FINRA and its predecessor NASD have long worked to promote fairness in the allocation of new issues of equity securities by prohibiting allocations to broker-dealers and persons who, among other things, own or control, directly or indirectly, more than 10% of a broker-dealer or who are portfolio managers (Restricted Persons). FINRA Rule 5130 reflects these principles, and also includes exemptions and exclusions to recognize that some entities and offerings do not implicate new issue allocation concerns. FINRA also has adopted Rule 5131 to, among other things, prohibit “spinning,” which refers to allocations of new issues to persons in a position to direct hiring of broker-dealers to provide investment banking services. Rules 5130 and 5131 referred to together as the “Rules.”
The US Securities and Exchange Commission (SEC) has published for notice and comment a FINRA proposal that, if adopted, would provide much needed clarification on the application of the Rules to non-US investors, including non-US retirement plans, non-US investment companies, and sovereign wealth funds, as well as to non-US offerings of securities. The proposed amendments would apply as follows:
The proposed amendments to the Rules would also expand and clarify the scope of the exemption for family offices in Rule 5130 and exclude from “covered non-public companies” in Rule 5131 “unaffiliated charitable organizations” that would otherwise fall within the definition, and adopt language making the provisions of the Rules consistent with regard to the exclusion for issuer directed securities. These proposed amendments are:
Finally, FINRA proposes to add supplemental materials to Rule 5131 to add anti-dilution provisions, similar to those already in Rule 5130. Supplemental Material .04 would provide that if an executive officer or director of a public company or covered non-public company or a person materially supported by such a person has a beneficial interest in an account with an equity interest in an issuer or company acquired by the issuer in the year prior to the offering, the account can receive an allocation of the new issuer if the allocation would not increase the account’s equity ownership percentage above its level three months prior to the filing of the registration statement for the offering, there are no special terms, and securities acquired pursuant to the Supplemental Material .04 are essentially restricted for three months following the effective date of the offering.
The SEC published the proposal for notice and comment on August 2, 2019, and the proposal was published in the Federal Register on August 8. Comments should be submitted to the SEC by August 29.The SEC’s release states that the proposed changes to the Rules will be effective within 45 days of the date of publication of the proposal in the Federal Register or such longer period up to 90 days, if the SEC finds it appropriate. As a result, anyone considering commenting on this proposal should act as soon as possible. Areas to consider commenting on include, but are not limited to:
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact the author, Amy Natterson Kroll, in our Washington, DC, office, or any of the following Morgan Lewis lawyers:
 The complete definition of “restricted person” is found in Rule 5130(i)(10).
 NASD originally adopted the “Hot Issues” interpretive memorandum prohibiting allocations of shares in new issues with significant appreciation on their first day of trading to Restricted Persons. See SEC Release No. 34-35059, File No. SR-NASD-94-15 (Free-Riding and Withholding Interpretation (IM-2110-1)). In 2003, the NASD, concluding that the policy underlying the Hot Issues interpretation applied to all new issues, adopted Rule 2790, prohibiting allocations of any new issue to Restricted Persons. See NASD Notice to Members 03-79, December 23, 2003. FINRA Rule 5130 incorporates the provisions of NASD Rule 2790 and further refinements made by FINRA as practices in the markets have evolved.
 FINRA Regulatory Notice 10-60, November 2010.
 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).
 This amendment would remedy a disparity in treatment due to the differences in exemptive authority in Rule 5130 and Rule 5131. While FINRA Rule 5130(h) permits “the staff, for good cause shown [to] exempt any person, security or transaction,” FINRA Rule 5131(f), however, only permits exemptions “in exceptional and unusual circumstances.” As a result, FINRA has issued a number of individual exemptive letters under Rule 5130 to foreign employee retirement benefit plans, but has not been able to do the same under Rule 5131. See n. 4, infra.
 FINRA has in a number of instances granted specific relief from Rule 5130 for foreign employee retirement benefit plans that have demonstrated that through their structure they could not serve as conduits for restricted persons to purchase new issues. See Letter from Gary L. Goldsholle, FINRA, to Edward A. Kwalwasser, Proskauer Rose LLP, dated December 7, 2010; Letter from Afshin Atabaki, FINRA, to Christopher M. Wells, Proskauer Rose LLP, dated November 2, 2012; Letter from Meredith Cordisco, FINRA, to Amy Natterson Kroll, Morgan, Lewis & Bockius LLP, dated July 23, 2015; and Letter from Meredith Cordisco, FINRA, to Amy Natterson Kroll, Morgan, Lewis & Bockius LLP, dated April 16, 2018.
 The proposed exemption for foreign investment companies may not be available with regard to funds operating under the European Union’s Undertakings for the Collective Investment in Transferable Securities (UCITS) that are offered to the public. The UCITS regime does not specifically “authorize” funds for sale to the public as contemplated by Rule 5130, despite the fact that the funds may be available for sale to the public under the law of a European Union member state.
 An “‘Unaffiliated charitable organization’ is a tax-exempt entity organized under Section 501(c)(3) of the Internal Revenue Code 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).” FINRA Rule 5131(e)(9).
 With the proposed amendments, FINRA is updating Rule 5130 and Rule 5131 based on its experience administering the Rules while preserving the underlying public policies. In the future, FINRA may want to consider further refinements. For instance, FINRA may wish to clarify that an “investment company” for purposes of the definition of “limited purpose broker-dealer” includes private fund, as well as registered investment companies.