FINRA Proposes Lighter Rule Set for Capital Acquisition Brokers

FINRA proposed a rule change to create a separate rule set for firms that elect to be governed under it and that meet the definition of "capital acquisition broker."

FINRA specified that a "capital acquisition broker" ("CAB") would mean any broker that engages solely in any 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 going-private transactions, divestitures or mergers;
• 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;
• qualifying, identifying, soliciting, or acting as a placement agent or finder with respect to institutional investors in connection with purchases or sales of unregistered securities; and
• effecting securities transactions solely in connection with the transfer of ownership and control of a privately held company through the purchase, sale, exchange, issuance, repurchase or redemption of, or a business combination involving, securities or assets of the company, to a buyer that will actively operate the company or business conducted with the assets of the company, in accordance with the terms and conditions of an SEC rule, release, interpretation or "no-action" letter that permits a person to engage in such activities without having to register as a broker or dealer pursuant to Section 15(b) of the Exchange Act.

In addition, the only contact that a CAB could have with investors would be the sale of private placements to institutional investors. A CAB also would not be permitted to buy or sell securities for its own account.

Although the rulebook that would apply to CABs is much smaller than that which would apply to ordinary brokers, most of this shrinkage would result from the fact that FINRA largely has carved out rules that would be irrelevant to CABs; e.g., limits on markups obviously are irrelevant to a firm that does not do proprietary trading. However, FINRA also took steps to carve out rules that were applicable (but which seemed to be overkill) for firms doing such limited business - including the requirement to hold annual compliance meetings and the requirement to conduct an annual compliance audit.