The SEC approved a FINRA proposal, as twice amended, to adopt a separate rule set for firms that meet the definition of "capital acquisition broker" ("CAB") and elect to be governed under it. The final rule was published in the Federal Register.

The following securities activities may be conducted by a CAB:

  • 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 businesses 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 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 Securities Exchange Act.

Commentary / Steven Lofchie

This is a rule change that could be very significant. Firms that currently are registered as broker-dealers should consider whether there is any benefit to changing their regulatory status. See now adopted  FINRA Rule 116 (concerning the process for changing a firm's registration status).

More significantly, firms that currently are unregistered and do not know whether they might be subject to a registration requirement, or that wish to expand the scope of their activities, must now reconsider whether it could be worthwhile for them to register as CABs.  When deciding whether to register, firms also might consider the possible impact of the SEC's future initiatives, particularly if the SEC decides to expand the scope of the broker-dealer registration requirement, since a less burdensome set of rules now applies to firms that engage solely in the allowed activities for CABs.

The new CAB rules might be shorter than other FINRA rules that apply to broker-dealers, but they are no less burdensome. In fact, many of the CAB rules simply incorporate existing FINRA rules by cross-reference. The biggest advantage of the new rule set might be that it is tailored to exclude existing FINRA rules that are irrelevant to the activities that may be conducted by a CAB. On the one hand, that advantage might be too small to induce firms to register; on the other, some firms, such as private equity advisors, have been concerned about the SEC's pattern of enforcement (as reflected in the  SEC's recent action against Apollo) and may find that a shorter rulebook is enough to make them favor registration.

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