Restrictions on the Purchase and Sale of Initial Equity Public Offerings - FINRA Rule 5130
The staff granted an exemption from FINRA Rule 5130 with respect to purchases of “new issues” by the Healthcare of Ontario Pension Plan Trust Fund.
December 7, 2010
Edward A. Kwalwasser
Proskauer Rose LLP
New York, NY 10036-8299
Dear Mr. Kwalwasser:
This is in response to your letter dated November 30, 2010, in which you request an exemption from Rule 5130 (Restrictions on the Purchase and Sale of Initial Equity Public Offerings) on behalf of KGS-Alpha Capital Markets, L.P. (“KGS”) and Healthcare of Ontario Pension Plan Trust Fund (“HOOPP”).
Pursuant to paragraph (h) of Rule 5130, the staff, for good cause shown after taking into consideration all relevant factors, may conditionally or unconditionally exempt any person, security or transaction (or any class or classes of persons, securities or transactions) from Rule 5130 to the extent that such exemption is consistent with the purposes of the Rule, the protection of investors and the public interest. For the reasons set forth below, the staff grants your request for an exemption from Rule 5130.
Based upon your letter, we understand the facts to be as follows. HOOPP is a pension plan provider, subject to continued registration under the Income Tax Act (Canada) and the Pension Benefits Act (Ontario). HOOPP has provided pensions to Ontario’s healthcare community since 1960. It has over 300 participating employers and more than 250,000 members and pension recipients. Its net investment portfolio exceeds $35 billion. Further, it pays out more than $1 billion per year in pension benefits. From time to time, HOOPP invests in initial public offerings (“IPOs”), in Canada, the United States and elsewhere, for the benefit of its participants and pensioners, either directly by purchasing new issues or indirectly by investing in an entity, such as a hedge fund, that may purchase new issues.
HOOPP is governed by a Board of Trustees consisting of 16 voting members. Half the trustees are appointed by the Ontario Hospital Association and the other half by four unions representing healthcare workers. The trustees have a fiduciary obligation to administer HOOPP’s pension plan in the best interest of plan participants.
HOOPP is contemplating investing in KGS, a registered broker-dealer through an investment in KGS Holdings, L.P., KGS’s parent company. Although the proposed investment by HOOPP in KGS is an insignificant portion of HOOPP’s investment portfolio, it would be enough to cause HOOPP to become an indirect owner of over 10% of KGS, and, as such, would make HOOPP a restricted person under Rule 5130. HOOPP does not intend to take an active role in the management of KGS’s business generally nor, particularly, in its activities as a broker-dealer. You are requesting an exemption from Rule 5130 for HOOPP.
Rule 5130 protects the integrity of the public offering process by ensuring that: (1) members make bona fide public offerings of securities at the offering price; (2) members 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 members; and (3) industry insiders, including members 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.
Rule 5130 contains a number of exemptions, including one for an Employment Retirement Income Security Act (“ERISA”) benefits plan that is qualified under Section 401(a) of the Internal Revenue Code, provided that such plan is not sponsored solely by a broker-dealer. HOOPP does not qualify for this exemption because, as a foreign plan, it is not subject to ERISA. Additionally, Rule 5130 does not specifically exempt foreign benefit or pension plans because the rules and standards in foreign jurisdictions can vary widely. However, a plan such as HOOPP, with more than 250,000 members and pension recipients, plainly cannot serve as a conduit for restricted persons to purchase new issues. Moreover, the broad base of HOOPP participants far exceeds the broad ownership standards in other exemptions, such as for common trust funds, insurance company separate and general accounts, and foreign investment companies.
In view of the unique characteristics of HOOPP, as described above, and in particular the nature and extensive number of members and pension recipients, as well as assets of the fund, FINRA staff believes that granting an exemption for HOOPP is consistent with the purposes of the Rule, the protection of investors and the public interest. For these reasons, the staff exempts from Rule 5130 purchases, directly or indirectly, of new issues by HOOPP.
This letter responds only to the issue you have raised based on the facts as you have described them, and does not address any other rule or interpretation of FINRA, or all the possible regulatory and legal issues involved. Any changes in the facts or representations as you have described them will require further consideration and may cause us to reach a different conclusion. You should contact FINRA immediately if there is a change in any of the facts or representations contained in your letter. In addition, this exemption is subject to modification or revocation if at any time FINRA determines that such action is necessary or appropriate for the protection of investors.
If you have any questions on this matter, please do not hesitate to contact me at (202) 728-8104.
Very truly yours,
Gary L. Goldsholle
Executive Vice President and General Counsel
Hans L. Reich,
Senior Vice President and Regional Director
New York District Office