisfying the current five percent condition. 
However, allowing the foreign investment company to satisfy either the 
five percent condition, the 100 or more direct investor condition, or 
the 1,000 or more indirect investor condition, in addition to the other 
conditions, achieves the purpose of the rule while providing greater 
flexibility for foreign investment companies to meet the conditions of 
the exemption.
    In assessing the appropriateness of an exclusion for charitable 
organizations from the definition of ``covered non-public company'' in 
Rule 5131(e)(3), FINRA considered whether to extend the exclusion to 
all nonprofit organizations, including, for example, civic leagues or 
social welfare entities organized pursuant to other sections of the 
IRC.\56\ However, FINRA determined not to extend the definition in this 
manner and notes that, unlike Section 501(c)(3) organizations, such 
organizations are not prohibited from substantially engaging in other 
activities. In addition, limiting the exclusion to Section 501(c)(3) 
charitable organizations is consistent with the treatment of such 
entities in the context of other provisions of Rules 5130 and 5131.\57\
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    \56\ Civic leagues and social welfare organizations may be 
organized pursuant to Section 501(c)(4) of the IRC.
    \57\ See, e.g., Rule 5130(c)(9) (exempting Section 501(c)(3) tax 
exempt charitable organizations from Rule 5130); Rule 5131(e)(9) 
(defining unaffiliated charitable organization as a tax-exempt 
entity organized under Section 501(c)(3) of the IRC).
---------------------------------------------------------------------------

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received on the 
proposed rule change. As noted above, in April 2017, FINRA published 
Regulatory Notice 17-14 seeking comment on the effectiveness and 
efficiency of its rules relating to the capital-raising process, 
including FINRA Rules 5130 and 5131 generally, and, in response, two 
commenters requested that FINRA consider certain amendments to Rules 
5130 and 5131.\58\
---------------------------------------------------------------------------

    \58\ See supra notes 9 and 10.
---------------------------------------------------------------------------

    In addition to comments received in response to Regulatory Notice 
17-14, FINRA has experience with the rules since their adoption that 
has informed the proposed rule change. During that time, FINRA has 
generally engaged in discussions with industry groups and market 
participants regarding: (1) Persons with authority to buy or sell 
securities on behalf of accounts beneficially owned by family offices; 
(2) sovereign entities that own broker-dealers; (3) foreign employee 
retirement benefits plans; (4) executive officers and directors of 
unaffiliated charitable organizations; and (5) foreign investment 
companies whose shares are held in omnibus or nominee accounts. The 
proposed rule change also reflects FINRA's experience and years of 
informal discussions with market participants.
    FINRA believes that the proposed rule change strikes the 
appropriate balance by promoting capital formation and aiding member 
compliance efforts while maintaining the protections that Rules 5130 
and 5131 are designed to provide, as discussed above.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

[[Page 39037]]

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2019-022 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2019-022. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. Copies of such filing also will be available for inspection and 
copying at the principal office of FINRA. All comments received will be 
posted without change. Persons submitting comments are cautioned that 
we do not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
FINRA-2019-022 and should be submitted on or before August 29, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\59\
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    \59\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-16942 Filed 8-7-19; 8:45 am]
 BILLING CODE 8011-01-P