United States: Capital Acquisition Brokers: New Category Of Broker-Dealers Provides Limited Relief For Some Investment Banking Boutiques

Last Updated: September 20 2016
Article by Hillel Cohn

The SEC recently approved a set of FINRA rules which creates a new category of broker-dealers known as Capital Acquisition Brokers or CABs. The rules were originally proposed in 20141 and will go into effect on the date set forth in FINRA's regulatory notice regarding approval of the rules. The CAB rules are intended to provide regulatory relief for broker-dealers that limit their activities to investment banking. However, the relief provided is limited and the constraints on what business may be conducted by a CAB may diminish the interest of many broker-dealers in using this new category.

The Historical Problem

FINRA has historically applied a single set of requirements for all broker-dealers. Many of these rules make little sense when applied to broker-dealers that limit their business to M&A advisory work or corporate financing transactions. For example, many FINRA rules are designed to protect retail customers who buy and sell securities through their broker-dealer. While the SEC Private M&A No-Action letter provided some relief,2 it does not apply to firms providing corporate financing services or M&A services for public companies.

Who Qualifies as a Capital Acquisition Broker?

The recently approved FINRA rules create a new category of broker-dealers who will be entitled to somewhat relaxed regulatory requirements. CABs are broker-dealers who limit their business to the following:

  • Advising an issuer on capital raising activities
  • Advising a company on M&A transactions
  • Assisting in the preparation of offering materials for the sale of securities
  • Acting as placement agent in the sale of newly issued, unregistered securities to "institutional investors" (see discussion below regarding the definition of institutional investors)
  • Providing fairness opinions, assistance in negotiation, structuring advice and other support for M&A and other corporate transactions

CABs may not:

  • Underwrite registered offerings
  • Sell securities in private placements to investors who do not qualify as "institutional investors"
  • Engage in proprietary trading
  • Act as a broker or dealer filling customer buy/sell orders
  • Exercise investment discretion over customer accounts
  • Handle customer funds or securities
  • Operate a crowdfunding platform

Importantly, CABs may only sell securities in private placements to "institutional investors"—a category which is defined to exclude many persons who would qualify as "accredited investors." "Institutional investors" is limited to:

  • Institutional accounts as defined in the FINRA rules ($50 million of assets)
  • Qualified purchasers as defined in the Investment Company Act of 1940 ($5 million of investments or $25 million of investments under management)
  • Certain retirement and other benefit plans with at least 100 participants
  • Banks, insurance companies and registered investment companies
  • Governmental entities

The definition of "institutional investor" under the CAB rules is thus substantially narrower than the definition of "accredited investor" under Regulation D. Many brokers who act as placement agents for private placements may find the narrower definition unworkable and therefore determine not to register as a CAB.

What Relief Is Provided for CABs?

The relief for CABs from the requirements of the FINRA rules is summarized below.

Membership Registration and Qualification of Associated Persons. CABs are required to comply with all FINRA membership registration requirements and their associated persons are subject to the same licensing and examination requirements as are personnel associated with other broker-dealers.

Conduct Rules. CABs will be subject to most of FINRA's rules governing the conduct of broker-dealers, including the Know Your Customer and Suitability rules (new Rules 209 and 211 which are similar to current Rules 2090 and 2111). They will also be subject to all AML requirements, although they may test their AML compliance every two years, as opposed to testing every year. An important benefit of CAB status is a simplified rule on customer communications (new Rule 221) which essentially consists of a command to avoid false or misleading statements vs. the detailed review and clearance requirements for communications set forth in current Rule 2210. In addition, certain current rules relating to fair prices and mark-ups will not apply to CABs given that CABs will not engage in retail trading or market-making.

Supervision Requirements. CABs will be subject to a somewhat relaxed set of rules regarding the establishment and implementation of supervisorial controls. CABs will have a fair amount of discretion to design a supervisorial system which is suitable for the nature of their business. Registered principals will not be required to review all transactions, routine internal inspections will not be required, nor will annual certifications be required regarding the adequacy of the supervisory systems.

Financial and Operational Requirements. CABs will generally be subject to FINRA's rules on financial responsibility. However, many of the requirements will not be applicable in light of the fact that CABs cannot handle customer funds or securities, engage in firm commitment underwritings or engage in proprietary trading. CABs will not be required to adopt business continuity plans.

Securities Offerings. CABs will be subject to FINRA's rules governing private placements (current Rule 5122) and fairness opinions (current Rule 5150).

Investigations; Arbitration. CABs will be subject to essentially the same rules as other FINRA members regarding FINRA investigations and disciplinary actions, as well as the requirements to submit certain disputes for arbitration in accordance with the FINRA Code of Arbitration.

How Do Firms Register as Capital Acquisition Brokers?

Broker-dealers who are currently members of FINRA may file a Continuing Membership Application under NASD Rule 1017 when seeking to amend their membership status.

New applicants will be able to elect CAB status when submitting their applications for membership.


The CAB rules offer limited but meaningful relief from a number of FINRA requirements that are ill-suited for investment banking boutiques. FINRA has estimated that as many as 750 current member firms could be eligible for CAB status. However, given the limited business which may be conducted by a CAB, we expect that the new broker-dealer category will be attractive to a relatively narrow group of firms, primarily M&A boutiques, firms that provide advisory services on corporate financing transactions but do not engage in the sale of securities and firms that limit their selling activities to exempt offerings to institutional accounts.


1 See our blog post, "FINRA Releases Proposed Rule to Reduce the Regulatory Burdens on Boutique Investment Banks," available at http://www.bdiaregulator.com/2016/01/finra-releases-proposed-rule-to-reduce-the-regulatory-burdens-on-boutique-investment-banks/.

2 See M&A Brokers No-Action Letter (January 31, 2014), available at https://www.sec.gov/divisions/marketreg/mr-noaction/2014/ma-brokers-013114.pdf.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Hillel Cohn
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.