Interpretive Letter to Gregory J. Nowak, Pepper Hamilton LLP

February 20, 2015

Mr. Gregory J. Nowak
Pepper Hamilton LLP
3000 Two Logan Square
Eighteenth and Arch Streets
Philadelphia, PA 19103-2799

Re: FINRA Rule 5130 - Restrictions on the Purchase and Sale of Initial Equity Public Offerings

Dear Mr. Nowak:

This is in response to your letter dated December 3, 2014, in which you request interpretive guidance on behalf of PCV Lux, SCA ("PCV") regarding the definition of "portfolio manager" under FINRA Rule 5130(i)(10)(D) (Portfolio Managers).

Background

Based upon your letter and our subsequent conversations, we understand the facts to be as follows. PCV is a Société en Commandite par Actions (or SCA) formed under the laws of Luxemburg, and it is an investment vehicle for current and former partners, employees and other persons associated with Apax Partners LLP ("Apax Partners") and its subsidiaries and affiliates and one unrelated institutional investor. The investors in PCV principally invest in private equity funds sponsored by Apax Partners and its affiliates ("Apax Funds") as well as debt, listed equity, cash and cash equivalents. Apax Partners is an investment adviser formed under the laws of England and Wales and regulated by the Financial Conduct Authority. Apax Partners is not a broker-dealer, and it does not own a broker-dealer.

The investment manager of PCV is Apax Guernsey Managers Limited ("AGML"). The Board of Directors of AGML consists of two independent Guernsey-based directors and the internal legal counsel of Apax Partners. None of the directors of AGML, including the internal legal counsel of Apax Partners, is an investor in PCV. As the investment manager of PCV, only AGML has the authority to buy and sell securities for PCV. The investment management decisions of AGML are informed by the recommendations made by the Investment Committee of Apax Partners ("Apax Investment Committee"), subject to review and final approval by the Board of Directors of AGML.

Each of the Apax Funds is controlled and managed by its own general partner. The general partners are Guernsey entities and are not investors in PCV. The Chairman of Apax Partners and the internal legal counsel of Apax Partners sit on the Board of Directors of each of the Guernsey entities that serve as the general partners of the Apax Funds.1 Only the general partners have the authority to buy or sell securities for their respective partnerships.2 The general partners make all investment decisions and have the authority to disregard any investment recommendations received. The investment management decisions of the general partners are informed by the recommendations made by the Apax Investment Committee, subject to review and final approval by the Boards of Directors of the general partners.

Apax Partners and its subsidiaries and affiliates are currently contemplating and are in the process of raising another private equity fund, known as the AMI Fund. AMI Management Limited will have the authority to buy or sell securities for the AMI Fund. AMI Management Limited has three Board members, one of whom is an investor in PCV. The investment management decisions of AMI Management Limited are informed by the recommendations made by the Investment Committee of the AMI Fund ("AMI Investment Committee"), subject to review and final approval by the Board of Directors of AMI Management Limited.

You state that the Apax Investment Committee, the AMI Investment Committee and individual members of the committees (other than the Chairman of Apax Partners) are solely responsible for providing investment advice and that they do not have the authority to buy or sell securities for a bank, savings and loan institution, insurance company, investment company, investment adviser or collective investment account. You also state that the Boards of Directors of AGML, the general partners of the Apax Funds and AMI Management Limited independently evaluate the recommendations made by the Apax Investment Committee and the AMI Investment Committee and have the authority to disregard any investment recommendations received from these committees.

You seek guidance on whether the Apax Investment Committee, the AMI Investment Committee and members of the committees, other than the Chairman of Apax Partners, are considered "portfolio managers" as defined under FINRA Rule 5130 if they solely provide investment advice as described above, and do not have the authority to buy or sell securities for a bank, savings and loan institution, insurance company, investment company, investment adviser or "collective investment account" as defined under FINRA Rule 5130.

Response

FINRA 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.

Paragraph (a) of FINRA Rule 5130 provides that, except as otherwise permitted under the rule:

  • A member (or an associated person) may not sell a new issue to an account in which a restricted person has a beneficial interest;
  • A member (or an associated person) may not purchase a new issue in any account in which such member or associated person has a beneficial interest; and
  • A member may not continue to hold new issues acquired as an underwriter, selling group member, or otherwise.

The definition of "restricted person" includes a portfolio manager, which is a person who has the authority to buy or sell securities for a bank, savings and loan institution, insurance company, investment company, investment adviser or collective investment account.3 A "collective investment account" is defined as any hedge fund, investment partnership, investment corporation or any other collective investment vehicle that is engaged primarily in the purchase or sale of securities, excluding a "family investment vehicle" or an "investment club" as defined under FINRA Rule 5130.4

You state that the Apax Investment Committee, the AMI Investment Committee and individual members of the committees (other than the Chairman of Apax Partners5) are solely responsible for providing investment advice and that they do not have the authority to buy or sell securities for a bank, savings and loan institution, insurance company, investment company, investment adviser or collective investment account. Moreover, you state that the Boards of Directors of AGML, the general partners of the Apax Funds and AMI Management Limited independently evaluate the recommendations made by the Apax Investment Committee and the AMI Investment Committee. Therefore, the Apax Investment Committee, the AMI Investment Committee and their respective members (other than the Chairman of Apax Partners) are not considered "portfolio managers" as defined under FINRA Rule 5130(i)(10)(D).

We trust that this letter is responsive to your request. Please note that the opinions expressed herein are staff opinions only and have not been reviewed or endorsed by the FINRA Board of Governors. This letter responds only to the issues 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. In addition, you should be aware that any changes in the facts as you have described them will require further consideration and may cause us to reach a different conclusion.

Very truly yours,

 

 

Afshin Atabaki


1 The Chairman of Apax Partners sits on the Board of Directors of each of the Guernsey entities that serve as the general partners of the Apax Funds, and he is a member of the Apax Investment Committee and the AMI Investment Committee and an investor in PCV. The internal legal counsel of Apax Partners sits on the Board of Directors of AGML and of each of the Guernsey entities that serve as the general partners of the Apax Funds, but he is not a member of the Apax Investment Committee or AMI Investment Committee, and not an investor in PCV.

2 You state that the Chairman of Apax Partners is considered a "portfolio manager" as defined under FINRA Rule 5130 based on his role as a director of the general partners of the Apax Funds

3 See FINRA Rule 5130(i)(10)(D). The definition of "portfolio manager" also includes any immediate family member of a portfolio manager who materially supports, or receives material support from, the portfolio manager. The term "material support" is defined as directly or indirectly providing more than 25% of a person's income in the prior calendar year. See FINRA Rule 5130(i)(8).

4 See FINRA Rule 5130(i)(2).

5 See supra note 2.