December 26, 2000
Mr. Jonathan Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: SR - NASD - 99 - 60: Notice of Filing of Amendment No. 2 to Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to Trading in Hot Equity Offerings Release No. 34-43627; 65 Fed. Reg. 76316 November 28, 2000 (the "Proposed Rule Change")
Dear Mr. Katz:
The Managed Funds Association (the "MFA") appreciates the opportunity to provide comments in response to the above-referenced Proposed Rule Change which the National Association of Securities Dealers, Inc. ("NASD") through its wholly owned subsidiary NASD Regulation, Inc. ("NASD Regulation") filed with the Securities and Exchange Commission (the "SEC" or the "Commission") on November 15, 2000.
MFA, located in Washington, D.C., is the only U.S.-based membership organization dedicated to serving the needs of professionals who specialize in the international managed funds industry - private and public managed futures funds, funds of funds, "hedge funds" (private alternative investment funds) and individual accounts, that provide alternative investment opportunities to institutional and private clients world-wide.
MFA's more than 700 members provide diverse perspectives of alternative investment professionals, including commodity trading advisors, commodity pool operators, investment advisers, fund of funds managers and hedge fund sponsors. These professionals in the aggregate manage a vast majority of the over $40 billion invested in managed futures and a significant portion of the nearly $400 billion invested in hedge funds. MFA members also include professionals providing essential services to the managed funds industry such as brokers, futures exchanges, cash managers, foreign exchange dealers, banks, accountants, lawyers, consultants and academics.
We applaud the NASD for the Proposed Rule Change, which we believe will significantly rationalize the application of the "hot issues" rules as well as eliminate much of the unnecessary costs and administrative burden necessitated by Business Conduct Rule IM-2110-1 as currently in effect. We must, however, draw your attention to one technical point in the Proposed Rule Change which, if not addressed, could materially adversely impact an entire sector of the managed funds industry without advancing the policies of the "hot issues" rules. We ask that the applicability of the Proposed Rule to commodity pool IPOs be clarified.
In order to simplify the determination of what securities offerings are subject to the restrictions on the sale of "hot issues," the Proposed Rule Change introduces the concept of "new issues" which it defines as, among other things, "any initial . . . public offering of an equity security." While we wholeheartedly agree that this approach is a major improvement over the current criterion of "trading at a premium in the secondary market," it is imperative that the initial public offerings of commodity pools be exempted from classification as "new issues." This is the approach which the Rule has always taken in the case of open-end mutual funds. The shares of an open-end mutual fund are not listed on or traded on an exchange. Rather, the fund continuously offers shares for sale as well as stands ready to redeem shares at the fund's closing net asset value. The policies and logic behind exempting open-end mutual funds are equally applicable to commodity pools.
The managed futures industry has approximately $40 billion in assets, including individual accounts as well as private and publicly offered commodity pools. The vast majority of commodity pools are offered and placed through private placements. There are, however, several publicly offered commodity pools whose interests are registered under the 1933 Act. There are no commodity pools which are currently listed and traded on a U.S. stock exchange as is the case with dozens of closed-end mutual funds. Commodity pool interests do not trade, so that there can by definition be no secondary market premium incorporated into their pricing. Furthermore, commodity pools are net asset value redemption entities which periodically - usually monthly - permit interests to be redeemed not based on market value (as there is none), but solely on the basis of such interests' pro rata share of each pool's assets. Furthermore, many public pools are also available for subscription at net asset value on an ongoing basis. Any premium that could conceivably exist in the pool context is economically precluded by the availability of frequent net asset value redemptions and subscriptions; and in the case of such pools as well as pools which do not offer interests on an ongoing basis, such premium is precluded because no market exists for such interests.
There is no policy reason for the "hot issue" rules to apply in a context where there is no market premium upon issuance of securities in an IPO. No abuse can result from the receipt by Wall Street professionals of allocations, even priority allocations, of a new issuance of commodity pool interests. Such interests are worth after sale exactly what was paid for them, and any subsequent increment in their value is a result solely of the pool's commodity trading, not of any secondary market trading in the interests themselves. As an indication of how alien the purposes of the "hot issue" policies are in the commodity pool context - far from there being any concern that Wall Street will reserve for itself prize commodity pool offerings - it is generally perceived to be a pro-public investor requirement for the Wall Street personnel involved in sponsoring a commodity pool to invest in it to show their support for their own product. This is because, rather than there being a premium to misappropriate, there is only a net asset value to be put at risk pari passu with all other investors. In fact, applicable Commodity Futures Trading Commission rules require that the investment of a pool sponsor's principals in a pool be disclosed because it is considered a negative indication if they do not buy into their own commodity pools' IPOs. Not only would it be extremely burdensome to compel the commodity pool industry to identify which of the prospective offerees of a commodity pool are restricted persons - let alone exclude such persons as offerees - but also it would be substantively counter-productive to prohibit the persons who sponsor public pools from investing in them.
MFA believes this is only a technical correction. Let us close simply by emphasizing that we have no doubt that the commodity pool industry speaks with one voice in urging that the Proposed Rule Change be clarified regarding treatment of IPOs of commodity pools. Clearly commodity pools - both those which are private placements as well as those which are publicly offered but not listed on a U.S. exchange - are similar to open-end mutual funds and should be accorded the same treatment. In the same vein, MFA believes that if in the future a commodity pool is listed on a U.S. exchange that it should be eligible for the closed-end mutual fund exemption found in the Proposed Rule.
Please call me if you have any questions concerning this letter.
John G. Gaine
CH1 2090514v5 December 22, 2000 (03:53pm)