Notice2025-10882
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend the FINRA Capital Acquisition Broker (“CAB”) Rules
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
June 16, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 90 Issue 114 (Monday, June 16, 2025)</title>
</head>
<body><pre>
[Federal Register Volume 90, Number 114 (Monday, June 16, 2025)]
[Notices]
[Pages 25396-25409]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-10882]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-103216; File No. SR-FINRA-2025-005]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend
the FINRA Capital Acquisition Broker (``CAB'') Rules
June 10, 2025.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 4, 2025, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by FINRA. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing amendments to the FINRA Capital Acquisition
Broker (``CAB'') Rules (``CAB Rules''), which are discussed in greater
detail below.
The text of the proposed rule change is available on FINRA's
website at <a href="https://www.finra.org">https://www.finra.org</a>, at the principal office of FINRA and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Overview
CABs are broker-dealers that help promote capital formation through
specified functions, essentially acting as placement agents for sales
of unregistered securities to institutional investors; acting as
intermediaries in connection with the change of control of privately
held companies; and advising companies and private equity funds on
capital raising and corporate restructuring.\3\ Member firms that meet
the CAB criteria may elect to be governed by the CAB Rules. CABs'
specified functions do not include broader broker-dealer activities,
such as accepting customers' trading orders, carrying customer
accounts, handling customers' funds or securities, or engaging in
proprietary trading or market-making.\4\
---------------------------------------------------------------------------
\3\ See CAB Rule 016(c)(1).
\4\ See CAB Rule 016(c)(2).
---------------------------------------------------------------------------
Given their limited institutional business model, CABs are subject
to fewer restrictions on particular activities (such as advertising)
and are not subject to sales practice requirements for particular
products that CABs do not offer, such as variable insurance contracts
or investment company securities.
CAB Supervisory Requirements
CABs are subject to less extensive supervisory requirements than
non-CAB member firms; however, pursuant to CAB Rule 311, CABs are
subject to FINRA's core supervisory requirements. By subjecting CABs to
specified
[[Page 25397]]
provisions of FINRA Rule 3110, CAB Rule 311 requires CABs to establish
and maintain a system to supervise the activities of each associated
person that is reasonably designed to achieve compliance with
applicable securities laws and regulations and applicable FINRA rules.
A CAB's supervisory system must provide, at a minimum:
<bullet> The establishment and maintenance of written procedures as
required by FINRA Rule 3110;
<bullet> The designation, where applicable, of an appropriately
registered principal with authority to carry out the CAB's supervisory
responsibilities for each type of business in which it engages for
which registration as a broker-dealer is required;
<bullet> The registration and designation as a branch office or
office of supervisory jurisdiction (``OSJ'') of each location,
including the CAB's main office, that meets the definitions contained
in Rule 3110(f);
<bullet> The designation of one or more appropriately registered
principals in each OSJ and one or more appropriately registered
representatives or principals in each non-OSJ branch office with
authority to carry out the supervisory responsibilities assigned to
that office by the CAB;
<bullet> The assignment of each registered person to an
appropriately registered representative(s) or principal(s) who shall be
responsible for supervising that person's activities; and
<bullet> The use of reasonable efforts to determine that all
supervisory personnel are qualified, either by virtue of experience or
training, to carry out their assigned responsibilities.\5\
---------------------------------------------------------------------------
\5\ See CAB Rule 311(a); see also FINRA Rules 3110(a)(1) through
(6).
---------------------------------------------------------------------------
CABs also must establish, maintain, and enforce written procedures
to supervise the CAB's and its associated persons' activities that are
reasonably designed to achieve compliance with applicable securities
laws and regulations and FINRA rules. Such procedures must include
procedures for the review of incoming and outgoing written (including
electronic) correspondence to properly identify and handle in
accordance with firm procedures, customer complaints, and internal or
external communications that require review under FINRA rules and
federal securities laws.\6\ CABs also must ascertain the good
character, business reputation, qualifications, and experience of an
applicant before the CAB applies to register that applicant with FINRA
and before making a representation to that effect on the application
for registration.\7\ Consistent with FINRA Rule 3110, CABs have the
flexibility to tailor their supervisory systems to their limited
business models.
---------------------------------------------------------------------------
\6\ See CAB Rule 311(a); see also FINRA Rules 3110(b)(1),
(b)(4), (b)(5), and (b)(7).
\7\ See CAB Rule 311(a) and FINRA Rule 3110(e).
---------------------------------------------------------------------------
CABs must designate and specifically identify to FINRA one or more
principals to serve as chief compliance officer.\8\ In addition, CABs
are subject to FINRA Rules 3220 (Influencing or Rewarding Employees of
Others), 3240 (Borrowing from or Lending to Customers), and 3270
(Outside Business Activities of Registered Persons).\9\
---------------------------------------------------------------------------
\8\ See CAB Rule 313.
\9\ See CAB Rules 322, 324, and 327.
---------------------------------------------------------------------------
CABs are not subject to all of the same supervisory requirements
that apply to non-CAB member firms, however. For instance, there is no
requirement for CAB representatives and principals to participate in
annual interviews with firm compliance personnel, for a CAB to conduct
annual reviews of the businesses in which it engages, or for a CAB to
conduct periodic inspections of its OSJ, branch, and non-branch
offices.\10\ CABs also are not subject to FINRA Rule 3110's requirement
for members to adopt and implement procedures for the review of
securities transactions that are effected for specified accounts of the
member, its associated persons, and other related persons.\11\
---------------------------------------------------------------------------
\10\ See CAB Rule 311(a) and FINRA Rule 3110(c).
\11\ See CAB Rule 311(a) and FINRA Rule 3110(d).
---------------------------------------------------------------------------
Growth of CAB Membership
The CAB Rules became effective on April 14, 2017.\12\ A firm may
elect CAB status either by stating in its new member application that
it intends to operate as a CAB, or if the firm is already registered as
a broker-dealer, by amending its membership agreement to state that it
will operate as a CAB going forward.\13\
---------------------------------------------------------------------------
\12\ See Regulatory Notice 16-37 (October 2016). See also
Securities Exchange Act Release No. 78617 (August 18, 2016), 81 FR
57948 (August 24, 2016) (Order Approving File No. SR-FINRA-2015-
054).
\13\ See CAB Rules 112 and 116.
---------------------------------------------------------------------------
The number of member firms that have elected CAB status has grown
gradually since the CAB Rules became effective. During 2017, 44 member
firms elected CAB status.\14\ As of the end of 2024, the number of
members that have elected CAB status had grown to 65 firms.\15\ Some
existing members that initially elected CAB status subsequently amended
their membership agreements to revert to non-CAB status.\16\ A few
former CABs have filed a Form BDW and withdrawn their broker-dealer
registration entirely.
---------------------------------------------------------------------------
\14\ Thirty-eight of these firms were already member firms at
the time the CAB Rules took effect and elected CAB status as
permitted by CAB Rule 116(b). CAB Rule 116(b) provides a means by
which an existing FINRA member can elect CAB status without having
to file an application for approval of change in ownership, control,
or business operations pursuant to FINRA Rule 1017. Six firms
elected CAB status as part of their new member application in 2017.
See generally CAB Rules 111-115.
\15\ Thirty-three of these firms were existing member firms that
elected CAB status pursuant to CAB Rule 116(b), and 32 firms elected
CAB status as part of their initial application.
\16\ During the first year after an existing member elects CAB
status pursuant to CAB Rule 116(b), the member may terminate its CAB
status and continue operations as a non-CAB broker-dealer member
without having to file an application for approval of a material
change in business operations pursuant to FINRA Rule 1017. The CAB
must file a request to amend its membership agreement to provide
that the member agrees to comply with all FINRA Rules and execute an
amended membership agreement that imposes the same limitations on
the member's activities that existed prior to the member's election
of CAB status. See CAB Rule 116(d).
---------------------------------------------------------------------------
Modernization of FINRA Capital Raising Rules
Adoption of the CAB Rules is one of a number of steps taken by
FINRA to modernize its regulation of members' participation in capital-
raising activities and to increase efficiency and reduce unnecessary
burdens on the capital-raising process without compromising important
protections for investors. The rules were intended to improve
efficiency and reduce regulatory burdens by reducing the range of rules
that apply to CABs given their limited activities and institutional
business model, while maintaining necessary investor protections. FINRA
believes that the CAB Rules continue to meet these goals, thereby
supporting capital formation, particularly with regard to private
placement activities.
FINRA notes that there has been tremendous growth in the number and
dollar amount of unregistered securities offerings in the U.S. For
example, an analysis of data derived from all initial Regulation D
(``Reg D'') filings finds that the number of deals increased from
22,853 in 2015 to 32,554 in 2024 and the dollar value of these deals
doubled during this time period.\17\ To protect investors in these
markets, FINRA has
[[Page 25398]]
in place both examination programs \18\ and filing requirements \19\
for specified members that engage in these activities to help ensure
that they are complying with applicable SEC and FINRA standards and,
per Regulation Best Interest (``Reg BI''), that recommendations of
unregistered securities are in the best interest of retail
customers.\20\ FINRA's oversight applies to members that are registered
broker-dealers and funding portals. While FINRA currently does not have
data that would enable it to calculate the percentage of all private
placements conducted through registered broker-dealers, it believes
generally that only a fraction of private placement deals are conducted
through registered broker-dealers.\21\ FINRA believes that most of the
remaining private placements are conducted through either the issuer of
the securities or an intermediary that is not registered as a broker-
dealer and therefore not subject to broker-dealer regulation by FINRA
and the SEC. FINRA believes that investors would benefit if more
private placements were conducted through CABs and thus subject to
regulatory oversight.
---------------------------------------------------------------------------
\17\ See SEC Report, Market Statistics of Exempt Offerings under
Regulations A, D, and Crowdfunding March 2025 (published April 28,
2025), <a href="https://www.sec.gov/files/dera-offering-reg-d-cf-2504.pdf">https://www.sec.gov/files/dera-offering-reg-d-cf-2504.pdf</a>.
While initial Reg D filings indicate substantial increases between
2015 to 2024, in both number of deals and their dollar value (with a
peak in 2021 in terms of number of filings and 2023 in terms of
their dollar value), it is possible that the amendments to the
initial Reg D filings would result in an increase to the aggregate
amount.
\18\ See, e.g., 2025 FINRA Annual Regulatory Oversight Report,
<a href="https://www.finra.org/sites/default/files/2025-01/2025-annual-regulatory-oversight-report.pdf">https://www.finra.org/sites/default/files/2025-01/2025-annual-regulatory-oversight-report.pdf</a>.
