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News September 13, 2004 Issue

Hedge Fund Group Fires Back on NASD Staff’s Interpretation

The Managed Funds Association does not like the way the NASD staff has interpreted the foreign investment company exception in the new IPO rule, and they’ve asked the SEC to do something about it.

At issue: whether the exemption for foreign investment companies in NASD Rule 2790 applies to all foreign investment companies listed on an exchange, regardless of whether they are offered for sale to the public. In an August 6 memorandum, the NASD staff interpreted the exemption as applying only to exchange-listed foreign investment companies that were "for sale to the public" (IM Insight, August 16, 2004).

In a September 8 letter to SEC Chairman William Donaldson, the MFA said that interpretation rewrites the exemption "in a way that is not reasonably and fairly implied by the language of the rule." The interpretation, said the MFA, "constitutes a proposed rule change . . . and cannot lawfully take effect unless and until the NASD has filed it as such and obtained [SEC] approval . . . ." The group noted that the interpretation "has created, and unless it is withdrawn immediately will continue to create, substantial confusion and disruption among foreign investment companies" as well as among domestic and international hedge funds in which those companies invest. The group asked the NASD and/or SEC to take immediate action to withdraw the interpretation.

According to the letter, MFA’s outside counsel, Roger Blanc of Willkie Farr, sent an advance draft of the letter to the NASD staff. When the staff didn’t back down, said the MFA, its outside counsel commented "that the NASD Staff Memorandum is without legal foundation and that the NASD would proceed at its peril without protection under the antitrust laws if it sought to enforce a rule that had not been filed under Section 19(b) of the Exchange Act" (which governs SRO rulemaking).