New FINRA Rule 5131: Implications for Fund Managers


On May 27, 2011, new Rule 5131 ( New Issue Allocations and Distributions) of the Financial Industry Regulatory Authority, Inc. (“FINRA”) will go into effect. This new rule is intended to address certain abuses in the allocation and distribution of new issues and specifically prohibits, among other things, “spinning.” The full text of the rule can be found on the FINRA website. Rule 5131 does not replace the existing new issues rule (Rule 5130), but instead creates an additional set of requirements.

Although FINRA Rule 5131 only applies directly to FINRA members, investment funds that participate in new issues will likely be impacted. In order to comply with the new rule, broker-dealers that are subject to FINRA rules will require certain representations from a fund before the fund will be allowed to participate in initial public offerings (“new issues”).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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