FINRA Rule 5131(b) "Spinning Prohibition Rules" - New Effective Date - September 26, 2011
All hedge fund managers that invest in "new issues" will need to update their funds' Subscription Documents for new investors and recertify their existing investors in order to continue to be eligible to purchase "new issues" under the "Spinning Prohibition Rules" adopted by the Financial Industry Regulatory Authority, Inc. ("FINRA"). The Spinning Prohibition Rules generally prohibit a FINRA-member broker-dealer from allocating "new issues" to accounts (including hedge funds) in which a beneficial interest is held by executive officers and directors of certain current, former or prospective investment banking clients of such broker-dealer ("Restricted Investors"). The original effective date for the Spinning Prohibition Rules was May 27, 2011 and such date was recently extended by the Securities and Exchange Commission until September 26, 2011. To ensure compliance with the Spinning Prohibition Rules, FINRA-member broker-dealers will need to confirm whether any investor in a fund is a Restricted Investor. Similar to the other "new issues" rules which generally prohibit a FINRA-member broker-dealer from allocating "new issues" to accounts (including hedge funds) in which a beneficial interest is held by any employee or affiliate of any FINRA-member broker-dealer, the Spinning Prohibition Rules contain a "carve out" whereby new issues may be allocated to accounts in which the beneficial interests of Restricted Investors do not exceed 25% (the carve out is 10% under the other "new issues" rules).
Please note that the Spinning Prohibition Rules are in addition to the other "new issues" rules currently in effect, and therefore, even if an investor in your hedge fund is not considered a Restricted Investor under the Spinning Prohibition Rules, such investor may be considered a "restricted person" under the other "new issues" rules. For example, while an investor in your hedge fund may not be an executive officer or director of a current, former or prospective investment banking client of the broker-dealer from which your fund is allocated "new issues", such investor may still be an employee or affiliate of a FINRA-member broker-dealer. As a result, you need to ensure that all new and existing investors in your hedge funds that participate in the profits and losses from "new issues" meet the requirements of the Spinning Prohibition Rules and the other "new issues" rules.
Please contact your attorney at Sadis & Goldberg to discuss updating your hedge fund's subscription documents, as well as to obtain a copy of the Spinning Prohibition Questionnaire for your existing hedge fund investors. If you have any questions concerning this Alert or any related matters, please contact Lance Friedler, 212-573-8030 or firstname.lastname@example.org.