Earlier this year, FINRA began accepting applications for firms wishing to register as Capital Acquisition Brokers.  A Capital Acquisition Broker (“CAB”) is a firm that engages in a limited range of activities.  Such activities include advising companies and private equity funds on capital raising and corporate restructuring, and acting as placement agents for sales of unregistered securities to institutional investors under limited conditions. CABs cannot carry or maintain customer accounts, handle customers’ funds or securities, accept customers’ trading orders, or engage in proprietary trading or market-making.  Firms that elect CAB status are governed under different regulatory rules so that they can avoid the more stringent requirements applicable to full-service broker-dealers.

You may be familiar with the FINRA’s pay-to-play rules that became effective on August 20, 2017.  The new Rules 2030 and 4530 regulate the activities of broker-dealers that engage in distribution or solicitation activities with government entities on behalf of investment advisers. Recently, FINRA released a notice to specifically declare that CABs, beginning December 6, 2017, will be subject to FINRA Rules 2030 and 4530.  Under the rules, if a member solicits a government entity on behalf of an investment adviser, they cannot receive compensation for a period of two years if a contribution was made by the Firm or a covered person of the firm to the government entity solicited.  An official of a government entity includes an incumbent, candidate or successful candidate for elective office of a government entity if the office is directly or indirectly responsible for, or can influence the outcome of, the hiring of an investment adviser or has authority to appoint any person who is directly or indirectly responsible for, or can influence the outcome of, the hiring of an investment adviser.

Beginning December 6, 2017, CABs that solicit on behalf of investment advisers will be required to maintain books and records to allow FINRA to examine compliance with Rule 2030.  The following records must be maintained:

  • the names, titles, business and residence addresses of all covered associates;
  • the name and business addresses of each investment adviser on behalf of which the covered member has engaged in distribution or solicitation activities with a government entity within the past five years;
  • the name and business address of all government entities with which the covered member has engaged in distribution or solicitation activities for compensation on behalf of an investment adviser, or which are or were investors in any covered investment pool on behalf of which the covered member has engaged in distribution or solicitation activities with the government entity on behalf of the investment adviser to the covered investment pool, within the past five years (but not prior to the rule’s effective date); and
  • all direct or indirect contributions made by the covered member or any of its covered associates to an official of a government entity, or direct or indirect payments to a political party of a state or political subdivision thereof, or to a PAC.

As mentioned, FINRA’s pay-to-play rules were already in effect for member firms on August 20, 2017.  However, since CABs are governed under a separate set of rules, FINRA thought it was important to specifically state that CABs are also subject to FINRA Rules 2030 and 4530.

For more guidance related to this topic, please refer to our other posts on capital acquisition brokers.