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Communications from the Institute do not constitute, and should not be considered a substitute for, legal advice.
[18966]
June 22, 2005
TO: INTERNATIONAL MEMBERS No. 20-05
INTERNATIONAL INVESTING SUBCOMMITTEE No. 3-05
RE: ICI COMMENT LETTER ON NASD PROPOSAL RELATING TO RULE 2790
The Institute has filed a comment letter with the Securities and Exchange Commission
on a proposed rule change filed by the NASD relating to Rule 2790,1 which generally prohibits
an NASD member from selling a “new issue” to any account in which a “restricted person” has
a beneficial interest. The most significant aspects of the comment letter are summarized below
and a copy of the letter is attached.
Application of Rule 2790 to Foreign Investment Companies
The letter discusses several reasons why the current exemption from Rule 2790 for
foreign investment companies, particularly the condition in the exemption requiring that no
person owning more than 5% of the shares of the investment company is a restricted person, is
ineffectual in permitting these entities to invest in initial public offerings (“IPOs”) in the U.S.
securities market. Specifically, the letter states that it is not possible for a foreign investment
company to identify all the beneficial owners of the fund, and how much of the fund they own,
in order to determine whether any restricted person owns more than 5% of the fund for
purposes of the exemption. This is due to the manner in which investors hold shares of foreign
investment companies, the broad scope of the definition of “restricted person” under Rule 2790,
and because shares of foreign investment companies are typically owned by a large number of
individual shareholders. The letter notes that it also is not practical for foreign investment
companies to provide a representation, as required under the rule, that all purchases of new
issues are in compliance with the rule.
The letter therefore recommends that the NASD change the current exemption for
foreign investment companies to eliminate the condition relating to the beneficial ownership of
“restricted persons” and, in general, redefine what constitutes a foreign investment company
for purposes of the rule. In order to address concerns about preventing restricted persons from
establishing investment companies and other investment vehicles abroad to circumvent Rule
2790, the letter recommends that the NASD instead require as a condition of the exemption that
the investment adviser for the foreign investment company have investment discretion over the
1 SEC Release No. 34-51735 (May 24, 2005), 70 FR 31554 (June 1, 2005).
2
account. The letter states that this would, in effect, rule out the ability of restricted persons to
influence the fund. In addition, in order to further ensure that restricted persons cannot
circumvent the rule, the letter recommends explicitly requiring that the foreign investment
company neither be created nor operated for the purpose of circumventing Rule 2790. Finally,
in order to ensure that the exemption is limited only to those funds that are available to the
public, the letter recommends that the NASD amend the first part of the exemption and create a
definition of a foreign investment company similar to that used by the SEC in its rule requiring
the registration under the Investment Advisers Act of 1940 of certain hedge fund advisers. The
letter states that this definition would clarify the scope of the exemption in a more efficient
manner than the proposed amendment and would promote uniformity between NASD and
SEC rules relating to what constitutes a publicly offered foreign investment company.
Application of Rule 2790 to Foreign Pension Plans and Foreign Charitable Organizations
The letter notes that Rule 2790 contains exemptions for pension plans and charitable
organizations organized under applicable U.S. law but does not contain corresponding
exemptions for foreign pension plans or foreign charitable organizations. For the reasons
discussed in the letter in connection with the exemption for foreign investment companies, the
letter recommends that the NASD amend the rule to provide workable exemptions to permit
foreign pension plans and foreign charitable organizations to invest in IPOs in the U.S.
securities market. Specifically, the letter recommends creating exemptions for foreign pension
funds and foreign charitable organizations that would contain conditions requiring that these
entities are created or organized under the laws of a foreign jurisdiction, are not created or
operated for the purpose of circumventing Rule 2790, and are regulated, as applicable, by the
foreign jurisdiction.
Ari Burstein
Associate Counsel
Attachment (in .pdf format)
Note: Not all recipients receive the attachment. To obtain a copy of the attachment, please visit our members
website (http://members.ici.org) and search for memo 18966, or call the ICI Library at (202) 326-8304 and request the
attachment for memo 18966.