FINRA Rule 5130

FINRA Rule 5130 creates strict rules that prevent brokerage firms and their employees from selling new stock offerings to accounts owned by industry insiders. When companies go public for the first time—called initial public offerings New issues New issues (or IPOs) refers to initial public offerings of equity securities, subject to FINRA Rules 5130 and 5131 that restrict certain persons, including financial industry personnel and hedge fund investors, from participating in these offerings. or IPOs—this rule ensures that financial industry professionals don't get unfair advantages.

The rule specifically covers IPOs of regular company stock. However, it doesn't apply to certain types of offerings, including private placementsA securities offering that is exempt from public registration requirements and typically limited to accredited or sophisticated investors., bonds that can convert to stock, preferred sharesEquity securities that have priority over common stock for dividend payments and asset claims but typically carry limited voting rights., or special purpose acquisition companies (SPACs).

This rule protects the fairness of public stock markets. Without these restrictions, brokerage firms could save the most profitable new stock offerings for themselves or for clients who might send them more business in the future. The rule ensures that regular public investors get fair access to buy new stocks at their initial offering prices.

Rule 5130 replaced earlier "hot issue" regulations that only applied to stocks that were trading above their IPO price in the secondary marketTrading and transfer activities that occur after initial securities issuance, involving transactions between investors rather than with the issuing company.. The current rule is broader—it covers all IPO securities regardless of how they perform after going public.

The newer rule also introduced the de minimis exceptionA regulatory exception that allows limited participation in restricted activities when the involvement falls below specified minimal thresholds., which wasn't available under the old rules. While the current framework defines restricted persons Restricted persons Restricted persons are individuals or entities prohibited or limited from participating in certain hedge fund investments due to regulatory restrictions, particularly FINRA Rules 5130 and 5131 regarding new issues, including financial industry personnel and their family members. more narrowly than the old rules did, it provides fewer exceptions overall. The new rule also standardizes the recordkeeping requirements that firms must follow to document their compliance.

The rule identifies several groups as "restricted persons" who cannot receive special IPO allocations. These groups include FINRA member firms and other brokerage companies, employees of these firms (except those working for very small brokerages with limited business), people who help underwriters find investors, portfolio managersInvestment professionals who make decisions about how to allocate assets in investment portfolios on behalf of clients or institutions. who control large amounts of money, certain owners of brokerage firms, and immediate family members of all these individuals.

However, the rule makes an important distinction: if someone manages investments only for their own family, they are not automatically considered a portfolio manager under this rule.

"Beneficial interestEconomic ownership or stake in an investment, including any right to share in gains, losses, or distributions, regardless of legal title." means any economic stake in an investment, including any right to share in gains or losses. The rule looks at economic reality, not just legal ownership on paper.

However, investment advisers who only collect management fees or performance fees from the funds they manage do not have beneficial interests, as long as they don't actually own part of the fund. The rule applies no matter how indirect the economic interest might be—it looks through all levels of ownership without requiring direct control.

Rule 5130 includes many exceptions that allow large institutional investorsProfessional investors such as pension funds, insurance companies, and asset managers who invest on behalf of others. to participate in IPOs, even if some of their owners might be restricted persons. These exemptions cover mutual funds, bank trust funds, insurance company investment accounts, publicly traded companies, foreign investment funds listed on exchanges, retirement plans, government employee benefit plans, charitable organizations, and religious organization plans.

Importantly, as of July 2025, business development companiesA type of closed-end investment company that invests in small and mid-sized businesses, subject to specific regulatory requirements under the Investment Company Act. also qualify for this exemption. This change expanded access for these regulated investment companies that focus on providing capital to smaller businesses.

The rule provides special relief for family investment structures. A "family investment vehicleA legal entity owned entirely by immediate or close family members for the purpose of managing family wealth and investments." is a legal entity that is owned entirely by immediate family members or close family members as defined by federal investment law.

When someone manages investments for one of these family entities, they don't automatically become a "restricted person" just because of their management role. This exception recognizes that managing your own family's money is different from managing money for outside clients.

Private investment funds like hedge funds usually cannot use the institutional exemptions listed above. Instead, they must rely on what's called the "de minimis" (meaning "minimal") exception.

This exception works in two ways. First, a fund can buy IPO shares if restricted persons own less than 10% of the fund. Second, even if restricted persons own more than 10% of the fund, the fund can still participate if those restricted persons receive no more than 10% of the profits and losses from each IPO investment.

For example, if a hedge fund has partners who are restricted persons owning 15% of the fund, the fund can still buy IPO shares as long as those partners don't get more than 10% of any gains or losses from those specific IPO investments.

Investment advisers typically create detailed compliance systems to follow this rule. They require investors to fill out questionnaires about their status when they first invest, and then provide annual updates confirming whether their status has changed.

Many advisers use a "negative consentAn approach where continued participation or unchanged status is assumed unless the party specifically provides notice to the contrary." approach for these annual updates. This means they assume an investor's status hasn't changed unless the investor specifically tells them otherwise. These certifications help funds properly determine which investors can participate in IPO investments and how to allocate any associated costs.

Some investment funds use "master-feeder structures Master-feeder structure A master-feeder structure is a fund arrangement where multiple feeder funds (typically designed for different investor types) invest into a single master fund that makes all investments, creating operational efficiency while accommodating diverse investor needs. ", where multiple smaller funds (feeders) pool their money into one larger fund (master). FINRA guidance says that brokerage firms don't need to get separate confirmations from each individual feeder fund.

Instead, the master fund can provide the necessary representations, as long as whoever signs for the master fund verifies the status of investors in all the feeder funds and ensures any representations stay current within twelve months. This guidance helps investment managers who aren't FINRA members understand what brokerage firms expect for compliance.