SEC Weighs FINRA Plan to Exempt Collective Trust Funds From IPO Rules

The SEC formally opened a proceeding to determine whether to approve a FINRA proposal to grant an exemption from FINRA Rule 5130 and FINRA Rule 5131(b) to collective trust funds so that the funds may buy shares in initial public offerings.

FINRA's proposal would exempt collective trust funds from two new-issue rules: (i) FINRA Rule 5130 (Restrictions on the Purchase and Sale of Initial Equity Public Offerings), which bars "restricted persons," such as broker-dealer employees and their families, from buying IPO shares, to keep insiders from taking a hot new stock ahead of ordinary investors, and (ii) FINRA Rule 5131(b) (New Issue Allocations and Distributions), the "spinning" rule, which bars broker-dealers from steering IPO shares to company executives in exchange for future business.

FINRA argued these funds should benefit from the same exemption that registered mutual funds and common bank trust funds have. FINRA pointed out that the funds are already overseen by the OCC, by the Labor Department under ERISA, and by state bank regulators and that the fund's managers are fiduciaries who must act in investors' interests.

The SEC is taking comment on whether the plan protects investors and guards against manipulation. The SEC is also weighing whether the plan meets Section 15A(b)(6) (Registered securities associations) of the Exchange Act, which requires FINRA rules to prevent fraud and protect investors.