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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 Canada Pension Plan Investment Board.


April 16, 2018

Amy Natterson Kroll
Partner
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 April 12, 2018, you request an exemption from FINRA Rule 5130 (Restrictions on the Purchase and Sale of Initial Equity Public Offerings) on behalf of the Canada Pension Plan Investment Board (“CPPIB”).

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 CPPIB.

Background

Based upon your letter, we understand the facts to be as follows. The CPPIB is a Canadian federal Crown corporation, established by the 1997 Canada Pension Plan Investment Board Act, for the sole purpose of overseeing and investing funds contributed to the Canada Pension Plan (“CPP”), Canada’s national statutory pension plan.1 In total, the CPP has over 20 million contributors and beneficiaries. All Canadian employers, employees and self-employed people, other than those in the Province of Québec,2 make mandatory contributions to, and ultimately receive benefits from, the CPP. In this regard, the CPP is non-discriminatory, insofar that workers in Canada (excluding Québec), regardless of income or position, participate in the CPP.

As of December 31, 2017, the CPPIB manages approximately $268.0 billion in investment assets exclusively for the benefit of the CPP and its contributors and beneficiaries. The CPPIB invests funds contributed by the CPP globally and across a wide range of asset classes through both passive and active investing. From time to time, the CPPIB invests, either directly or indirectly, in new issues of equity securities in Canada, the United States and elsewhere, for the benefit of the CPP contributors and beneficiaries.

The CPPIB is governed by directors appointed by the federal Minister of Finance in consultation with the Finance Ministers of each province of Canada, other than the Province of Québec. In accordance with the legislative mandate of the CPPIB, the CPPIB directors are independent, have a fiduciary obligation to the CPPIB and must invest funds in the best interest of CPP contributors and beneficiaries. Neither the CPPIB nor the CPP is sponsored by a broker-dealer.

The CPPIB is part of a consortium of investors that has agreed to acquire, through a private equity transaction, certain businesses currently owned directly or indirectly by Thomson Reuters Corporation, including subsidiaries that are U.S. registered broker-dealers. The CPPIB will have no involvement in the day-to-day operations of the broker-dealers upon completion of the acquisition. Although the proposed investment would be an insignificant portion of the CPPIB’s investment portfolio, the CPPIB would become a restricted person under Rule 5130(i)(10)(E)(ii) following the acquisition.3 Further, absent an exemption, Rule 5130 would prevent the CPPIB from investing in new issues for the benefit of over 20 million contributors and beneficiaries of the CPP.

Analysis

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 CPP, and by extension the CPPIB, does not qualify for this exemption because, as a foreign benefits plan, it is not subject to ERISA.4 Moreover, Rule 5130 does not otherwise exempt foreign pension plans.

FINRA staff believes that granting an exemption to the CPPIB is consistent with the purposes of the Rule, the protection of investors and the public interest. The CPPIB was formed under and is governed by Canadian law to manage investment assets exclusively for the benefit of the contributors and beneficiaries of Canada’s national statutory pension plan, the CPP. The CPP is non-discriminatory in nature, insofar that all workers in Canada (excluding Québec), regardless of income or position, participate in the CPP. The CPPIB’s directors have a fiduciary obligation to manage assets in the best interest of the CPP’s contributors and beneficiaries. In addition, although its proposed acquisition would render the CPPIB an indirect owner of registered broker-dealers, neither the CPPIB nor the CPP is, or would be, sponsored by a broker-dealer.5 In light of these facts, and given the number of contributors and beneficiaries and the size of assets involved (over 20 million contributors and beneficiaries and approximately $268.0 billion in assets), the staff believes that the CPPIB and the CPP plainly cannot serve as a conduit for restricted persons to purchase new issues.6 For these reasons, the staff exempts from Rule 5130 purchases, directly or indirectly through a collective investment account, of new issues by the CPPIB.

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.

Sincerely,

Meredith Cordisco
cc: Steven Stone, Morgan, Lewis & Bockius LLP


Afshin Atabaki, FINRA

 


1. You represent that CPP was established pursuant to the Canada Pension Plan Act for the purpose of providing contributors and their families with partial replacement of earnings in the case of retirement, disability or death.

2. Your letter indicates that the Québec Pension Plan provides similar benefits to contributors living or working in Québec, under specific circumstances.

3. Rule 5130 defines “restricted person” to include, among others, “[a]ny person listed, or required to be listed, in Schedule B of a Form BD (other than with respect to a limited business broker-dealer), except persons whose listing on Schedule B relates to an ownership interest in a person listed on Schedule A identified by an ownership code of less than 10%.” See FINRA Rule 5130(i)(10)(E)(ii). You indicate that, upon completion of the acquisition, the CPPIB would be listed in Schedule B as an indirect owner and would not be able to avail itself of the exception for persons that have a de minimis ownership interest.

4. 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).

5. See Letter from Gary L. Goldsholle, FINRA, to Edward A. Kwalwasser, Proskauer Rose LLP, dated December 7, 2010 (granting an exemption to Healthcare of Ontario Pension Plan Trust Fund (“HOOPP”), a pension plan provider subject to Canadian law, when HOOPP was contemplating an investment that would render it an indirect owner of over 10% of a registered broker-dealer).

6. See Letter from Meredith Cordisco, FINRA, to Amy Natterson Kroll, Morgan, Lewis & Bockius LLP, dated July 23, 2015 (granting an exemption to Novartis Pension Funds, which had, in aggregate, approximately 32,000 pension participants and beneficiaries and $14.1 billion in assets).