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NASD ruling might catch out hedge funds

Foreign hedge fund managers registering with the SEC might be caught out by a NASD ruling on IPOs, say lawyers. Foreign managers investing in US or non-US IPOs are subject to the US securities regulator’s ‘new issue’ ruling if those managers use a US broker/dealer.

The new issue ruling, enforced in 2004, restricts the buying of IPOs by various individuals, including NASD members, broker/dealers, hedge fund managers and anyone related to or reliant on them, and is enforced against US broker/dealers.

Hedge fund managers are therefore not allowed to buy IPOs through their US broker/dealers on behalf of any investors that would fall into any of these categories – unless those investments account for less than 10% of the fund’s assets. When the rule was introduced, hedge fund managers paid little attention to the ruling as the IPO market was dead. Now it is heating up, managers will have to examine more closely the end investors for whom they are buying IPOs and see whether they meet the restrictions.

The rule is also not exclusive to US IPOs. Greg Gnall, a securities regulatory attorney at law firm White & Case in New York, says: “I’m not sure that foreign managers are aware of this issue unless they are using a US broker/dealer who would tell them.”

Hedge fund managers worldwide that have registered with the SEC will be open to inspection, and the SEC could end up uncovering non-compliance with the new issue ruling.

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