SEC Allows Non-SEC-Registered Collective Trust Funds to Buy IPOs

The SEC approved a FINRA rule change that exempts collective trust funds ("CTFs") from restrictions on buying initial public offerings and from the ban on spinning in new-issue allocations.

A "CTF" is defined as a trust fund maintained by a bank whose interests are issued in connection with a qualified plan. A "qualified plan" is, in turn, defined as including certain (i) stock bonus or similar plans, (ii) annuity plans related to employer contributions, (iii) plans for government employees, and (iv) plans for church employees.

The rule change extends the exemptions in FINRA Rule 5130 ("Restrictions on the Purchase and Sale of Initial Equity Public Offerings") and, by reference, Rule 5131 ("New Issue Allocations and Distributions") to these funds, treating them like registered investment companies. It reaches only funds described in Exchange Act Section 3(a)(12)(A)(iv) ("Definitions and application"). FINRA cited (i) the funds' inherent oversight, (ii) the anti-circumvention condition, and (iii) more investment options for retirement plan investors. The exemption is available only if the fund was not formed or maintained to allow restricted persons to invest in new issues.

FINRA dropped a proposed condition requiring at least 1,000 plan participants and beneficiaries. The only commenters, the Coalition of Collective Investment Trusts and the Investment Company Institute, said participant counts change daily for reasons unrelated to abuse risk and are hard to determine in omnibus arrangements. FINRA agreed the condition was difficult to administer and unnecessary.

Both commenters also cited the frameworks governing the funds, including banking supervision, ERISA, and fiduciary duties. The Coalition said fiduciaries may not use managed assets to influence a broker-dealer's allocation of new offerings. FINRA said the funds can accept investments only from retirement plans meeting specified criteria.

The SEC found the change consistent with Exchange Act Section 15A(b)(6) ("Registered securities associations"), which requires FINRA rules to prevent fraud and manipulation and protect investors. The SEC had opened proceedings in July (see prior coverage), and the order did not state an effective date.