FINRA Rule 5131 (Anti-Spinning Rule)

FINRA Rule 5131(b) addresses a problematic practice called "spinning" that occurs when companies first sell their shares to the public. Spinning happens when investment banks give valuable IPO (initial public offeringThe first time a private company offers shares of stock to the general public to raise capital.) shares to corporate executives and board members as an incentive for future business relationships. The arrangement works as follows: these executives receive preferential access to profitable IPO shares and may later favor that same investment bank when selecting providers for future business deals.

This creates a potential conflict of interest. Executives should choose investment banks based on what's best for their company and shareholders, rather than based on personal financial benefits. Like its companion FINRA Rule 5130 FINRA Rule 5130 FINRA Rule 5130 (New Issue Rule) prevents brokerage firms from giving initial public offerings (IPOs) to accounts owned by industry insiders. This rule stops people who work in finance from getting special access to new stock offerings that might be underpriced and profitable. , this regulation exists to keep the IPO market fair and prevent these conflicts of interest.

The rule stops FINRA members—which include most major investment banks and broker-dealerA person or firm engaged in the business of buying and selling securities for the account of others or for its own account.—from giving IPO shares to certain high-risk accounts. Specifically, it targets accounts where executives or directors of public companies hold ownership stakes. This matters most when these individuals have the power to influence which investment bank their company chooses for future deals.

The prohibition also covers people who receive significant financial support from these executives or directors. This prevents obvious workarounds, like giving IPO shares to an executive's spouse or business partner instead.

Rule 5131(b) doesn't apply to every situation. Instead, it activates under specific timing and relationship conditions that create the highest risk for conflicts of interest.

The restrictions kick in during two key time periods. First, they apply for twelve months after the investment bank has already received compensation from the executive's company for investment banking services. Second, they apply for three months into the future if the bank expects to provide such services to that company.

The rule also covers explicit agreements where IPO allocations are directly tied to future investment banking business. More importantly, it addresses implicit arrangements where such connections are understood but not formally documented.

Private investment funds face particular challenges under Rule 5131(b) because they typically cannot use most of the standard exemptions available to other investors. Instead, they must rely on a special provision called the de minimis exemptionA regulatory exception that allows limited participation in restricted activities when the involvement falls below specified minimal thresholds., found in Rule 5131(b)(2).

This exemption creates a safe harbor for investment funds. It allows these funds to receive IPO allocations even when they have executive investors, provided those executives from any single covered company collectively own no more than 25% of the fund's beneficial ownershipThe concept of identifying the natural persons who ultimately own or control a legal entity, used in compliance screening to detect indirect relationships with sanctioned parties.. This threshold ensures that no single company's executives can dominate the fund's decision-making or create undue influence over the IPO allocation.

The New Issues 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. Rules technically apply only to FINRA members—the broker-dealers and investment banks that are directly subject to FINRA's authority. However, these rules indirectly affect investment advisers and private funds in important ways.

FINRA members must obtain annual certifications from their account holders, including private funds, confirming compliance with the New Issues Rules. This requirement effectively forces private funds to understand and follow these rules, even though they are not technically FINRA members themselves.

Additionally, contractual agreements typically require private funds and their investment advisorA professional who provides investment advice or manages client portfolios for compensation, typically regulated under the Investment Advisers Act. to protect (indemnifyLegal protection where one party agrees to compensate another for losses or damages arising from specified events or activities.) broker-dealers from any financial losses that result from violations of the New Issues Rules. This arrangement gives broker-dealers an incentive to work with compliant funds and creates real financial consequences for violations.

Rule 5131 uses the same definition of "beneficial interest" as Rule 5130, which looks beyond formal legal ownership to consider who actually controls or benefits from an investment. However, calculating these interests can become complicated when dealing with complex fund structures.

To address this complexity, FINRA added Supplementary MaterialAdditional guidance and interpretations provided by regulatory bodies to clarify the application of specific rules. .02(b) in February 2014. This provision offers modified calculation methods for accounts that receive investments through fund-of-funds structures. The modification responds to practical concerns from the private fund industry about unrealistic look-through requirements.

Under the original approach, funds would need to trace ownership through multiple layers—for example, from a main fund to a feeder fund to the ultimate investors. The industry argued this created impractical reporting burdens, especially since investors several layers removed typically cannot engage in spinning activities anyway.

The New Issues Rules, including Rule 5131, only apply to securities that meet the specific definition of a "new issue." Once IPO shares begin trading in the secondary market at market-determined prices rather than the original IPO price, these restrictions no longer apply.

"Journaling" refers to transferring securities between accounts through internal book entries rather than actual sale and repurchase transactions. FINRA has confirmed that journaling remains acceptable under Rule 5130, as long as transfers occur at current market prices rather than the original IPO pricing.

However, FINRA has not yet provided specific guidance about journaling under Rule 5131. This creates some uncertainty for market participants who need to transfer IPO allocations between related accounts.

On July 23, 2025, FINRA updated Rules 5130 and 5131 to create a new exemption for 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. (BDCs). This exemption covers publicly traded BDCs, non-traded BDCs, and private BDCs, making it easier for these investment vehicles to participate in IPO markets.

The exemption includes an important anti-abuse provision: it does not apply to BDCs that were created specifically to circumvent the prohibited person restrictions in the original rules. This prevents market participants from using BDC structures as a loophole to avoid the rules' intended protections.

This change reflects FINRA's recognition that BDCs serve legitimate investment purposes and that their structural characteristics reduce the spinning risks that the rules were designed to address.

Rule 5131(b) works hand-in-hand with Rule 5130 to create a comprehensive framework preventing conflicts of interest in IPO allocations. While the two rules target different types of problematic behavior, they share the same underlying goal of maintaining market integrity.

Rule 5130 focuses on preventing 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. —such as investment bank employees and their families—from receiving new issue allocations that could create conflicts with their professional duties. Rule 5131 specifically targets the spinning problem by blocking allocations to corporate executives when such distributions could conflict with their fiduciary dutiesLegal obligation to act in the best interests of another party, requiring utmost good faith and loyalty. to shareholders.

Together, these rules create overlapping layers of protection that address the various ways that IPO allocations can be misused to create inappropriate business relationships and conflicts of interest.