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January 26, 2004 at 07:00 PM
CHICAGO (HedgeWorld.com)–Gardner Carton & Douglas LLP has sent out a client memorandum expounding on the significance of the National Association of Securities Dealers’ new conduct rule 2790, which governs responsibilities of broker-dealers in the allocation of new issues in initial public offerings.
The hedge fund team at GCD said in the memorandum that unlike the older hot-issue rule–which generally prohibited an NASD member firm from selling hot issues to any account in which a restricted person has a beneficial interest, absent implementation of carve-out and certification procedures–the new rule contains a de minimis exemption that permits NASD member firms to sell new issues to an account without such procedures so long as the restricted persons own less than 10% of the beneficial interests in such an account.
One of the most significant changes in practice to come from the new rule is that a broker-dealer NASD member, in permitting a pooled investment vehicle such as a hedge fund to participate in new issues, need no longer get a representation letter from its attorney or accountant representing that the fund is not restricted. The broker-dealer now can rely upon a representation directly from the manager of the hedge fund itself.
“At the same time,” the memorandum cautioned, “the NASD indicated that it expects a hedge fund manager to obtain appropriate representations from the investors in the fund no less frequently than annually. The initial representations from investors must be in writing, and subsequent representations must either be in writing or obtained through the ‘negative representation’ process.”
