The SEC has approved a series of FINRA rules that are meant to simplify regulation of firms engaged as M&A brokers and those who conduct other limited activities. While the rules may be simpler, it still looks like a regulatory morass to me.
The relaxed rules apply to capital acquisition brokers, or CABs. A CAB is 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;
- qualifying, identifying, soliciting, or acting as a placement agent or finder (i) on behalf of an issuer in connection with a sale of newly-issued, unregistered securities to institutional investors or (ii) on behalf of an issuer or control person in connection with a change of control of a privately-held company. For purposes of this part, a “control person” is a person who has the power to direct the management or policies of a company through ownership of securities, by contract, or otherwise. Control will be presumed to exist if, before the transaction, the person has the right to vote or the power to sell or direct the sale of 25% or more of a class of voting securities or in the case of a partnership or limited liability company has the right to receive upon dissolution or has contributed 25% or more of the capital. Also, for purposes of this part, a “privately-held company” is a company that does not have any class of securities registered, or required to be registered, with the SEC under Section 12 of the Exchange Act or with respect to which the company files, or is required to file, periodic information, documents, or reports under Section 15(d) of the Exchange Act;
- 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 the 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.
CAB firm principals and representatives are subject to the same registration, qualification examination, and continuing education requirements as principals and representatives of other FINRA firms. FINRA believes that it is providing CABs with flexibility to tailor their supervisory structures to their business model, which is geared toward acting as a consultant in capital acquisition transactions. CABs must designate and identify one or more principals to serve as a firm’s chief compliance officer.
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