\19\ See FINRA Rule 5122 (Private Placements of Securities
Issued by Members) and FINRA Rule 5123 (Private Placements of
Securities). CABs are not subject to these rules' filing
requirements. Under the current CAB Rules, CABs may only act as
placement agents on behalf of issuers in connection with the sale of
newly-issued unregistered securities to institutional investors, as
defined under CAB Rule 016(i), or on behalf of an issuer or control
person in connection with a change of control of a privately-held
company. See CAB Rule 016(c)(1)(F). The term ``institutional
investor'' under the CAB Rules includes, among other things, many of
the same types of persons who are investing in private offerings
that are excluded from filing under FINRA Rules 5122 and 5123. See,
e.g., FINRA Rules 5122(c)(1)(A), (B), and 5123(b)(1)(A) and (B)
(exempting from filing private offerings sold solely to
institutional accounts as defined in FINRA Rule 4512(c) and
qualified purchasers, as defined in Section 2(a)(51)(A) of the
Investment Company Act of 1940 (``ICA'')). Nevertheless, FINRA
believes that its examinations and oversight of CABs protect
investors through the review and monitoring of CABs' activities,
including private placements.
\20\ 17 CFR 240.15l-1.
\21\ For example, a 2020 white paper published by the SEC
Division of Economic and Risk Analysis found that in the total
population of Reg D offerings filed with the Commission between 2009
and 2015, fewer than 20 percent of issuers, on average, reported
using an intermediary. Among a sample of 210 cases that the white
paper analyzed, of the 154 cases that involved use of an
intermediary, only 40 percent of these intermediaries were broker-
dealers. See Rachita Gullapalli, Division of Economic and Risk
Analysis, SEC, Misconduct and Fraud in Unregistered Offerings
(August 2020) at 24, <a href="https://www.sec.gov/files/misconduct-and-fraud-unregistered-offerings.pdf">https://www.sec.gov/files/misconduct-and-fraud-unregistered-offerings.pdf</a>. Moreover, FINRA analysis finds that only
around 10 percent of new Reg D offerings during 2013-2022 involved
at least one FINRA-registered broker-dealer. This analysis is based
on initial Reg D filings and may underestimate the true number of
intermediaries in such cases where an issuer decided to engage a
finder or a placement agent after the initial Reg D filing.
---------------------------------------------------------------------------
Industry Engagement on Proposed Changes to CAB Rules
In December 2017, the FINRA Board of Governors (``Board'') approved
the creation of an advisory committee to the Board called the Capital
Acquisition and Placement Broker Committee (``CAP Committee''). The
Board's resolutions instructed the CAP Committee to: (1) make
recommendations to FINRA on SEC and FINRA policies that affect the
activities of CABs and non-CAB broker-dealer members that have similar
business models; and (2) propose to FINRA, for its consideration and
decision, new initiatives, new rules, or amendments to the CAB Rules
and to FINRA Rules that apply to non-CAB broker-dealer members that
have similar business models. The CAP Committee included both
individuals registered with CABs and those registered with non-CAB
broker-dealer members that have similar business models.\22\
---------------------------------------------------------------------------
\22\ The CAP Committee met several times during 2018 and 2019 to
discuss these issues, and pursuant to the Board's enabling
resolutions, terminated as an advisory committee in December 2019.
---------------------------------------------------------------------------
FINRA subsequently published Regulatory Notice 20-04 requesting
comment on several proposed amendments to the CAB Rules. As stated in
Regulatory Notice 20-04, FINRA believed that the proposed amendments
would ``make [the CAB Rules] more useful to CABs without reducing
investor protection.'' Regulatory Notice 20-04 and the comments
received are discussed in greater detail below.
Overview of Proposed Amendments
FINRA has determined to amend the CAB Rules as part of its ongoing
efforts to ensure that FINRA rules are effective and efficient and its
rules relating to the capital-raising process support efficient capital
formation.\23\ FINRA believes that the proposed amendments are
reasonable in light of the experience gained since adoption of the CAB
Rules, as well as changes in the regulatory environment, such as the
Commission's adoption and implementation of Reg BI and Form CRS,\24\
which have added investor protections that did not exist at the time
the CAB Rules were adopted.
---------------------------------------------------------------------------
\23\ See, e.g., Regulatory Notice 25-06 (March 2025) (requesting
comment on modernizing FINRA rules, guidance and processes to
facilitate capital formation, including the CAB Rules) and
Regulatory Notice 17-14 (April 2017) (requesting comment on FINRA
rules impacting capital formation).
\24\ See 17 CFR 240.17a-14.
---------------------------------------------------------------------------
As a result of the CAP Committee meetings, as well as ongoing
engagement with industry members, including in the context of
Regulatory Notice 20-04, FINRA believes that the current CAB Rules
include limitations on CABs' activities that may be unnecessarily
restrictive and have unintended consequences. The proposed rule change
is designed to remedy such challenges. If the Commission approves these
proposed changes, non-CAB broker-dealer members or firms that are
eligible for an exemption from broker-dealer registration under the
Exchange Act \25\ may be encouraged to elect CAB status, thereby
benefitting these firms and investors alike.
---------------------------------------------------------------------------
\25\ See infra note 30 and accompanying text.
---------------------------------------------------------------------------
First, FINRA is proposing to expand the pool of permissible
investors for sales of newly-issued unregistered securities under the
CAB Rules to include ``eligible employees'' (under the proposed amended
CAB Rules definition of ``institutional investor''). The proposed
definition of ``eligible employee'' includes ``Knowledgeable
Employees'' under Investment Company Act (``ICA'') rules for private
fund issuers,\26\ and specified officers, directors, and employees of
issuers other than private funds. Such investors have the expertise and
knowledge about the issuer, and the resources to retain counsel and
advisors, if necessary, to understand the risks of their investment. As
such, these investors do not raise the same investor protection
concerns as, for example, retail investors \27\ who are not officers,
directors or employees of the issuer, or other institutional investors.
Reg BI and Form CRS provide an additional layer of investor protection
to the extent any eligible employee receives a recommendation of any
securities transaction or investment strategy involving securities from
a broker-dealer or its associated person, and uses the recommendation
primarily for personal, family, or household purposes under Reg BI, or
receives
[[Page 25399]]
services primarily for personal, family, or household purposes under
Form CRS. Thus, FINRA does not believe that this proposed expansion
would materially impact investor protection.
---------------------------------------------------------------------------
\26\ See infra notes 36-38 and accompanying text.
\27\ The CAB rules do not define ``retail investor.'' For
purposes of this discussion, that term is intended to include
investors that are not ``institutional investors'' under CAB Rule
016(i). See infra notes 34-35 and accompanying text. It should be
noted that ``retail investor'' for purposes of this discussion, and
the terms ``retail customer'' and ``retail investor'' under Reg BI
and Form CRS, respectively, are not coterminous. For example, a
natural person with $50 million in assets, and who uses a
recommendation of a securities transaction for personal, family, or
household purposes, would be an ``institutional investor'' under the
CAB Rules, but would be a ``retail customer'' under Reg BI and a
``retail investor'' under Form CRS.
---------------------------------------------------------------------------
Second, FINRA is proposing to allow CABs to act as placement agents
or finders for secondary transactions of unregistered securities in the
limited circumstance where both the seller and purchaser of such
unregistered securities are institutional investors and the sale
qualifies for an exemption from registration under the Securities Act
of 1933 (``Securities Act'') (e.g., Securities Act Rules 144 or 144A).
FINRA believes that the proposed conditions would allow CABs to offer a
wider range of services to their clients without materially impacting
investor protection because proposed CAB Rule 016(c)(1)(H) would not
permit CABs to act as a placement agent or finder in connection with a
secondary transaction sale of unregistered securities to persons other
than institutional investors. FINRA also believes that this proposed
change may help promote capital formation. A commenter on Regulatory
Notice 20-04 noted that secondary market liquidity for investors in
exempt primary offerings of an issuer is integral to capital formation
in the primary offering market.\28\
---------------------------------------------------------------------------
\28\ See NYSBA Letter. All references to commenters are to the
comment letters as listed in Exhibit 2b. See Exhibit 2b for a list
of abbreviations assigned to commenters.
---------------------------------------------------------------------------
Third, FINRA is proposing to permit CAB associated persons to
participate in private securities transactions (``PSTs''), subject to
the same requirements that apply to associated persons of non-CAB
broker-dealer members who participate in PSTs. As discussed in greater
detail below, CAB Rule 328's express prohibition on PSTs, as defined in
FINRA Rule 3280(e),\29\ often creates logistical and other business-
related difficulties, for example, for firms that have created two
separate affiliates that effect securities transactions depending on
whether a transaction may be effected through an exempt merger and
acquisition broker (``M&A Broker'').\30\ To the extent that an
associated person of the registered broker-dealer affiliate is also an
employee of the exempt M&A Broker affiliate, any securities transaction
effected through the M&A Broker in which the associated person
participated would be considered a PST. Since CAB Rule 328 prohibits
associated persons of CABs from participating in PSTs, this structure
does not work for such firms. Furthermore, FINRA has interpreted FINRA
Rule 3280 to apply to many of the investment advisory activities of
members' associated persons.\31\ FINRA believes that a strict
prohibition on PSTs is not necessary to achieve the goals of the CAB
Rules.
---------------------------------------------------------------------------
\29\ ``Private securities transaction'' means any securities
transaction outside the regular course or scope of an associated
person's employment with a member, including, though not limited to,
new offerings of securities which are not registered with the
Commission. The term excludes transactions subject to FINRA Rule
3210's notification requirements, transactions among immediate
family members for which no associated person receives any selling
compensation, and personal transactions in investment company and
variable annuity securities. See FINRA Rule 3280(e).
\30\ The Consolidated Appropriations Act of 2023 amended Section
15 of the Exchange Act to create a new registration exemption for
specified merger and acquisition brokers. Under this exemption, a
person may effect a securities transaction in connection with the
transfer of ownership of a privately held company without
registering as a broker or dealer under the Exchange Act, provided
that the person and transaction meet specified conditions, which in
many respects align with those contained in a prior SEC staff no-
action letter. These amendments became effective on March 29, 2023.
See Public Law 117-328, Division AA, Section 501, codified at 15
U.S.C. 78o(b)(13) (``M&A Brokers Exemption''). See also M&A Brokers,
2014 SEC No-Act. Lexis 92 (January 31, 2014) (``M&A Brokers
Letter''). Prior to March 29, 2023, firms relied upon the M&A
Brokers Letter to effect securities transactions through this
structure. The SEC staff withdrew the M&A Brokers Letter on March
29, 2023.
\31\ See Notice to Members 94-44 (June 1994) (``NtM 94-44''). As
discussed in NtM 94-44, if an individual is registered as both a
representative of a member firm and as an investment adviser
(``IA'') or investment adviser representative and conducts their IA
activities away from their member firm employer, the representative
may be subject to Rule 3280. In particular, if the representative's
participation goes beyond the mere recommendation of a securities
transaction, such as where he or she enters an order on behalf of an
IA client with a brokerage firm other than the member with which
they are registered, or with another entity, and receives any
compensation for the overall advisory services, the representative
would be viewed as participating in a PST.
