A Capital Acquisition Broker (CAB) is a firm that engages exclusively in corporate financing activities. These activities include any one or more of the following:
- Advising an issuer, including a private fund, about securities offerings or other capital raising activities;
- Advising a company about the purchase or sale of a business or assets, corporate restructuring, or the selection of an investment banker;
- Assisting in the preparation of offering materials;
- Providing fairness opinions, valuation services, expert testimony, litigation support, and negotiation and structuring services;
- Qualifying, identifying, soliciting, or acting as a placement agent or finder for the sale of unregistered securities to institutional investors (emphasis added) or in connection with a change of control of a privately-held company; and
- Effecting dispositions of a privately-held company to a buyer that will actively operate the company (as provided in the SEC’s M&A Brokers no-action letter).
These firms do not engage in many activities typically associated with traditional broker-dealers, such as:
- acting as an introducing broker with respect to customer accounts;
- handling customer funds or securities;
- accepting orders to purchase or sell securities either as a principal or as an agent for the customer;
- exercising investment discretion on behalf of customers; or
- engaging in proprietary trading of securities or market making activities.
Due to the narrow scope of activity engaged in by these firms, many FINRA rules are not or should not be applicable. As such, FINRA has created a separate, narrower set of rules to govern CAB firms.
Because the Securities and Exchange Commission (SEC) only recently approved FINRA’s definition of a Capital Acquisition Broker, many new and current FINRA member firms may not be aware that they qualify to covert to CAB status.
The CAB rules are intended to simplify and streamline the registration and compliance burden for firms engaged in raising debt or equity capital in private placements with institutional investors, and advising private equity firms and companies on M&A transactions, as well as other strategic and financial alternatives. The CAB rules provide a regulatory framework that parallels, but is simpler than, the standard FINRA rules to be followed by all FINRA member firms. By way of example, CABs are not subject to FINRA’s fair pricing rules and are also not required to hold annual compliance meetings, review or investigate transactions or conduct internal inspections. In addition, FINRA has streamlined advertising rules specific to CABs and their activities.
CABs are also exempt from the supervisory certification rules, the business continuity plan rule and the disaster recovery testing rule. While CABs must still implement an AML compliance program, need only conduct independent testing every two years, rather than annually
Why Convert to CAB Status?
FINRA encourages its qualifying member firms, as well as any firms submitting new applications for FINRA membership, to consider applying for CAB status. Converting to CAB status can provide firms with greater assurance that they will be governed by a regulatory structure tailored to the limited nature of their business.
Additionally, FINRA also encourages non-broker-dealer firms to consider registering as CABs if they meet the definition. Registering as CABs would help these firms remove any ambiguity about their status as non-broker-dealers, as well as providing a regulatory regime specifically suited to the limited nature of their business and operations.
Converting to CAB Status
New firms may apply for CAB Status during the process of filing their New Membership Application (NMA). When filing their NMA, firms must attest that their activities will be limited to those permitted for CABs and that they will comply with the CAB rules and regulations.
A current member firm must contact its regulatory coordinator and request to amend its Membership Agreement.
Firms that currently operate as full-service broker-dealers may convert to CAB status and then return to their former, full-service status, as long as they do so within one year of conversion. Firms that return to full status within a year are not required to file a Continuing Membership Application (CMA).
Registration as a CAB may be a solution for broker-dealers with limited activities, including: capital raising through private placements of private fund interests; certain additional private placements to institutional investors; private equity fund portfolio transactions; and advice to companies regarding mergers and acquisitions (M&A) and corporate restructuring transactions. Please see FINRA Regulatory Notice 16-37 for a more in-depth breakdown of the activities that do or do not qualify a firm to apply for CAB status. FINRA also provides a Capital Acquisition Broker Written Supervisory Procedures Checklist (CAB WSP Checklist) to aid CABs in fulfilling their compliance obligations under the CAB Rules. Finally, the CAB Rules themselves can be found in the CAB Rulebook.