Family offices no longer have to spend the time trying to convince an investment bank that they are eligible to purchase an initial public offering of an equity security, thanks to an interpretive letter from FINRA.

The letter — which is in response to a letter from Elliott R. Curzon, a partner at Dechert LLP, on behalf of the Private Investor Coalition — determines that a “family office,” as defined in the Advisers Act, may be considered an “investment adviser” for purposes of meeting the limited exception of FINRA Rule 5131(b).

FINRA Rule 5131 (New Issue Allocations and Distributions) addresses potential misconduct in the allocation and distribution of new issues. “New issue” means any IPO of an equity security.

FINRA Rule 5131(b) prohibits the practice of “spinning,” which occurs when an underwriter allocates new issue shares to executive officers and directors of a company as an inducement to award the underwriter with investment banking business.

The rules are designed to prevent securities insiders from using their position to corner the market in an IPO or to get all the allocations. The rule does this by saying certain securities insiders are restricted persons; for example, investment banking clients can’t purchase IPOs either directly or through a vehicle.

There is a limited exception to the spinning provision.

Under 5131(b), a private fund that wants to purchase an IPO must provide a written representation to the selling broker-dealer or the selling investment bank that the account or the fund is managed by an investment advisor.

Specifically, the rule “permits firms to rely upon a written representation obtained within the prior 12 months from a person authorized to represent an account that does not look through to the beneficial owners of any unaffiliated private fund invested in the account, except for beneficial owners that are control persons of the investment adviser to the private fund, if the unaffiliated private fund meets the following conditions: (1) is managed by an investment adviser; (2) has assets greater than $50 million; (3) owns less than 25% of the account and is not a fund in which a single investor has a beneficial interest of 25% or more; and (4) was not formed for the specific purpose of investing in the account,” according to the letter.

Prior to the interpretive letter, it wasn’t clear whether this exemption in Rule 5131(b) included both RIAs and entities that were exempt from having to register from being considered an investment adviser (e.g. family offices).

The letter rules that “despite their exclusion from the definition of ‘investment advisers’ under the Advisers Act, family offices may perform equivalent functions to regulated investment advisers, including investing the assets of a pooled investment vehicle or providing other forms of investment advice.”

FINRA concludes family offices may be considered “investment advisers” solely for purposes of Rule 5131(b).

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