---------------------------------------------------------------------------
FINRA believes that the proposed rule change increases efficiency
by remedying some of the challenges CABs face under the current CAB
Rules and promotes capital formation by reducing the regulatory burden
on CABs. In addition, FINRA believes that the proposed rule change is
reasonably designed to protect investors because it does not materially
impact the limited institutional business model of CABs and may enhance
regulation in this space. By addressing some of the challenges and
burdens that have been identified since adoption of the CAB Rules, the
proposed rule change may encourage some non-members and current FINRA
broker-dealer members that conduct a limited range of corporate
financing activities to register as a CAB. These include, for example,
firms that have relied on the M&A Brokers Letter (prior to March 29,
2023) or the M&A Brokers Exemption (subsequent to March 29, 2023) to
conduct limited securities activities without registering as a broker
under the Exchange Act.\32\ FINRA membership could benefit such firms
by allowing them to expand their securities business and engage in the
expanded range of activities permitted under the CAB Rules. In turn,
increased regulatory oversight of these firms by FINRA and the SEC
would further enhance investor protection. Firms that are currently
FINRA members that elect CAB status as a result of the proposed rule
change could benefit from lower compliance costs associated with
maintaining FINRA membership.
---------------------------------------------------------------------------
\32\ FINRA does not have data that would enable it to estimate
the number, if any, of such firms. However, some comments received
on Regulatory Notice 20-04 suggest that this could be a possible
outcome, for example: ``I believe the coordination [with the M&A
Brokers Letter] will result in more firms opting for the CAB
platform and thus performing M&A activities from start to finish
under FINRA's jurisdiction, which will result in stronger investor
protections.'' See M&R Letter.
---------------------------------------------------------------------------
Finally, FINRA believes that the proposed rule change is reasonable
in light of Reg BI and Form CRS, which provide an additional layer of
investor protection that was not available at the time the CAB Rules
were adopted.
The specific proposed amendments are discussed in greater detail
below.
Proposed Amendments to CAB Rules
Sales of Newly-Issued Unregistered Securities
Currently, a CAB may act as a placement agent or finder (1) on
behalf of an issuer in connection with a sale of newly-issued
unregistered securities to ``institutional investors'' or (2) on behalf
of an issuer or a control person in connection with a change of control
of a privately-held company.\33\ FINRA proposes to expand the scope of
such permissible activity by broadening the definition of
``institutional investor'' for purposes of the CAB Rules to include any
``eligible employee'' under new CAB Rule 016(i)(8). As discussed below,
FINRA believes that ``eligible employees'' do not raise the same
investor protection concerns as retail investors and as such, this
proposed expansion will not materially impact investor protection.
---------------------------------------------------------------------------
\33\ See CAB Rule 016(c)(1)(F).
---------------------------------------------------------------------------
The term ``institutional investor'' for purposes of the CAB Rules
\34\ includes,
[[Page 25400]]
among others, banks, investment companies, large employee benefit
plans, and ``qualified purchasers'' under the ICA.\35\ FINRA proposes
to broaden the definition of institutional investor to include
``eligible employees'' as defined in new CAB Rule 016(m). The term
would include specified officers, directors, and employees of issuers
or control persons for which the CAB has provided services as permitted
under subparagraphs (F) and (G) of CAB Rule 016(c)(1).
---------------------------------------------------------------------------
\34\ CAB Rule 016(i) currently defines ``institutional
investor'' as any: (1) bank, savings and loan association, insurance
company or registered investment company; (2) governmental entity or
subdivision thereof; (3) employee benefit plan, or multiple employee
benefit plans offered to employees of the same employer, that meet
the requirements of Section 403(b) or Section 457 of the Internal
Revenue Code and in the aggregate have at least 100 participants,
but does not include any participant of such plans; (4) qualified
plan, as defined in Section 3(a)(12)(C) of the Exchange Act, or
multiple qualified plans offered to employees of the same employer,
that in the aggregate have at least 100 participants, but does not
include any participant of such plans; (5) other person (whether a
natural person, corporation, partnership, trust, family office or
otherwise) with total assets of at least $50 million; (6) person
meeting the definition of ``qualified purchaser'' as that term is
defined in Section 2(a)(51) of the ICA; and (7) any person acting
solely on behalf of any such institutional investor.
\35\ The term ``qualified purchaser'' includes, among others,
any natural person, family-owned company or specified trust that
owns not less than $5,000,000 in investments, and any person, acting
for its own account or the accounts of other qualified purchasers,
who in the aggregate owns and invests on a discretionary basis, not
less than $25,000,000 in investments. See ICA section 2(a)(51), 15
U.S.C. 80a-2(a)(51).
---------------------------------------------------------------------------
First, ``eligible employee'' would include any ``Knowledgeable
Employee,'' as defined in ICA Rule 3c-5,\36\ with respect to services
provided to an issuer that is a Covered Company, as defined in ICA Rule
3c-5,\37\ or services provided to an ``Affiliated Management Person''
of such Covered Company, as defined in ICA Rule 3c-5,\38\ under
proposed CAB Rule 016(m)(1). The Commission adopted ICA Rule 3c-5 as
directed by Congress pursuant to the National Securities Markets
Improvements Act of 1996 (``NSMIA'').\39\ The Commission stated that
the purpose of this provision of NSMIA ``appears to be to allow private
funds to offer persons who participate in the funds' management the
opportunity to invest in the fund as a benefit of employment.'' \40\
---------------------------------------------------------------------------
\36\ Specifically, under ICA Rule 3c-5(a)(4), the term
``Knowledgeable Employee'' with respect to any Covered Company means
any natural person who is: (i) an Executive Officer, director,
trustee, general partner, advisory board member, or person serving
in a similar capacity, of the Covered Company or an Affiliated
Management Person of the Covered Company; or (ii) an employee of the
Covered Company or an Affiliated Management Person of the Covered
Company (other than an employee performing solely clerical,
secretarial or administrative functions with regard to such company
or its investments) who, in connection with his or her regular
functions or duties, participates in the investment activities of
such Covered Company, other Covered Companies, or investment
companies the investment activities of which are managed by such
Affiliated Management Person of the Covered Company, provided that
such employee has been performing such functions and duties for or
on behalf of the Covered Company or the Affiliated Management Person
of the Covered Company, or substantially similar functions or duties
for or on behalf of another company for at least 12 months. Under
ICA Rule 3c-5, shares beneficially owned by knowledgeable employees
are excluded for purposes of determining whether a private fund is
excluded from the definition of ``investment company'' under ICA
sections 3(c)(1) or 3(c)(7). See ICA Rule 3c-5(b).
\37\ ``Covered Company'' includes companies that would be
investment companies under the ICA but for the exclusions provided
by sections 3(c)(1) and 3(c)(7) of the ICA. See 17 CFR 270.3c-
5(a)(2), (a)(5), and (a)(6).
\38\ Under ICA Rule 3c-5(a)(1), the term Affiliated Management
Person ``means an affiliated person, as such term is defined in
section 2(a)(3) of the [Investment Company] Act [15 U.S.C. 80a-
2(a)(3)], that manages the investment activities of a Covered
Company. For purposes of this definition, the term `investment
company' as used in section 2(a)(3) of the Act includes a Covered
Company.''
\39\ See NSMIA section 209(d)(3), Public Law 104-290, 110 Stat.
3416, 3436 (1996).
\40\ See ICA Release No. 22405 (December 18, 1996), 61 FR 68100,
68102 & n.25 (December 26, 1996).
---------------------------------------------------------------------------
As noted above, the CAB definition of ``institutional investor''
currently includes qualified purchasers as defined under the ICA. ICA
Rule 3c-5 permits Knowledgeable Employees of private funds and certain
of their affiliates to invest in such funds to the same extent as other
qualified purchasers, even if an employee does not fall within the
definition of that term. Thus, the inclusion of ICA Rule 3c-5
Knowledgeable Employees in the CAB definition of ``eligible employee''
would align the scope of persons to whom a CAB may sell private fund
securities under the CAB Rules with the scope of investors permitted to
invest in private funds under the ICA relying on the exclusion from the
definition of ``investment company'' provided by section 3(c)(7) of the
ICA.
Second, the term ``eligible employee'' would include specified
officers, directors, or employees of an issuer that is not a Covered
Company as defined in ICA Rule 3c-5,\41\ under proposed CAB Rule
016(m)(2). Thus, the CAB Rules would permit CABs to act as a placement
agent or finder in connection with sales to persons who hold similar
positions to Knowledgeable Employees at issuers that are not private
funds. In this regard, it is common for officers, directors, and other
employees of issuers that are not private funds to invest in those
companies' securities, either through stock options that are paid to
such persons as compensation, or as part of a private offering of
securities. FINRA believes that the proposed expansion of CABs'
permissible activities to include sales to eligible employees is
appropriate because they are likely to understand and appreciate any
risks and limitations associated with investing in the issuer's
securities. Eligible employees likely have the expertise and knowledge
about the issuer, and the resources to retain counsel and financial
advisers, if necessary, to evaluate a potential investment.
Accordingly, they do not raise the same investor protection concerns
as, for example, retail investors. Eligible employees would still have
to qualify to invest in securities of a private company under the
federal securities laws. Thus, for example, they could invest in
unregistered securities pursuant to Securities Act Regulation D, such
as by meeting the definition of ``accredited investor.'' \42\
---------------------------------------------------------------------------
\41\ Specifically, this sub-category of ``eligible employee''
includes the president, any vice president in charge of a principal
business unit, division, or function (such as sales, administration,
or finance), any other officer who performs a policy-making
function, or any other person who performs similar policy-making
functions, director, trustee, general partner, advisory board
member, or person serving in a similar capacity, of an issuer that
is not a Covered Company as defined in ICA Rule 3c-5.
\42\ See Securities Act Regulation D, 17 CFR 230.500 et seq.
