SEC Approves Rule Set for Capital Acquisition Brokers

The SEC recently approved FINRA’s proposed rule change to adopt a new Rule set for firms that meet the definition of “capital acquisition brokers” and that elect to be governed under this rule set (collectively, the ‘‘CAB rules’’).

In the associated Federal Register notice, FINRA states that there are member firms that are solely corporate financing firms that advise companies on mergers and acquisitions, advise issuers on raising debt and equity capital in private placements with institutional investors, or provide advisory services on a consulting basis to companies that need assistance analyzing their strategic and financial alternatives. FINRA explains that these firms often are registered as broker-dealers because of their activities and because they may receive transaction-based compensation as part of their services.  Nevertheless, FINRA believes that these firms do not engage in many of the types of activities typically associated with traditional broker-dealers.

The proposed rules subject capital acquisition brokers to the FINRA By-Laws, as well as core FINRA rules that FINRA believes should apply to all of its members.  However, there are several FINRA rules or certain aspects of FINRA rules that will not apply to capital acquisition brokers.  Some of the rules, among others, that will not be applicable are as follows:

  • Certain provisions of Rule 2111 – Suitability
  • Rule 2121 – Fair Prices and Commissions
  • Rule 2122 – Charges for Services Performed
  • Rule 2124 – Net Transactions with Customers
  • Most provisions of Rule 2210 – Communications with the Public
  • Certain provisions of Rule 3110 – Supervision
  • Certain provisions of Rule 3130 – Annual Certification of Compliance and Supervisory Processes
  • Certain provisions of Rule 3310 – Anti-Money Laundering Compliance Program
  • Rule 4370 – Business Continuity Plans and Emergency Contact Information)

Pursuant to the new rules, the term ‘‘capital acquisition broker’’ means any broker that solely engages in one or more of the following activities:

  • Advising an issuer, including a private fund, concerning its securities offerings or other capital raising activities;
  • advising a company regarding its purchase or sale of a business or assets or regarding its corporate restructuring, including a going-private transaction, divestiture or merger;
  • advising a company regarding its selection of an investment banker;
  • assisting in the preparation of offering materials on behalf of an issuer;
  • providing fairness opinions, valuation services, expert testimony, litigation support, and negotiation and structuring services; or
  • qualifying, identifying, soliciting, or acting as a placement agent or finder on behalf of an issuer in connection with a sale of newly-issued, unregistered securities to institutional investors; or on behalf of an issuer or control person in connection with a change of control of a privately-held company.

A firm will be permitted to register as, or change its status to, a capital acquisition broker only if the firm solely engages in one or more of these activities.  The term ‘‘capital acquisition broker’’ does not include any broker or dealer that:

  • Carries or acts as an introducing broker with respect to customer accounts;
  • holds or handles customers’ funds or securities;
  • accepts orders from customers to purchase or sell securities either as principal or as agent for the customer (except as permitted by CAB Rule 016);
  • has investment discretion on behalf of any customer;
  • engages in proprietary trading of securities or market-making activities;
  • participates in or maintains an online platform in connection with offerings of unregistered securities pursuant to Regulation Crowdfunding or Regulation A under the Securities Act of 1933; or
  • effects securities transactions that will require the broker or dealer to report the transaction under the FINRA Rules 6300 Series, 6400 Series, 6500 Series, 6600 Series, 6700 Series, 7300 Series or 7400 Series.

Capital acquisition broker’s applicants will follow the same procedures for membership as any other FINRA applicant, with four modifications.

First, an applicant for membership that seeks to qualify will have to state in its application that it intends to operate solely as such.

Second, in reviewing an application for membership as a capital acquisition broker, FINRA will consider, in addition to the standards for admission set forth in NASD Rule 1014, whether the applicant’s proposed activities are consistent with the limitations imposed under CAB Rule 016(c).

Third, CAB Rule 116(b) sets forth the procedures for an existing FINRA firm to change its status to a capital acquisition broker. If an existing firm is already approved to engage in the activities of a capital acquisition broker, and the firm does not intend to change its existing ownership, control or business operations, it will not be required to file either a NMA or a CMA. Instead, the firm will be required to file a request to amend its membership agreement to provide that: The firm’s activities will be limited to those permitted for capital acquisition brokers, and the firm agrees to comply with the CAB rules.

Fourth, CAB Rules 116(c) and (d) set forth the procedures for an existing capital acquisition broker to terminate its status as such and continue as a FINRA firm. Under Rule 116(c), such a firm will be required to file a CMA with FINRA, and to amend its membership agreement to provide that the firm agrees to comply with all FINRA rules.

For more guidance related to this topic, please refer to the related Notice in the Federal Register, or to our other posts on capital acquisition brokers.

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