Hedge Fund “New Issue” Rule Changes

Minor Modifications to “New Issues” Rule Approved; New FINRA Rule 5130

FINRA (formerly the NASD) has been reworking a new rulebook which means that many rules have been modified and renumbered.  At least one important hedge fund rule has been renumbered.  The “new issue” rule, which affects hedge funds and other members of the securities community, has been slightly modified and is now known as FINRA Rule 5130 (formerly Rule 2790). Hedge fund managers should discuss with their attorneys whether their hedge fund offering documents need to be updated to reflect this change. 

Purpose of the New Issue Rule

NASD Rule 2790 (now Rule 5130) protects the integrity of the initial public offering (‘‘IPO’’) process by ensuring that: (1) Firms make bona fide public offerings of securities at the offering price; (2) firms 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 firms; and (3) industry insiders, including firms and their associated persons, do not take advantage of their insider position to purchase new issues for their own benefit at the expense of public customers. NASD Rule 2790 plays an important part in maintaining investor confidence in the capital raising and IPO process.

Discussion of New Consolidated FINRA Rulebook and Rule 5130

As part of the process of developing the new consolidated rulebook (the“Consolidated FINRA Rulebook”), FINRA is proposing to adopt NASD Rule 2790 as FINRA Rule 5130 in the Consolidated FINRA Rulebook, with only minor changes as described below.

The current FINRA rulebook consists of two sets of rules: (1) NASD rules and (2) rules incorporated from NYSE (“Incorporated NYSE Rules”) (together referred to as the “Transitional Rulebook”). The Incorporated NYSE Rules apply only to those members of FINRA that are also members of the NYSE (“Dual Members”).
Dual Members also must comply with NASD rules. For more information regarding the rulebook consolidation process, see FINRA Information Notice March 12, 2008 (Rulebook Consolidation Process).

For the reasons discussed above, FINRA is proposing to transfer NASD Rule 2790 to the Consolidated FINRA Rulebook in substantially the same form. As part of this transfer, FINRA is proposing minor changes to the Rule to reflect the registration of the NASDAQ Stock Market, LLC (“NASDAQ”) as a national securities exchange. The Rule currently refers to the NASDAQ Global Market because at the time the Rule was adopted, references to the listing standards of a national securities exchange did not include NASDAQ’s Global Market. Since NASDAQ completed its registration as a national securities exchange, the references to the NASDAQ Global Market in the Rule are no longer necessary. In addition, FINRA is proposing certain minor, technical changes to the Rule.

Please contact us if you need to revise your offering documents or have questions on the application of the new issue rule to your hedge fund. Other hedge fund law articles on hedge fund structural considerations include:

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