---------------------------------------------------------------------------
These proposed changes are consistent with CABs' limited
institutional business model because they would not expand permissible
sales to allow CABs to sell newly issued unregistered securities to
retail investors who are not eligible employees. If the CAB recommends
a securities transaction to an eligible employee who qualifies as a
retail customer under Reg BI, or a retail investor for purposes of Form
CRS, the CAB will be required to comply with the requirements of Reg BI
and Form CRS.\43\ FINRA believes that
[[Page 25401]]
the additional protections that Reg BI and Form CRS provide will help
ensure that any such securities recommendations are in the eligible
employees' best interests, and that such employees will receive
disclosures concerning the CAB required by Form CRS. Accordingly, FINRA
does not believe that this proposed change will have a material impact
on investor protection.\44\
---------------------------------------------------------------------------
\43\ Reg BI establishes a standard of conduct for broker-dealers
and their associated persons when they make a recommendation to a
retail customer of any securities transaction or investment strategy
involving securities. Reg BI aligns the standard of conduct with
retail customers' reasonable expectations by requiring broker-
dealers, among other things, to act in the retail customer's best
interest at the time a recommendation is made, without placing the
financial or other interest of the broker-dealer ahead of the
interests of the retail customer; and to address conflicts of
interest by establishing, maintaining, and enforcing policies and
procedures reasonably designed to identify and fully and fairly
disclose material facts about conflicts of interest, and in
instances where disclosure is insufficient to reasonably address the
conflict, to mitigate or, in certain instances, eliminate the
conflict. See Regulation Best Interest: The Broker-Dealer Standard
of Conduct, Securities Exchange Act Release No. 86031 (June 5,
2019), 84 FR 33318 (July 12, 2019). In addition, a broker-dealer
making a recommendation to a retail investor of any securities
transaction or investment strategy involving securities must provide
a brief relationship summary prior to, or at the time of, the
recommendation. The relationship summary is intended to inform
retail investors about the types of client and customer
relationships and services the firm offers; the fees, costs,
conflicts of interest, and required standard of conduct associated
with those relationships and services; whether the firm and its
financial professionals currently have reportable legal or
disciplinary history; and how to obtain additional information about
the firm. See Form CRS Relationship Summary; Amendments to Form ADV,
Securities Exchange Act Release No. 86032 (June 5, 2019), 84 FR
33492 (July 12, 2019).
\44\ FINRA is also proposing to make a technical change to the
definition of ``institutional investor'' by deleting the word
``any'' at the beginning of CAB Rule 016(i)(7). This deletion is
appropriate because ``any'' already appears in the introductory
clause of Rule 016(i). FINRA also is moving the word ``and'' from
the end of Rule 016(i)(6) to the end of Rule 016(i)(7) due to the
addition of proposed Rule 016(i)(8).
---------------------------------------------------------------------------
Secondary Transactions
CABs currently may not act as placement agents in connection with
secondary transactions involving unregistered securities, except when
the transaction is in connection with the change of ownership or
control of a privately-held company.\45\ FINRA proposes also to allow
CABs to act as placement agents or finders for secondary transactions
of unregistered securities in the limited circumstance where both the
seller and purchaser of such unregistered securities are institutional
investors for purposes of the CAB Rules and the sale qualifies for an
exemption from registration under the Securities Act (e.g., Securities
Act Rules 144 or 144A).\46\
---------------------------------------------------------------------------
\45\ See CAB Rules 016(c)(1)(F) and (G).
\46\ See proposed CAB Rule 016(c)(1)(H); see also 17 CFR 230.144
and 230.144A.
---------------------------------------------------------------------------
FINRA believes that this proposed change is appropriate and would
not have a material impact on investor protection, particularly in
light of the implementation of Reg BI and Form CRS following adoption
of the CAB Rules. As discussed above, CABs would only be permitted to
act as a placement agent or finder in a secondary transaction involving
unregistered securities if both the seller and the buyer of such
securities are institutional investors as defined in CAB Rule 016(i).
Institutional investors often possess the knowledge and financial
expertise to evaluate whether a transaction is appropriate for their
needs or have the resources to hire a financial adviser who can assist
and advise them in the transaction. FINRA notes that, as amended
pursuant to the proposed rule change, the CAB Rules definition of
``institutional investor'' also would include eligible employees, as
discussed above.
If CABs were permitted to act as intermediaries in connection with
secondary transactions involving unregistered securities, they would be
subject to the CAB Rules rather than the entire FINRA rulebook.
Nevertheless, FINRA believes that there would be sufficient investor
protections for CAB customers under both the CAB Rules and applicable
SEC rules.
First, CABs still would be subject to CAB rules prohibiting any
communication concerning the unregistered securities or the CAB's
services from including false, exaggerated, unwarranted, promissory or
misleading statement or claim. Such a communication could not omit any
material fact or qualification that would cause the communication to be
misleading and would be required to be based on principles of fair
dealing and good faith, be fair and balanced, and provide a sound basis
for evaluating the facts regarding the security or service.\47\ Among
other things, as discussed above, CABs would still be subject to
FINRA's core supervisory requirements, and would be subject to FINRA
rules restricting borrowing from or lending to customers.\48\
---------------------------------------------------------------------------
\47\ See CAB Rule 221.
\48\ See CAB Rules 311 and 324.
---------------------------------------------------------------------------
In addition, if the CAB recommended a secondary transaction to a
natural person who falls within the CAB institutional investor
definition and qualifies as a retail customer under Reg BI, the CAB
would be required to comply with the requirements of Reg BI, including
the obligation to have a reasonable basis to believe that the
recommendation is in the best interest of a particular retail customer
based on that retail customer's investment profile. If a CAB recommends
a securities transaction to an institutional investor who does not
qualify as a retail customer under Reg BI, pursuant to CAB Rule 211,
the CAB still must have a reasonable basis to believe that the
recommended transaction is suitable for the customer based on
information obtained through reasonable diligence of the CAB to
ascertain the customer's investment profile.\49\
---------------------------------------------------------------------------
\49\ See CAB Rule 211 (Suitability). A CAB fulfills its
customer-specific suitability obligation for an institutional
investor if (1) the CAB has a reasonable basis to believe that the
institutional investor is capable of evaluating investment risks
independently, both in general and with regard to particular
transactions and investment strategies involving a security or
securities, and (2) the institutional investor affirmatively
indicates that it is exercising independent judgment in evaluating
the CAB's recommendations. Where an institutional investor has
delegated decision-making to an agent, such as an investment adviser
or a bank trust department, these factors are applied to the agent.
See CAB Rule 211(b).
---------------------------------------------------------------------------
FINRA believes that the proposed conditions for participating in
secondary market transactions are appropriately tailored to allow CABs
to offer a wider range of services to their clients while remaining
consistent with the purpose of the CAB Rules and CABs' limited
institutional business model. The proposed rule change would not expand
CABs' permitted activities to broader broker-dealer activities, such as
accepting customers' trading orders, carrying customer accounts,
handling customers' funds or securities, or engaging in proprietary
trading or market-making. CABs would only be permitted to act as an
intermediary with respect to secondary transactions in securities where
both the seller and purchaser are institutional investors and would not
be permitted to sell unregistered securities to persons who are not
institutional investors.
This limitation would help mitigate any concerns that CABs would be
acting as a placement agent or finder in connection with the secondary
sale of unregistered securities to individuals who lack the knowledge
and expertise to understand the risks and limitations of such
securities or lack the resources to employ a person with such knowledge
and expertise. In addition, to the extent that an institutional
investor qualifies as a retail investor for purposes of Form CRS, or a
retail customer under Reg BI, the CAB may need to file and deliver a
relationship summary, and any recommendation that the CAB would make to
such an investor about a qualifying secondary transaction may trigger
the requirements of Reg BI.\50\
---------------------------------------------------------------------------
\50\ See supra note 43 and accompanying text.
---------------------------------------------------------------------------
Private Securities Transactions
FINRA Rule 3280 (Private Securities Transactions of an Associated
Person) governs situations in which an associated person of a member
firm participates in any manner in a private securities transaction
(i.e., a securities transaction outside of the regular course or scope
of the associated person's employment with the broker-dealer) without
providing prior written notice to the employer firm. If the private
securities transaction involves selling compensation, the firm must
determine whether to approve or disapprove the person's participation
in the proposed transaction. If the member approves the transaction, it
must record it on its books and records and must supervise the person's
participation as if the
[[Page 25402]]
transaction were executed on behalf of the member.
Currently, CAB Rule 328 prohibits any person associated with a CAB
from participating in a PST as defined in Rule 3280(e). At the time of
adoption of the CAB Rules, FINRA believed that an associated person of
a CAB should not be engaged in selling securities away from the CAB and
a CAB should not have to oversee and review such transactions, given
its limited business model. However, FINRA believes that it would be
appropriate to amend the CAB Rules to permit PSTs to remedy the
challenges and unintended consequences presented by this prohibition.
FINRA believes the proposed change is reasonable in light of changes in
the regulatory landscape since adoption of the CAB Rules, including
implementation of Reg BI and Form CRS, which add a layer of investor
protection that did not exist at the time, and the M&A Brokers
Exemption, which resulted in some firms foregoing their broker-dealer
registrations to become exempt M&A Brokers.
As noted above, the current prohibition on PSTs presents
operational and other challenges for some broker-dealers. For example,
some registered broker-dealers have exempt affiliates that engage in
limited merger and acquisitions activities in reliance on the M&A
Brokers Exemption.\51\ Under FINRA Rule 3280(a), an associated person
of a FINRA member firm ``shall not participate in any manner in a
private securities transaction except in accordance with'' Rule 3280's
requirements. Accordingly, if a CAB associated person is also
associated with an exempt affiliated M&A Broker that is relying on the
M&A Brokers Exemption, that person is not permitted to participate in
PSTs through the exempt affiliate.
---------------------------------------------------------------------------
\51\ Under this business model, if a transaction meets the
conditions and requirements of the M&A Brokers Exemption, the
transaction is effected through an exempt affiliated M&A Broker. If
a transaction does not meet the M&A Brokers Exemption's
requirements, it is effected through a registered broker-dealer
affiliate.
---------------------------------------------------------------------------
A commenter on Regulatory Notice 20-04 noted that, in addition to
creating significant operational challenges, the current prohibition on
PSTs places CABs at a competitive disadvantage relative to firms
relying on the M&A Brokers Exemption. This is because it may be unclear
whether a future transaction will be an asset or stock sale, and the
CAB may have to forgo entering into strategic referral
arrangements.\52\
---------------------------------------------------------------------------
\52\ See Waterview 1 Letter.
---------------------------------------------------------------------------
In addition, many firms that have considered electing CAB status
declined to do so due to the inability of their associated persons to
act as supervised persons of registered investment advisers (``RIAs'')
if they participate in private securities transactions.\53\
---------------------------------------------------------------------------
\53\ See NtM 94-44.
---------------------------------------------------------------------------
Such impacts on CABs and firms that might otherwise consider
registering with FINRA as a CAB was not intended at the time the CAB
Rules were adopted, and FINRA believes that the prohibition on PSTs is
unnecessarily restrictive. FINRA believes it is appropriate to amend
CAB Rule 328 and apply the same risk controls and compliance procedures
relating to PSTs to CABs and non-CAB broker-dealer members alike. FINRA
believes that the proposed rule change may help support capital
formation by expanding the range of activities in which CABs can
participate without materially impacting investor protection. Today,
CABs and non-CAB broker-dealer members are subject to the same core
supervisory obligations (as discussed above), and under the proposed
rule change, they would have the same supervisory and record-keeping
obligations with respect to PSTs.
