Notice2026-02899
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change, as Modified by Partial Amendment No. 1, To Amend the FINRA Capital Acquisition Broker (“CAB”) Rules
Primary source
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Published
February 13, 2026
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 91 Issue 30 (Friday, February 13, 2026)</title>
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[Federal Register Volume 91, Number 30 (Friday, February 13, 2026)]
[Notices]
[Pages 6954-6961]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-02899]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104806; File No. SR-FINRA-2025-005]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change, as Modified by
Partial Amendment No. 1, To Amend the FINRA Capital Acquisition Broker
(``CAB'') Rules
February 10, 2026.
I. Introduction
On June 4, 2025, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend certain FINRA capital
acquisition broker rules (``CAB Rules''). Specifically, the proposed
rule change, as modified by Partial Amendment No. 1, would amend the
CAB Rules to: (1) permit capital acquisition brokers (``CABs'') to
qualify, identify, solicit, or act as placement agents or finders \3\
on behalf of an issuer or institutional investor buyer in connection
with a sale of newly issued unregistered securities to an expanded
scope of institutional investors; (2) permit CABs to qualify, identify,
solicit, or act as placement agents or finders in connection with a
change of control of a privately held company, regardless of whether
the CAB acts on behalf of a seller or a buyer; (3) permit CABs, in
limited circumstances, to qualify, identify, solicit, or act as
placement agents or finders on behalf of an institutional investor that
seeks to sell or buy unregistered securities; (4) permit CAB associated
persons to participate in private securities transactions, subject to
the requirements of FINRA Rule 3280 (Private Securities Transactions of
an Associated Person); (5) codify existing FINRA guidance on CAB
compensation; and (6) replace a reference to a withdrawn SEC no-action
letter with a reference to a corresponding Exchange Act provision.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ This order may refer to these activities collectively as
``acting as a placement agent or finder.''
\4\ See Exchange Act Release No. 103216 (Jun. 10, 2025), 90 FR
25396 (Jun. 16, 2025) (File No. SR-FINRA-2025-005) (``Notice'');
Exchange Act Release No. 104097 (Sep. 26, 2025), 90 FR 47017 (Sep.
30, 2025) (File No. SR-FINRA-2025-005) (``Notice of Partial
Amendment No. 1'').
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The proposed rule change was published for comment in the Federal
Register on June 16, 2025.\5\ The public comment period closed on July
7, 2025. The Commission received comment letters related to this
filing.\6\ On July 17, 2025, FINRA consented to extend until September
12, 2025, the time period in which the Commission must approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to approve or disapprove the proposed
rule change.\7\ On September 11, 2025, the Commission published an
order instituting proceedings to determine whether to approve or
disapprove the proposed rule change.\8\
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\5\ See Notice.
\6\ The comment letters are available at <a href="https://www.sec.gov/comments/sr-finra-2025-005/srfinra2025005.htm">https://www.sec.gov/comments/sr-finra-2025-005/srfinra2025005.htm</a>.
\7\ See letter from Joseph Savage, Vice President and Associate
General Counsel, FINRA (dated Jul. 17, 2025), <a href="https://www.finra.org/sites/default/files/2025-07/sr-finra-2025-005-extension1.pdf">https://www.finra.org/sites/default/files/2025-07/sr-finra-2025-005-extension1.pdf</a>.
\8\ Exchange Act Release No. 103945 (Sep. 11, 2025), 90 FR 44747
(Sep. 16, 2025) (File No. SR-FINRA-2025-005) (``OIP'').
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On September 24, 2025, FINRA responded to the comment letters
received in response to the Notice \9\ and filed a partial amendment to
the proposed rule change (``Partial Amendment No. 1'').\10\ On
September 26, 2025, the Commission published a notice of filing of
Partial Amendment No. 1.\11\ On December 3, 2025, FINRA consented to an
extension of the time period in which the Commission must approve or
disapprove the proposed rule change to February 11, 2026.\12\ This
order approves the proposed rule change, as modified by Partial
Amendment No. 1 (hereinafter, the ``proposed rule change'' unless
otherwise specified).
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\9\ See letter from Lisa Horrigan, Associate General Counsel,
FINRA (dated Sep. 24, 2025), <a href="https://www.sec.gov/comments/sr-finra-2025-005/srfinra2025005-662647-1977754.pdf">https://www.sec.gov/comments/sr-finra-2025-005/srfinra2025005-662647-1977754.pdf</a> (``FINRA Response'').
