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Amy Natterson Kroll, Morgan, Lewis & Bockius LLP

The staff granted an exemption from FINRA Rule 5130 with respect to purchases of "new issues" by the Novartis Pension Funds.

July 23, 2015

Amy Natterson Kroll
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Avenue, NW
Washington, DC 20004

Re: Request for Exemption from FINRA Rule 5130

Dear Ms. Kroll:

In your letter dated July 22, 2015, you request an exemption from FINRA Rule 5130 (Restrictions on the Purchase and Sale of Initial Equity Public Offerings) on behalf of Novartis Pensionskasse 1 ("NP") and Kaderkasse Novartis ("KN") (collectively, "Novartis Pension Funds").

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 exempts from Rule 5130 purchases, directly or indirectly, of "new issues" (as defined in Rule 5130) by the Novartis Pension Funds.


Based upon your letter, we understand the facts to be as follows. Novartis AG ("Novartis") is a publicly-traded Swiss corporation located in Basel, Switzerland, and is composed of a multinational group of companies ("Novartis Group") that specialize in the research, development, manufacturing, and marketing of healthcare products and pharmaceuticals. Swiss employees of Novartis Group in Switzerland may participate in one of two pension funds: (1) NP, which has approximately 31,000 participants and $13.76 billion in assets; and (2) KN, which has approximately 830 participants and $358 million in assets.1 The Novartis Pension Funds' participants are current employees and retirees of Novartis Group and their beneficiaries. More than 99 percent of Novartis Group's Swiss workforce participates in the Novartis Pension Funds, and the Novartis Pension Funds are operated in a non-discriminatory manner insofar as a wide range of employees, regardless of income and including rank and file employees, are eligible to participate without further amendment or action by Novartis.2 The Novartis Pension Funds are not sponsored by a broker-dealer. In addition, participants in the Novartis Pension Funds have no ability to direct the investment of fund assets, receive only after-the-fact information about investments, and have very limited asset portability.3

In accordance with Swiss pension law, which governs the Novartis Pension Funds, NP and KN are administered by trustees and managers that have a fiduciary obligation to administer the funds in the best interests of the participants and beneficiaries. Each is administered by a board of trustees, which is composed of both employer and employee representatives. The Novartis Pension Funds' boards have delegated the asset management function to Novartis International AG ("Novartis International"), the Swiss management company of Novartis Group and a wholly-owned subsidiary of Novartis. Alternative investments and commodities investments for the Novartis Pension Funds are made through Calinvest SPC ("Calinvest"), a regulated proprietary Cayman segregated portfolio company whose only two investors are NP and KN. The voting shares in Calinvest are fully held by Novartis Holding AG, a fully-owned Swiss subsidiary of Novartis. Calinvest has appointed Novartis International to manage the investment of its assets.

The Novartis Pension Funds consist of two distinct benefit structures, depending on the age of the participant and the date that the participant joined Novartis. For participants born in 1955 or earlier who joined Novartis prior to 2011,4 benefits accrue in accordance with a traditional defined benefit plan structure, whereby the participant or beneficiary is entitled to receive a guaranteed and specified benefit based on a benefit formula that takes into account, for example, the employee's years of service and income during his or her final years of employment. In 2011, the plans of participants born after 1955 were converted to the equivalent of cash balance plans in the United States.5 Under this plan structure, the participant's benefit formula is stated in terms of a hypothetical account balance to which annual pay credits and interest credits are applied. With either plan structure, the Novartis Pension Funds' participants are required to contribute to the plan.6

From time to time, the Novartis Pension Funds may have an opportunity to invest their assets in new issues either directly by purchasing new issues or indirectly by investing in an entity, such as a hedge fund or fund of funds, that may purchase new issues. You are requesting that the staff exempt from Rule 5130 purchases of new issues by the Novartis Pension Funds.


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 ("IRC"), provided that such plan is not sponsored solely by a broker-dealer. The Novartis Pension Funds do not qualify for this exemption because, as foreign plans, they are not subject to ERISA.7 Rule 5130 does not specifically exempt foreign benefits plans, such as a foreign pension plan, because the rules and standards in foreign jurisdictions can vary widely.

FINRA staff believes that granting an exemption to the Novartis Pension Funds is consistent with the purposes of the Rule, the protection of investors and the public interest. In view of the characteristics of the Novartis Pension Funds, as described above, including the aggregate number of participants and the size of assets of the Novartis Pension Funds (approximately 32,000 participants and $14.1 billion in assets), the staff believes that the Novartis Pension Funds plainly cannot serve as a conduit for restricted persons to purchase new issues.8 For these reasons, the staff exempts from Rule 5130 purchases, directly or indirectly through a collective investment account, of new issues by the Novartis Pension Funds.

This exemption applies 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 material changes in the facts or representations as you have described them will require further consideration and may not qualify for exemption. 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) 728-8018.

Very truly yours,

Meredith Cordisco


Jeanie Cogill, Morgan, Lewis & Bockius LLP
Afshin Atabaki, FINRA

  1. The information regarding the number of participants and beneficiaries and the size of assets of the Novartis Pension Funds is current as of December 31, 2014.
  2. The definition of "broad-based foreign retirement plan" under Section 409A of the Internal Revenue Code ("IRC") includes a substantially similar condition. See 26 CFR § 1.409A-1(a)(3)(v)(A). Section 409A imposes restrictions on the deferral of compensation by employees, directors and independent contractors. Section 409A provides an exemption for compensation deferred under certain broad-based foreign retirement plans.
  3. The Novartis Pension Funds are generally more restrictive in terms of pension portability than U.S. defined benefit plans. For example, under Swiss pension law, a beneficiary is not permitted to leave the pension balance with his or her employer upon termination, but must either transfer the plan to his or her new employer or, if unemployed, maintain the balance in a blocked account until, subject to a very few exceptions, he or she reaches the age of retirement.
  4. Employees joining Novartis in 2011 or subsequent years, regardless of their year of birth, are able to participate in the cash balance type plan.
  5. Cash balance plans are considered defined benefit plans under the IRC and require the sponsor to guarantee specified benefits to participants regardless of investment performance. See 26 CFR § 1.401(a)(4)-8(c)(3)(i).
  6. You have represented that, in Switzerland, typically both employers and employees contribute to defined benefit plans. While defined benefit plans in the United States may require or permit employee contributions, such plans generally do not do so. See Internal Revenue Service, Choosing a Retirement Plan: Defined Benefit Plan, available at ("Generally, the employer makes most contributions. Sometimes, employee contributions are required or voluntary contributions may be permitted.").
  7. ERISA explicitly excludes from coverage employee benefit plans that are "maintained outside of the United States primarily for the benefit of persons substantially all of whom are nonresident aliens." 29 U.S.C. § 1003(b)(4).
  8. See also Letter from Afshin Atabaki, FINRA, to Christopher M. Wells, Proskauer Rose LLP, dated November 2, 2012 (granting an exemption to the Shell Pension Funds, which had, in aggregate, more than 90,000 pension participants and beneficiaries and $40 billion in assets).