Specifically, FINRA is proposing to amend CAB Rule 328 to subject
CABs to FINRA Rule 3280 (or its successor) \54\ rather than strictly
prohibiting persons associated with CABs from participating in
PSTs.\55\ In this regard, prior to participating in any PST, an
associated person of a CAB must provide written notice to the CAB with
which the person is associated, describing in detail the proposed
transaction and the person's proposed role therein, and also stating
whether the person will receive selling compensation in connection with
the transaction.\56\ ``Selling compensation'' includes any compensation
paid directly or indirectly from whatever source in connection with or
as a result of the purchase or sale of a security, including, but not
limited to, finder's fees, securities or rights to acquire securities,
rights of participation in profits, tax benefits, or dissolution
proceeds, as a general partner or otherwise, and expense
reimbursements.\57\
---------------------------------------------------------------------------
\54\ FINRA has requested comment on a proposed new rule to
address the outside activities of its member firms' associated
persons, which would replace current FINRA Rules 3270 and 3280. See
Regulatory Notice 25-05 (March 2025). If FINRA files, and the
Commission approves, a proposed rule change to adopt the new rule,
FINRA would propose to replace CAB Rules 327 (Outside Business
Activities of Registered Persons) and 328 (Private Securities
Transactions of an Associated Person) with a new CAB Rule that would
cross-reference the new FINRA rule.
\55\ FINRA notes that Rule 3280 applies to persons associated
with a member. Accordingly, pursuant to amended CAB Rule 328, the
requirements of Rule 3280 would apply to the associated persons of
CABs as defined under FINRA Rules. See also CAB Rule 014
(Application of the By-Laws and the Capital Acquisition Broker
Rules).
\56\ See FINRA Rule 3280(b).
\57\ See FINRA Rule 3280(e)(2).
---------------------------------------------------------------------------
If the person will receive selling compensation, the CAB must
advise the person in writing stating whether the CAB approves or
disapproves the proposed transaction. If the CAB approved the person's
participating in the transaction, the CAB must record the transaction
in its books and records and must supervise the person's participation
in the transaction as if the transaction were executed on behalf of the
CAB. If the CAB disapproved the person's participation in the proposed
transaction, the person could not participate in it in any manner.\58\
If the person has not and will not receive any selling compensation,
the CAB must provide the person prompt written acknowledgement of the
person's notice of the proposed transaction, and may, at its
discretion, require the person to adhere to specified conditions in
connection with the transaction.\59\
---------------------------------------------------------------------------
\58\ See FINRA Rule 3280(c).
\59\ See FINRA Rule 3280(d).
---------------------------------------------------------------------------
FINRA believes that this proposed change is appropriate to address
the challenges that the current prohibition on PSTs presents for CABs
while maintaining investor protection through the CABs' limited
business model and other restrictions on CABs' activities. While this
proposed change would expand the permissible activities of a CAB and
its associated persons, it also would expand the CAB's supervisory
responsibilities, for example, where the CAB approves its associated
person's participation in a transaction for which the person will
receive selling compensation.
Applying the FINRA Rule 3280 requirements to CABs would benefit
investors by allowing persons who are employees or representatives of
exempt M&A Brokers to also act as associated persons of CABs. If such
exempt M&A Broker employees currently are also not associated persons
of a member firm, they are subject to little, if any, regulatory
oversight. If this proposed change were approved, such exempt M&A
Broker employees may choose also to be associated persons of CABs. In
such circumstances, the CAB's oversight of its associated persons'
participation in PSTs conducted through the exempt M&A Broker would be
subject to examination for compliance with FINRA Rule 3280. This
proposed change also could remove an impediment for currently exempt
firms
[[Page 25403]]
to create new CAB affiliates, which would benefit investors through
increased oversight of the exempt affiliate's transactions.
Compensation
In 2019, FINRA issued a staff interpretation of the CAB Rules
stating that CABs may be compensated in the form of securities issued
by a privately held CAB client, rather than in cash, provided that the
receipt, exercise or subsequent sale of such securities will not cause
the CAB to engage in activities prohibited under CAB Rule 016(c)(2)
(Definitions).\60\ In pertinent part, the interpretation states:
---------------------------------------------------------------------------
\60\ See Letter from Joseph P. Savage, FINRA, to Jonathan D.
Wiley, The Forbes Securities Group, dated May 30, 2019.
The CAB Rules do not specifically address whether a CAB may
receive compensation for its services in the form of equity
securities. Provided that compensation is for services in which CABs
are permitted to engage under CAB Rule 016(c)(1), and [the CAB] does
not engage in activities that are specifically prohibited under CAB
Rule 016(c)(2), [the CAB] may accept equity securities issued by
privately held companies as compensation for its services as
described in your letter. Thus, for example, upon receiving equity
securities as compensation, [the CAB] may not accept orders from
customers to purchase or sell securities either as principal or
agent for the customer, and may not engage in proprietary trading or
---------------------------------------------------------------------------
market making activities.
FINRA proposes to codify this interpretation in proposed CAB Rule 511
(Securities as Compensation).
M&A Brokers Exemption
Currently, CAB Rule 016(c)(1)(G) permits a CAB to effect 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 of 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. The purpose of this provision was to allow CABs to engage
in merger and acquisition activities to the same extent as unregistered
persons who were relying on the M&A Brokers Letter when it was in
effect.\61\ The M&A Brokers Letter was withdrawn on March 29, 2023.\62\
---------------------------------------------------------------------------
\61\ See Securities Exchange Act Release No. 76675 (December 17,
2015), 80 FR 79969, 79977 (December 23, 2015) (Notice of Filing of
File No. SR-FINRA-2015-054).
\62\ See supra note 30.
---------------------------------------------------------------------------
As discussed above, since the adoption of CAB Rule 016(c)(1)(G),
Congress has amended the Exchange Act to create a new registration
exemption for M&A Brokers similar to the no-action relief that firms
previously relied upon under the M&A Brokers Letter. Accordingly, FINRA
is proposing to amend Rule 016(c)(1)(G) to reference Exchange Act
Section 15(b)(13), as well as any SEC rule, release, interpretation, or
no-action letter, that permits a person to engage in the same or
materially similar activities without registering as a broker or dealer
under the Exchange Act. The purpose of this proposed amendment is to
make clear that CABs may effect M&A transactions to the same extent as
an exempt M&A Broker under the M&A Brokers Exemption.
If the Commission approves the proposed rule change, FINRA will
announce the effective date of the rule change in a Regulatory Notice.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\63\ which requires, among
other things, that FINRA rules be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest.
---------------------------------------------------------------------------
\63\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
FINRA believes that the proposed rule change will enhance the
efficiency and effectiveness of the CAB Rules without materially
impacting investor protection. The proposed rule change addresses some
of the challenges presented by the current CAB Rules by expanding some
of CABs' permissible activities without materially impacting CABs'
limited institutional business model. The CAB Rules are part of FINRA's
regulatory program designed to, among other things, support efficient
capital formation. By expanding the range of permissible activities,
the proposed rule change may further support capital formation.
At the same time, however, the proposed rule change ensures that
the scope of the corporate financing activities that CABs are permitted
to engage in will continue to be limited and the protections for
investors and the public under the CAB Rules will not be materially
impacted. CABs would remain subject to the core supervisory
requirements discussed above and would remain subject to many other
investor protection rules. For example, CABs would continue to be
subject to content standards governing their communications with the
public, a requirement to observe high standards of commercial honor and
just and equitable principles of trade in the conduct of their
business, and audit, recordkeeping, financial reporting, and net
capital compliance requirements.\64\
---------------------------------------------------------------------------
\64\ See, e.g., CAB Rules 201, 221, 311, 411, 414, 451, and 453.
---------------------------------------------------------------------------
The proposed rule change would amend the current definition of
``institutional investor'' for purposes of the CAB Rules to include
``eligible employees,'' thus permitting CABs to act as placement agents
or finders in the sale of newly-issued unregistered securities to
``Knowledgeable Employees'' under ICA rules for private fund issuers,
and specified officers, directors, and employees of issuers that are
not private funds. FINRA believes that the proposed rule change is
consistent with investor protection and the public interest because
these eligible employees have the expertise, knowledge, and resources
to understand the risks of investing in the issuer. Given the knowledge
and resources of these eligible employees, and the additional investor
protections provided by Reg BI and Form CRS, FINRA believes that this
proposed change would not materially impact investor protection or
CABs' limited institutional business model. Additionally, CABs'
permissible investor pool would not be expanded to retail investors who
are not eligible employees.
The proposed rule change would permit CABs to act as intermediaries
for specified secondary transactions involving unregistered securities
provided that the sale qualifies for an exemption from registration
under the Securities Act. This proposed change is consistent with CABs'
current authority to act as a placement agent or finder on behalf of an
issuer in connection with the sale of newly-issued unregistered
securities to institutional investors. Similar to acting as a placement
agent or finder for newly-issued unregistered securities, CABs only
would be allowed to act as an intermediary for a secondary transaction
involving unregistered securities and only where both the seller and
the purchaser are institutional investors. However, under the proposed
rule change, CABs would be allowed to engage in such services on behalf
of securities holders that are institutional investors, as newly
defined to include eligible employees, rather than just the
[[Page 25404]]
issuer (and, as noted, sales would be restricted to institutional
investors). This expansion in permissible activities would be
consistent with the public interest and investor protection, as it
would not allow CABs to act as an intermediary in a securities
transaction where either the seller or the purchaser is a retail
investor.
The proposed amendment to CAB Rule 328 would eliminate certain
operational and other challenges with respect to associated persons'
PSTs by eliminating the express prohibition on PSTs under CAB Rule 328
and subjecting CABs to current FINRA Rule 3280. FINRA believes that the
proposed amendment to CAB Rule 328 is consistent with investor
protection and the public interest since it would require a CAB to
supervise and keep records of any PST to the same extent and in the
same manner as a non-CAB broker-dealer member.
The proposed rule change would codify a previously issued staff
interpretation of the CAB Rules providing that CABs may receive
compensation in the form of equity securities of a privately held
issuer on behalf of which the CAB provided permitted services, provided
that the receipt, exercise or subsequent sale of such securities will
not cause the CAB to engage in any activity prohibited under the CAB
Rules. This change is consistent with investor protection and the
public interest in that it would not alter the way CABs operate today
and would enhance the transparency of the CAB Rules.
