On May 9, 2017, FINRA issued an interpretive letter stating that family offices may be considered investment advisers for purposes of meeting the limited exception of FINRA Rule 5131.02(b). FINRA Rule 5131 addresses abuses in the allocation and distribution of “new issue,” or IPO, shares and paragraph (b) of the rule prohibits the practice of “spinning.” Spinning occurs when an underwriter allocates new issue or IPO shares to executive officers and directors of a company as an inducement to award the underwriter with investment banking business, or as consideration for investment banking business previously awarded. FINRA Rule 5131.02(b) provides a limited exception to the spinning provision by permitting underwriters to rely upon a written representation obtained within the prior 12 months from a person authorized to represent an account that does not look through to the beneficial owners of any unaffiliated private fund invested in the account, except for beneficial owners that are control persons of the investment adviser to the private fund, if the unaffiliated private fund meets certain conditions. The unaffiliated private fund must: (1) be managed by an investment adviser; (2) have assets greater than $50 million; (3) own less than 25% of the account and not be a fund in which a single investor has a beneficial interest of 25% or more; and (4) not be formed for the specific purpose of investing in the account. In the interpretive letter, FINRA noted that despite their exclusion from the definition of “investment advisers” under the Investment Advisers Act of 1940, family offices may perform equivalent functions to regulated investment advisers. FINRA also emphasized that the remaining conditions of FINRA Rule 5131.02(b) must still be satisfied. The interpretive letter is significant because it makes it easier for family offices to purchase new issue or IPO shares.
A copy of the interpretive letter is available at: https://www.finra.org/industry/interpretive-letters/may-9-2017-1200am.
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