Memorandum to Clarify the Scope of the Foreign Investment Company Exemption under NASD Rule 2790(c)(6)

August 6, 2004

NASD staff is issuing this memorandum to clarify the scope of the foreign investment company exemption under NASD Rule 2790(c)(6).

Background

On October 24, 2003, the Securities and Exchange Commission approved new Rule 2790 (Restrictions on the Purchase and Sale of IPOs of Equity Securities), which replaced the Free-Riding and Withholding Interpretation (IM-2110-1). Paragraph (a) of Rule 2790 provides, among other things, that a member or a person associated with a member may not sell a new issue to any account in which a restricted person has a beneficial interest, except as otherwise permitted under the Rule. Paragraph (c)(6) exempts from the Rule sales to and purchases by an investment company organized under the laws of a foreign jurisdiction, provided that: (1) the investment company is listed on a foreign exchange or authorized for sale to the public by a foreign regulatory authority; and (2) no person owning more than 5% of the shares of the investment company is a restricted person.

Since the Rule's adoption, the staff has received several inquiries regarding the scope of the foreign investment company exemption. In particular, the staff has been asked whether the exemption in paragraph (c)(6) requires that a foreign investment company be offered for sale to the public, or whether a listing on a foreign exchange (e.g., Irish Stock Exchange) that is limited to select investors (e.g., high net worth individuals) is sufficient. As discussed below, the exemption in paragraph (c)(6) is not available to an entity listed on a foreign exchange that is not also for sale to the public.

Analysis

In Notice to Members 03-79 (December 2003), the staff explained that the foreign investment company exemption is intended to extend to foreign investment companies that are similar to U.S. registered investment companies. U.S. registered investment companies are, among other things, available for sale to the public. The exemption in paragraph (c)(6) expressly provides that the foreign investment company must be "for sale to the public." In this regard, the term "for sale to the public" modifies both the term "listed on a foreign exchange" and the term "authorized." Thus, the exemption for foreign investment companies extends only to an investment company organized under the laws of a foreign jurisdiction that is either "listed on a foreign exchange for sale to the public" or "authorized for sale to the public," and that does not have any restricted person that beneficially owns more than 5% of the company's shares.

As discussed in Notice to Members 03-79, a foreign investment company that is limited to select investors would not be considered as "for sale to the public." NASD staff has explained that foreign investment companies that are limited to high net worth individuals are not eligible for the foreign investment company exception. Inasmuch as U.S. registered investment companies are not limited to sale to high net worth individuals, it would be inconsistent to permit foreign investment companies to impose such requirements and still avail themselves of the exemption provided for foreign investment companies under Rule 2790. A foreign investment company that is limited to select investors would, however, be eligible to purchase new issues in accordance with the de minimis exemption set forth in paragraph (c)(4).

Please note that the opinions expressed in this memorandum are staff opinions only and have not been reviewed or endorsed by the NASD Board of Governors. If you have any questions regarding this memorandum, please contact Gary L. Goldsholle, Associate Vice President and Associate General Counsel, Office of General Counsel, NASD Regulatory Policy and Oversight, at (202) 728-8104; or Afshin Atabaki, Attorney, Office of General Counsel, NASD Regulatory Policy and Oversight, at (202) 728-8902