Lastly, the proposed rule change would clarify that CABs may effect
M&A securities transactions to the same extent as exempt M&A Brokers
under the M&A Brokers Exemption. This amendment is consistent with the
current provision in CAB Rule 016(c)(1)(G) that allows CABs to engage
in such M&A transactions to the same extent that exempt M&A Brokers
previously were permitted to engage in reliance upon the M&A Brokers
Letter, which was withdrawn in 2023.
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
Economic Impact Assessment
FINRA has undertaken an economic impact assessment, as set forth
below, to further analyze the regulatory need for the proposed rule
change, its potential economic impacts, including anticipated costs,
benefits, and distributional and competitive effects, relative to the
current baseline, and alternatives FINRA considered in assessing how
best to meet its regulatory objective.
Regulatory Need
FINRA maintains a separate rule set for CABs with the goal of
reducing regulatory burdens on broker-dealer firms that engage only in
limited institutional corporate financing and private placement
activities and do not interact with retail investors. Through its
ongoing dialogue with the industry regarding the effectiveness of the
CAB Rules, FINRA has learned that the current CAB definition and
existing regulatory framework may discourage some firms for which the
designation was intended from electing CAB status due to limits on
CABs' permissible activities.
Economic Baseline
The economic baseline of the proposed rule change is the existing
CAB regulatory framework, its adoption by the industry, and CAB-related
industry practices and activities. FINRA sought comments on proposed
changes to the CAB Rules in Regulatory Notice 20-04.\65\ FINRA
additionally obtained input from several advisory committees comprising
member firms of different sizes and business models, investor
protection advocates, member firms, and industry trade associations.
---------------------------------------------------------------------------
\65\ See Regulatory Notice 20-04 (January 2020).
---------------------------------------------------------------------------
FINRA has identified the relevant member firms currently engaged in
CAB activities. As of the end of 2024, these include 65 member firms
that have elected CAB status, approximately 135 non-CAB FINRA member
firms that conduct CAB-like activities (FINRA-registered CAB-like
firms) \66\ and an unknown number of firms that provide services
similar to CABs but are not registered with FINRA or the SEC
(unregistered CAB-like firms).\67\ Of the 65 member firms registered as
CABs at the end of 2024, approximately 92 percent had fewer than 20
registered persons at year end. In total, there were approximately 581
registered persons across the 65 CAB firms at the end of 2024.\68\
---------------------------------------------------------------------------
\66\ ``CAB-like'' refers to activities that are similar to those
in which CABs may engage, including advising companies on mergers,
acquisitions and corporate restructuring, advising issuers on
raising debt and equity capital, and acting as a placement agent for
sales of unregistered securities to institutional investors. To
estimate the number of FINRA-registered CAB-like firms, FINRA
analyzed all member firms' 2024 end-of-year FOCUS Supplementary
Statement of Income (SSOI) filings. Member firms that reported M&A
related fees that were 100 percent of total revenue, did not report
any commissions, and did not elect the CAB status, were identified
as CAB-like firms. In addition, FINRA used Form ADV information to
calculate the number of member firms dually registered as broker-
dealers and investment advisers that provide advisory services only
to institutional investors and identified 25 such firms. The total
number of 135 firms is believed to be a lower bound on the number of
potential FINRA member firms that are CAB-like.
\67\ For example, there may be some firms that are relying on
Exchange Act Section 15(b)(13), which exempts an ``M&A broker,'' as
defined in that section, from broker-dealer registration. See,
e.g.,15 U.S.C. 78o(b)(13). The staff does not have an estimate on
the number of these firms.
\68\ As of December 2024, existing CAB firms have an average of
9 registered persons per firm.
---------------------------------------------------------------------------
Economic Impacts
FINRA has analyzed the potential costs and benefits of the proposed
rule change, and the different parties that are expected to be
affected. FINRA has identified member firms that are currently
registered as CABs, member firms engaged in CAB-like activities without
being registered as CABs, that may or may not elect CAB status in the
future, non-member firms that engage in CAB-like activities, and
respective customers of such firms as the parties that would primarily
be affected by the proposed rule change.
Anticipated Benefits
The proposed rule change's benefits would accrue to those firms
whose business decisions or activities would be enhanced, or regulatory
burdens reduced, by the proposed rule change. These include member
firms that already have elected CAB status, member firms that have not
chosen to elect CAB status due to the CAB Rules' limits on their
current or future activities, and firms that have not applied for FINRA
membership.
Existing CAB firms that expand the scope of their activities as a
result of the proposed rule change would continue to benefit from a
streamlined FINRA rulebook and would benefit from increased flexibility
in their business practices. For example, they would be able to act as
placement agents or finders in secondary transactions of unregistered
securities (in certain cases). They also would be permitted to sell
unregistered securities to ``eligible employees'' who are specified
officers, directors, and employees of the issuer or certain affiliates
if they so desire. Additionally, they would be allowed to participate
in PSTs in accordance with FINRA Rule 3280 (or its successor).
The FINRA-registered CAB-like firms that could benefit from the
proposed rule change include those firms whose activities would fall
within the range of permissible CAB activities under the
[[Page 25405]]
proposed amendments and firms for which the expanded CAB definition
would overlap sufficiently with their business activities that the
benefits of becoming a CAB would exceed the costs. For example, any of
the existing CAB-like member firms that act as placement agents or
finders in secondary transactions of unregistered securities that would
be permitted for CABs would now be CAB-eligible. Firms that sell
unregistered securities to ``eligible employees'' and otherwise meet
the expanded CAB definition, would now be CAB-eligible and would have
the potential to realize any associated cost savings from electing CAB
designation.
Member firms that elect CAB status as a result of the proposed rule
change would benefit from reduced regulatory burdens and lower
compliance costs associated with maintaining FINRA membership. For
example, unlike non-CAB broker-dealer members, CABs are not subject to
branch inspection requirements under FINRA Rule 3110, are not required
to have a principal pre-approve, or file with FINRA, their
communications with the public, and are only required to conduct an
anti-money laundering audit every two years (versus annually for most
non-CAB broker-dealer members). These firms also likely would benefit
from more focused examinations that are tailored to their business
activities. This should reduce compliance costs for these firms and
allow them to deploy their capital more efficiently.
Some unregistered CAB-like firms may elect to become CABs as a
result of the proposed amendments.\69\ These firms are of two types:
(1) firms that may be uncertain about whether their activities require
broker-dealer registration; and (2) firms that are currently engaging
in activities that do not require broker-dealer registration and would
have to cease certain of these activities if they became CABs (for
example, an M&A Broker engaging in transactions that constitute PSTs
under the CAB Rules if the M&A Broker shared personnel with a newly
created CAB affiliate). Unregistered firms that may currently engage in
activities that require broker-dealer registration would benefit from
removing the uncertainty of being sanctioned for acting as an
unregistered broker-dealer while operating under a less burdensome
regulatory framework. Firms that are not currently engaging in broker-
dealer activities, but that choose to enter the broker-dealer space as
a CAB because of the proposed rule change may benefit from new business
opportunities.
---------------------------------------------------------------------------
\69\ In addition, it is possible that, because of the expanded
CAB definition, new firms may elect to enter the broker-dealer space
as CABs. FINRA does not have data that would enable the staff to
estimate the number of such firms.
---------------------------------------------------------------------------
The clients of firms that would benefit from the proposed rule
change likely would benefit as well. They may benefit from lower costs
to the extent FINRA-registered firms that become CABs pass any of their
regulatory cost savings onto their customers. Clients of currently
unregistered firms may benefit from the protections that come with
FINRA's regulatory and supervisory framework. Clients of existing CAB
firms may benefit from the expanded scope of the firms' activities,
without loss of protections.
Finally, FINRA believes that the proposed amendments to the CAB
Rules could individually, and collectively, support capital formation
without materially impacting investor protection.
Anticipated Costs
The proposed rule change would impose certain direct costs on
existing CAB firms. Such direct costs would include establishing
written policies and procedures, and any attendant monitoring costs
that arise from them, in response to the amendment related to persons
associated with CABs participating in PSTs. Additional costs would stem
from the required training and supervision of the associated persons
and their activities.
The proposed rule change is expected to impose some direct costs on
firms that elect to become CABs as a result of the proposal. Firms that
register with FINRA as CABs would incur implementation and ongoing
costs associated with applying for and maintaining FINRA membership.
The implementation costs would include FINRA application fees, legal or
consulting fees, and costs associated with setting up the
infrastructure for regulatory reporting and developing written
supervisory policies and procedures. The ongoing costs would be in the
form of annual registration fees and expenses associated with ongoing
compliance activities, including undergoing examinations. However,
these are costs that firms may choose to incur, presumably because they
conclude that the additional costs of regulation, supervision and
compliance are outweighed by the benefits of FINRA membership. Some of
the costs incurred from going from an unregistered to registered status
might be passed on to the firms' customers. However, these costs could
also be offset by the additional benefits stemming from the
registration status and added investor protections that come with it.
Competitive Effects and Additional Considerations
To the extent that FINRA-registered CAB-like firms elect CAB status
or non-FINRA members elect to register as CABs, the proposed rule
change should reduce the competitive imbalance between these groups.
For example, expanding the trading activities permissible for CAB
associated persons, such as under proposed amendments to Rule 328,
would potentially remove barriers for selecting CAB status or the
ability of CAB firms to compete with CAB-like FINRA members or non-
members. Overall, this should enhance competition among these groups
particularly since the former group will experience reduced regulatory
costs as a result of the proposed rule change.
FINRA considered the implications of the proposed rule change for
investor protection. FINRA believes that the proposed rule change is
reasonably designed to protect investors because it does not materially
impact the limited business model of CABs and may enhance regulation in
this space. To the extent that the proposed rule change expands CABs'
permissible activities, FINRA does not believe there would be a
material impact on investor protection. For example, as described
above, eligible employees likely have the knowledge and expertise to
understand the risks of investing in the issuer and resources necessary
to conduct due diligence. Reg BI and Form CRS provide an additional
layer of investor protection.
Alternatives Considered
FINRA has considered possible alternatives to the proposal. For
example, FINRA considered exempting or reducing Continuing Education
(CE) requirements for CAB firm registered personnel. However, FINRA
determined, also considering the recent changes to the CE program,\70\
that this change could hinder CAB registered persons' future employment
opportunities with non-CAB firms, and potentially could reduce investor
protection. FINRA further considered amending CAB Rule 016(c)(1) to
expressly allow a CAB to act as an investment adviser as defined in
section 202(a)(11) of the Advisers Act, provided that the advisory
clients of the CAB and its associated persons consist solely of
institutional investors. As discussed
[[Page 25406]]
below, FINRA has determined not to make this change and believes that
it is appropriate to defer to the existing federal and state statutory
framework with respect to whether CABs may register as investment
advisers and engage in advisory activities.
---------------------------------------------------------------------------
\70\ See Securities Exchange Act Release No. 93097 (September
21, 2021), 86 FR 53358 (September 27, 2021) (Order Approving File
No. SR-FINRA-2021-015).
