Restricted persons

Under , known as the New Issue Rule, restricted persons are individuals and entities that cannot receive allocations of new issues. New issues are (IPOs) of equity securities—when companies first sell their stock to the public. This classification creates significant challenges for hedge funds that invest in IPOs. These funds must establish procedures to identify which investors are restricted persons and ensure that IPO profits only go to eligible investors.

Rule 5130 creates safeguards for the initial public offering process. The rule ensures that cannot use their market access to favor industry insiders over regular public investors. Without this rule, broker-dealers might allocate valuable IPO shares to themselves, their employees, or other industry participants who could generate business for them. This would give unfair advantages to industry insiders at the expense of ordinary investors.

works alongside Rule 5130 to address additional conflicts of interest. Specifically, Rule 5131 targets the practice of allocating IPO shares to corporate executives or directors with the expectation of receiving their company's investment banking business in return.

Rule 5130(i)(10) defines "restricted person" to include several categories of people and entities. The main categories are FINRA members and other broker-dealers, personnel who work at these broker-dealers (except those at limited business broker-dealers), finders and people who act in a fiduciary capacity to the managing underwriter (such as attorneys, accountants, and financial consultants), , certain owners of broker-dealers, and certain immediate family members of all the foregoing persons.

Rule 5131(b) prohibits a practice called "spinning." Spinning involves allocating new issues to executive officers, directors, or other employees of companies with the intention of encouraging those individuals to direct their company's investment banking business to the broker-dealer. This rule operates as a separate restriction alongside Rule 5130. It addresses different conflict-of-interest concerns, though these concerns complement the restricted person prohibitions in Rule 5130.

Like Rule 5130, Rule 5131(b) includes exemptions for certain entity types and thresholds. However, private funds generally cannot use these exemptions.

These rules create significant operational challenges for hedge funds. Funds that manage new issue investments must develop comprehensive compliance processes. They need to determine each investor's restricted person status, calculate what percentage of fund ownership restricted persons hold, allocate new issue profits only to non-restricted investors, and maintain detailed documentation proving compliance with the rules.

The New Issues Rules apply directly only to FINRA members. However, most investment advisers and their managed funds are neither FINRA members nor affiliated with FINRA members. Despite this, Rules 5130 and 5131(b) still affect these funds indirectly. FINRA members are required to obtain annual written statements from account holders about their restricted person status. Additionally, contractual agreements between account holders (including private funds and their advisers) and their brokers often require the account holder to indemnify the broker for losses that result from New Issues Rules violations. Although it remains theoretically possible, regulatory action against a private fund and its adviser for new issue rule violations—such as for market manipulation—could still occur.

Private funds generally cannot use the exemptions available to other types of entities. When a private fund has who qualify as restricted persons, the fund typically must rely on the provided by FINRA Rule 5130(c)(4). This exemption allows an entity that would otherwise be prohibited from purchasing new issues due to restricted person ownership to still participate in new issue offerings under certain conditions.

The exemption works in one of two ways. First, if restricted persons own no more than 10% of the entity's beneficial ownership, the entity can participate in new issues. Second, if restricted persons own more than 10% of the entity, the entity may still invest in new issues as long as those restricted persons receive no more than 10% of the profits and losses from each new issue.

The New Issues Rules only restrict the initial sale and allocation of securities that meet the definition of "new issue." Once a security stops trading at its initial public offering price and begins trading in the secondary market, the New Issues Rules no longer apply to that security. FINRA has allowed the transfer of new issue shares between accounts through journal entries rather than traditional purchase and sale transactions. However, such transfers must occur at prevailing market prices at the time of transfer, not at the IPO price. FINRA has not specifically addressed whether this procedure applies to Rule 5131.

On July 23, 2025, FINRA expanded the exemptions to both Rule 5130 and Rule 5131(b) to include (BDCs). This expansion applied to non-traded, private, and publicly traded BDCs, as long as such BDCs were not formed or maintained specifically to circumvent the restrictions on restricted person participation in new issues. FINRA recognized that BDCs were already subject to comprehensive regulation under the , which justified this exemption.

This change did not affect how the rules apply to private hedge funds. Private hedge funds continue to rely on the de minimis exemptions described above.