---------------------------------------------------------------------------
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Background
In January 2020, FINRA published Regulatory Notice 20-04 (the
``Notice''), requesting comment on proposed amendments to the CAB Rules
(the ``Notice Proposal''). The Notice Proposal was intended to make the
CAB Rules more useful to CABs without reducing investor protection. A
copy of the Notice is available on FINRA's website at <a href="https://www.finra.org">https://www.finra.org</a>.
The comment period initially expired on March 30, 2020, and
subsequently was extended until June 30, 2020. FINRA received eight
comments in response to the Notice. A list of the commenters in
response to the Notice and copies of the comment letters received in
response to the Notice are available on FINRA's website.\71\ A summary
of the comments and FINRA's response is provided below.
---------------------------------------------------------------------------
\71\ See SR-FINRA-2025-005 (Form 19b-4, Exhibit 2b) for a list
of abbreviations assigned to commenters (available on FINRA's
website at <a href="https://www.finra.org">https://www.finra.org</a>).
---------------------------------------------------------------------------
Comments on Proposal
Investment Adviser Activities
The Notice Proposal would have amended CAB Rule 016(c)(1) to
expressly allow a CAB to act as an investment adviser as defined in
section 202(a)(11) of the Advisers Act, provided that the advisory
clients of the CAB and its associated persons consist solely of
institutional investors. Two commenters \72\ supported permitting CABs
to register as investment advisers. NYSBA commented that this proposed
change would benefit CABs whose advisory services to companies
contemplating a purchase or sale of securities, or to issuers who
request advice concerning the investment of offering proceeds, may
require registration as an IA. NYSBA also stated that allowing CABs to
become investment advisers would enhance the oversight of CABs from the
Commission or states, as regulators of investment advisers. NYSBA
further recommended that FINRA amend CAB Rule 328 (Private Securities
Transactions of an Associated Person) to exclude investment advisory
activities of CAB associated persons who are employees or supervised
persons of registered investment advisers, and employees of banks and
trust companies who are engaged in permissible securities or advisory
services. NYSBA argued that this exclusion should cover any type of
advisory activities, but at a minimum, activities involving
institutional clients.
---------------------------------------------------------------------------
\72\ M&R and NYSBA.
---------------------------------------------------------------------------
FINRA has determined not to make this change and instead to retain
the current approach under the CAB Rules (i.e., neither expressly
prohibiting nor expressly permitting CABs to register as investment
advisers). FINRA believes that it is appropriate to defer to the
existing federal and state statutory framework with respect to whether
CABs may engage in advisory activities. In addition, FINRA is not
proposing to exclude from CAB Rule 328 investment advisory or banking
activities of associated persons who are also employees or supervised
persons of investment advisers or banks, as recommended by NYBSA.
Institutional Investor Definition
The Notice Proposal would have amended the definition of
``institutional investor'' in CAB Rule 016(i) to include any
``knowledgeable employee.'' The Notice Proposal further would have
added a new defined term ``knowledgeable employee'' that included: (i)
Knowledgeable Employees as that term is defined in ICA Rule 3c-5 where
the CAB has provided services permitted under CAB Rule 016(c)(1)(F) and
(G) on behalf of an issuer that is a Covered Company \73\ as defined in
ICA Rule 3c-5, and (ii) the president, any vice president in charge of
a principal business unit, division or function (such as sales,
administration or finance), any other officer who performs a policy-
making function, or any other person who performs similar policy-making
functions, director, trustee, general partner, advisory board member,
or person serving in a similar capacity, of an issuer on behalf of
which the capital acquisition broker has provided services permitted
under CAB Rule 016(c)(1)(F) and (G); and (iii) any company owned
exclusively by knowledgeable employees.
---------------------------------------------------------------------------
\73\ A ``Covered Company'' under ICA Rule 3c-5 means any company
that would be an investment company but for the exclusions provided
by sections 3(c)(1) or 3(c)(7) of the ICA. See 17 CFR 270.3c-
5(a)(2).
---------------------------------------------------------------------------
Two commenters supported the proposed amendment to the CAB Rules
definition of ``institutional investor'' to include knowledgeable
employees, noting that it is common industry practice for hedge fund
and private equity fund senior officers and directors to invest in
private placements in which they are involved.\74\ March recommended
that ``institutional investor'' also include accredited investors as
defined in Securities Act Regulation D.\75\ M&R suggested that the term
also include professional legal representatives of investors under the
definition. IS expressed concern that if a CAB sold unregistered
securities to knowledgeable employees, those investors would be
considered retail customers under Reg BI and retail investors for
purposes of Form CRS, and that this status is ``perhaps . . . an
unintended consequence brought about by the SEC.''
---------------------------------------------------------------------------
\74\ M&R and NYSBA.
\75\ See 17 CFR 230.501(a).
---------------------------------------------------------------------------
FINRA does not believe that, for purposes of the CAB Rules,
``institutional investor'' should include accredited investors as
defined under Regulation D. Commenters on the original proposed CAB
Rules made the same recommendation, and FINRA chose at that time not to
adopt this change, in part because the CAB Rules are not intended to
govern broker-dealers that engage in retail private placement
activities, since the term ``accredited investor'' under Regulation D
covers a much wider range of individual investors than does the term
``institutional investor'' under the CAB Rules, and may not possess the
same wealth or expertise as other CAB institutional investors.
FINRA also does not believe it is necessary to revise the
definition of ``institutional investor'' to include professional legal
representatives of investors, since the term already includes any
person acting solely on behalf of any such institutional investor.\76\
---------------------------------------------------------------------------
\76\ See CAB Rule 016(i)(7).
---------------------------------------------------------------------------
However, FINRA has determined to create a new proposed definition
of ``eligible employee'' that would include, with respect to an issuer
for which the CAB has provided services to the issuer or a control
person permitted under CAB Rule 016(c)(1)(F) or (G): (1) persons that
meet the definition of ``Knowledgeable Employee'' under ICA Rule 3c-5
with respect to services provided to an issuer that is a Covered
Company as defined in ICA Rule 3c-5 or services provided to an
Affiliated Management Person of such Covered Company as defined in ICA
Rule 3c-5; and (2) specified officers, directors, and employees of
issuers other than private funds.
FINRA believes that it is appropriate to create the new defined
term ``eligible
[[Page 25407]]
employee'' rather than using the proposed definition of ``knowledgeable
employee'' in a manner that differs from the meaning of that term under
ICA Rule 3c-5. Using a new term ``eligible employee'' thereby avoids
potential confusion with the term ``Knowledgeable Employee'' under ICA
Rule 3c-5. As discussed above, this change to the CAB Rules would
permit the sale of newly-issued unregistered securities to specified
officers, directors, and employees of both private fund issuers and
issuers that are not private funds, in addition to institutional
investors as defined under the current rules. Such eligible employees
often invest in their employer companies as part of a private
securities offering.
In addition, because a CAB is a registered broker-dealer under the
Exchange Act, FINRA agrees that if a CAB recommends any securities
transaction or investment strategy involving securities to any natural
person, or a legal representative of a natural person, who uses the
recommendation primarily for personal, family, or household purposes,
the person receiving the recommendation would be a ``retail customer''
under Reg BI.\77\ FINRA also agrees that if a CAB offers services to a
natural person, or the legal representative of such natural person, who
seeks to receive or receives services primarily for personal, family,
or household purposes, the natural person would be a ``retail
investor'' for purposes of Form CRS.\78\
---------------------------------------------------------------------------
\77\ See 17 CFR 240.15l-1(b)(1).
\78\ See 17 CFR 240.17a-14(e)(2).
---------------------------------------------------------------------------
Nevertheless, FINRA does not believe the application of Reg BI or
Form CRS to a CAB or an associated person of a CAB is an unintended
consequence brought about by the SEC. The Commission intended these
rules to apply to broker-dealers' securities recommendations and offers
of services to natural persons who use them for personal, family or
household purposes, regardless of a natural person's net worth or
whether a natural person is considered an institutional investor under
FINRA Rules.\79\ Further, FINRA does not believe that the application
of Reg BI or CRS to CABs would impede the ability of CABs to comply
with the CAB Rules.
---------------------------------------------------------------------------
\79\ See Securities Exchange Act Release No. 86031 (June 5,
2019), 84 FR 33318, 33342-43 (July 12, 2019), and Securities
Exchange Act Release No. 86032 (June 5, 2019), 84 FR 33492, 33542-43
(July 12, 2019).
---------------------------------------------------------------------------
Secondary Transactions
The Notice Proposal would have permitted CABs to qualify, identify,
solicit, or act as a placement agent or finder on behalf of an
institutional investor that seeks to sell unregistered securities that
it owns, subject to specified conditions. The purchaser of such
securities would need to be an institutional investor, the CAB would
need to have previously provided services permitted under CAB Rules
016(c)(1)(F) and (G) to the issuer in connection with the initial sale
of such securities, and the sale of such securities would need to
qualify for an exemption from registration under the Securities Act.
Commenters supported this proposed change,\80\ but urged FINRA not
to restrict this authority to secondary transactions in securities of
an issuer on behalf of which the CAB previously had acted as placement
agent or finder.\81\ NYSBA noted that widening the ability of CABs to
act as intermediaries in the sale of any unregistered securities,
regardless of whether the CAB had previously provided services to the
issuer, would be consistent with the Commission's June 18, 2019,
concept release on harmonizing of securities offering exemptions.\82\
Similarly, two other commenters recommended that CABs be permitted to
advise clients regarding the sale of minority interests (involving less
than 25% of ownership interests) to institutional investors.\83\ Metric
further noted that if CABs are limited to acting as placement agents
only in secondary transactions involving securities where the CAB had
previously provided services to the securities' issuer, this
restriction ``would eliminate 99%+ of the potential market and not
justify the election of CAB status.''
---------------------------------------------------------------------------
\80\ M&R and NYSBA.
\81\ Metric and NYSBA.
\82\ See Securities Act Release No. 10649 (June 18, 2019), 84 FR
30640 (June 26, 2019).
\83\ HW and Metric.
---------------------------------------------------------------------------
After considering these comments, FINRA agrees that the proposed
restriction only allowing a CAB to act as intermediary for secondary
transactions involving securities issued by prior CAB clients would be
too limiting. FINRA also believes that allowing CABs to act as
intermediaries in other secondary unregistered securities transactions
where both the purchaser and seller are institutional investors would
be consistent with CABs' current business model, since it would not
allow CABs to serve retail investors.
Accordingly, FINRA proposes to modify the Notice Proposal to allow
CABs to act as intermediaries in secondary transactions involving
unregistered securities. As revised, a CAB would be permitted to
qualify, identify, solicit, or act as a placement agent or finder on
behalf of an institutional investor that seeks to sell unregistered
securities that it owns, provided that: (i) the purchaser of such
securities is an institutional investor; and (ii) the sale of such
securities qualifies for an exemption from registration under the
Securities Act (such as Securities Act Rules 144 or 144A). FINRA
believes that these conditions are in the public interest as they would
allow CABs to offer a wider range of services to their clients and
would maintain investor protection, since CABs could only privately
place securities where the purchaser is an institutional investor and
would not be permitted to sell unregistered securities to retail
investors.
Personal Investments
The Notice Proposal proposed new CAB Rule 321 (Supervision of
Associated Persons' Investments), which would have required any CAB
whose business model creates potential insider trading risks to
establish, maintain, and enforce written policies and procedures that
are reasonably designed to mitigate and prevent those risks. Such firms
would be subject to FINRA Rule 3110(d), which requires members to
include in their supervisory procedures a process for the review and
investigation of securities transactions that are reasonably designed
to identify trades that may violate provisions of the Exchange Act, the
rules thereunder, or FINRA rules prohibiting insider trading and
manipulative and deceptive devices that are effected for accounts of an
associated person or any of his or her immediate family members. In
addition, such firms would be subject to FINRA Rule 3210, which
requires associated persons to obtain his or her firm's prior written
consent before opening a securities account at another broker-dealer or
financial institution and authorizes the employer member to request
that the executing member transmit confirmations and statements of such
accounts. Proposed CAB Rule 321 also would have clarified that an
associated person of a CAB may purchase and sell unregistered
securities, provided he or she provides prior written notice of the
transaction to the person's employer broker-dealer.
Two commenters strongly opposed proposed Rule 321.\84\ These
commenters argued that the rule is not justified based on the nature of
CABs' activities. They recommended instead that CABs be required to
adopt and enforce a comprehensive insider trading policy,
[[Page 25408]]
including a restricted list of companies related to a CAB's projects,
and to educate CABs' employees on the prohibitions of insider trading.
---------------------------------------------------------------------------
\84\ Metric and Waterview.
---------------------------------------------------------------------------
Waterview stated that, as a CAB, it does not have and cannot afford
the automated systems that larger firms use to review associated
persons' brokerage statements for accounts at other broker-dealers, and
that this requirement would significantly burden small firms. Waterview
also noted that exempt brokers that rely on the M&A Brokers Letter are
not required to gather and review their employees' brokerage
statements, which puts CABs at a competitive disadvantage relative to
these exempt firms, and that FINRA should extend the same relief to
CABs.
In contrast, two commenters supported proposed CAB Rule 321.\85\
NYSBA stated that proposed Rule 321 would move CABs closer to their
investment banking and corporate financing brokerage peers in terms of
supervision of associated persons, and that it did not view this
requirement as unduly burdensome.
---------------------------------------------------------------------------
\85\ M&R and NYSBA.
---------------------------------------------------------------------------
In response to these comments, FINRA recognizes that uniformly
applying FINRA Rules 3110(d) and 3210 to all CABs may be unduly
burdensome for some smaller firms, and that such an approach fails to
recognize the differences between firms' sizes and business models.
FINRA has determined not to adopt proposed CAB Rule 321 in light of
current SEC requirements and FINRA rules. CABs that are involved in
transactions, either as a finder or a placement agent, that raise
insider trading risks due to the potential misuse of material nonpublic
information must maintain policies and procedures required by the
federal securities laws to address such risks.\86\ In addition,
pursuant to CAB Rule 201, CABs are subject to FINRA Rule 2010, which
requires that members ``observe high standards of commercial honor and
just and equitable principles of trade.'' \87\
---------------------------------------------------------------------------
\86\ See SEA Section 15(g), 15 U.S.C. 78o(g); see also Notice to
Members 91-45 (June 1991) (NASD/NYSE Joint Memo).
\87\ See All. for Fair Bd. Recruitment v. SEC, 125 F.4th 159,
176 (5th Cir. 2024) (stating that ``SROs have frequently applied
[FINRA Rule 2010 and similar rules] to discipline [their] members
for conduct that is unethical, such as[ ] violating the securities
laws''). See also, e.g., Dep't of Enforcement v. Clark, Complaint
No. 2017055608101, 2020 FINRA Discip. LEXIS 46 (NAC Dec. 17, 2020)
(affirming Hearing Panel's finding that respondent violated FINRA
Rule 2010 by misusing confidential information concerning a
corporate acquisition and purchasing shares for his own personal
financial gain); Dep't of Market Regulation v. Geraci, Complaint No.
CMS020143, 2004 NASD Discip. LEXIS 19 (NAC Dec. 9, 2004) (affirming
Hearing Panel's finding that the respondent violated Section 10(b)
of the Exchange Act, SEA Rule 10b-5, and NASD Rules 2110 (now FINRA
Rule 2010) and 2120 (now FINRA Rule 2020) by engaging in insider
trading).
---------------------------------------------------------------------------
Two commenters also recommended that FINRA exclude from the
definition of PST M&A transactions that are permissible for exempt
firms that rely on the M&A Brokers Letter.\88\ These commenters noted
that if these types of transactions are considered PSTs, it creates
significant operational and competitive challenges, particularly where
it is unclear whether a future transaction will be an asset or stock
sale. Waterview stated that CAB Rule 328's PST prohibition has
prevented the firm from entering into strategic referral arrangements,
which places the firm at a competitive disadvantage relative to exempt
firms relying on the no-action letter.
---------------------------------------------------------------------------
\88\ M&R and Waterview.
---------------------------------------------------------------------------
FINRA is proposing to revise CAB Rule 328 in response to these and
other comments. Currently CAB Rule 328 prohibits any associated person
from participating in any manner in a PST. As proposed to be amended,
CAB Rule 328 would subject all CABs to FINRA Rule 3280. Thus, while
there no longer would be a flat prohibition on PSTs, CABs would still
need to supervise and keep records of all associated persons' PSTs to
the same extent as non-CAB broker-dealer members under FINRA Rule 3280.
FINRA believes that, with the proposed amendment to CAB Rule 328, CABs
would not face the operational and competitive challenges, described
above, that CAB Rule 328 currently imposes.
Compensation
The Notice Proposal would have added a new CAB Rule 511 (Securities
as Compensation) that would state that a CAB may receive compensation
in the form of equity securities of a privately held issuer on behalf
of which the CAB provided services pursuant to CAB Rule 016(c),
provided that the receipt, exercise or subsequent sale of such
securities will not cause the CAB to engage in an activity prohibited
under Rule 016(c)(2).\89\ Proposed CAB Rule 511 would codify a prior
FINRA staff letter that interpreted the CAB Rules to allow CABs to
receive equity securities as compensation.\90\
---------------------------------------------------------------------------
\89\ CAB Rule 016(c)(2) provides that ``capital acquisition
broker'' does not include any broker or dealer that carries or acts
as an introducing broker with respect to customers' accounts, holds
or handles customers' funds or securities, accept orders from
customers (other than as permitted by CAB Rule 016(c)(1)(F) or (G)),
has investment discretion on behalf of any customer, engages in
proprietary trading of securities or market-making activities,
participates in or maintains an online platform in connection with
offerings of unregistered securities pursuant to Regulation
Crowdfunding or Regulation A under the Securities Act, or effects
securities transactions that would require the broker or dealer to
report the transaction to FINRA under the FINRA Rules 6000 or 7000
series.
\90\ See supra note 60.
---------------------------------------------------------------------------
NYSBA supported proposed CAB Rule 511, noted that CABs have
evolved, and thanked FINRA for acknowledging this evolution.
FINRA is retaining the text of proposed CAB Rule 511 without
change.
Other Comments
IS criticized the CAB Rules in general as too restrictive and
complex, and suggested that FINRA needs to redo the entire rulemaking
process instead of patching poorly conceived rules. For example, IS
argued that CABs should not have to comply with anti-money laundering
(``AML'') rules, and that FINRA should adopt a simple qualification
examination for persons working for CABs. IS further stated that
institutional investors do not need the protections that the CAB Rules
provide, and that the proposed changes do not go far enough to
encourage more firms to elect CAB status.
Metric recommended that FINRA eliminate continuing education
(``CE'') requirements for associated persons of CABs, and that it did
not believe that if a CAB representative moved to a non-CAB broker-
dealer, not having kept up his or her CE requirements would impede the
representative from obtaining employment.
M&R recommended that FINRA reach out to professional associations
and communities that engage in intermediary activities outside the
scope of FINRA registration to let them know the benefits that CAB
registration offers to their business, which would also benefit
investors should such firms actually register. M&R also urged FINRA to
develop CAB-specific compliance tools for small firms and solicit CAB
specific contributions to its Peer-2-Peer Compliance Library. M&R also
recommended that FINRA coordinate the CAB Rules with the conditions in
the M&A Brokers Letter, which would also encourage more firms that
currently rely on the letter to register as CABs instead.
FINRA does not believe it would be useful or appropriate to repeal
and replace the entire CAB Rules set. As of the end of 2024, 65 FINRA
members have elected CAB status and operate under the CAB Rules.
Completely repealing and then rewriting the CAB Rules would severely
disrupt these firms' operations and FINRA's efforts to
[[Page 25409]]
regulate these firms. Moreover, some of IS's recommendations, such as
exempting CABs from the AML rules, are beyond FINRA's authority, since
those obligations stem from statutory requirements applicable to all
registered broker-dealers.
FINRA believes it is premature to create a separate representative
or principal registration category solely for CABs. CABs often have
different business models that require different types of
registrations. FINRA also believes that it is important for associated
persons of CABs to maintain their CE requirements, both to ensure that
these persons are current on applicable securities laws, and to ease
their transition should they choose to work for a non-CAB broker-
dealer.
FINRA appreciates M&R's suggestions to work with both CAB and non-
CAB industry members to make them aware of the benefits of CAB
registration, and its suggestions to make more compliance tools
available to CABs. FINRA agrees that adding to and improving compliance
tools and resources benefit the industry and investors.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#750700191058161a1818101b0106350610165b121a03"><span class="__cf_email__" data-cfemail="90e2e5fcf5bdf3fffdfdf5fee4e3d0e3f5f3bef7ffe6">[email protected]</span></a>. Please include
file number SR-FINRA-2025-005 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-FINRA-2025-005. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of FINRA. Do not include
personal identifiable information in submissions; you should submit
only information that you wish to make available publicly. We may
redact in part or withhold entirely from publication submitted material
that is obscene or subject to copyright protection. All submissions
should refer to file number SR-FINRA-2025-005 and should be submitted
on or before July 7, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\91\
---------------------------------------------------------------------------
\91\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-10882 Filed 6-13-25; 8:45 am]
BILLING CODE 8011-01-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on June 16, 2025.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.