\10\ Partial Amendment No. 1 is available on FINRA's website at
<a href="https://www.finra.org/rules-guidance/rule-filings/sr-finra-2025-005">https://www.finra.org/rules-guidance/rule-filings/sr-finra-2025-005</a>.
\11\ Notice of Partial Amendment No. 1.
\12\ See letter from Joseph Savage, Vice President and Associate
General Counsel, FINRA (dated Dec. 3, 2025), <a href="https://www.finra.org/sites/default/files/2025-12/SR-FINRA-2025-005-Extension-2.pdf">https://www.finra.org/sites/default/files/2025-12/SR-FINRA-2025-005-Extension-2.pdf</a>.
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II. Description of the Proposed Rule Change
A. Background
FINRA adopted the CAB Rules in 2017 to provide a tailored
regulatory framework for member firms (hereinafter, ``members'' or
``member firms'') that elect CAB status.\13\ FINRA member firms
eligible for CAB status are
[[Page 6955]]
generally those that limit their activities to acting as placement
agents for the sale 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.\14\ CABs
are not permitted to engage in 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.\15\ In light of the limitations on CABs'
functions, the CAB Rules impose ``fewer restrictions'' and ``less
extensive supervisory requirements'' on CABs as compared to the FINRA
rules applicable to non-CAB member firms.\16\ FINRA stated that 44
member firms elected CAB status in 2017, and as of the end of 2024,
that number had grown to 65 member firms.\17\
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\13\ Notice at 25397.
\14\ Id. at 25396; see also CAB Rule 016(c) (identifying the
limited functions of a CAB).
\15\ Notice at 25396 (citing CAB Rule 016(c)(2)).
\16\ Id. at 25396.
\17\ Id.
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B. The Proposed Rule Change
FINRA stated that it ``determined to amend the CAB Rules as part of
its efforts to ensure that FINRA rules are effective and efficient, and
its rules relating to the capital-raising process support efficient
capital formation.'' \18\ Based on its experience with implementing the
CAB Rules, engagement with member firms,\19\ and the subsequent
adoption of Regulation Best Interest \20\ and Form CRS,\21\ FINRA
stated that the current CAB Rules include limitations on CABs'
activities that may be unnecessarily restrictive and have unintended
consequences.\22\
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\18\ Id. at 25398.
\19\ In 2017, for example, FINRA created the Capital Acquisition
and Placement Broker Committee, which comprised of both individuals
registered with CABs and individuals registered with non-CAB broker-
dealers with similar business models, to make recommendations about
policies and rules that impact CABs and non-CABs with similar
business models. Notice at 25398. In 2020, FINRA also published a
regulatory notice to solicit comment on multiple proposed amendments
``to make [the CAB Rules] more useful to CABs without reducing
investor protection.'' FINRA Reg. Notice 20-04 at 1 (Jan. 30, 2020),
<a href="https://www.finra.org/sites/default/files/2020-01/Regulatory-Notice-20-04.pdf">https://www.finra.org/sites/default/files/2020-01/Regulatory-Notice-20-04.pdf</a>; see Notice at 25398.
\20\ See Exchange Act Rule 15l-1, 17 CFR 240.15l-1.
\21\ See Exchange Act Rule 17a-14, 17 CFR 240.17a-14.
\22\ Notice at 25398.
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For example, FINRA stated that, notwithstanding a growth in
unregistered securities offerings in recent years, it believes that
registered broker-dealers, such as CABs, participate in only a fraction
of such offerings.\23\ FINRA stated that issuers and intermediaries
that are not registered as broker-dealers conduct the rest of these
private placements, and for that reason, investors lack the benefits
associated with broker-dealer regulation and oversight in these
transactions.\24\
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\23\ Id. at 25397-98.
\24\ Id. at 25398.
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FINRA stated that the proposed rule change may encourage non-CAB
members and firms that are eligible for an exemption from broker-dealer
registration ``to elect CAB status, thereby benefitting these firms and
investors alike.'' \25\ FINRA stated that the proposed rule change
would address certain limitations in multiple CAB Rules,\26\ as well as
codify existing FINRA guidance on CAB compensation \27\ and update rule
text to reflect a subsequent Exchange Act amendment.\28\ This order
addresses each proposed rule change in turn.
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\25\ Id.
\26\ Id. at 25398-25403.
\27\ Id. at 25403.
\28\ Id.
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1. Sales of Newly Issued Unregistered Securities
The CAB Rules currently permit a CAB to, among other things,
qualify, identify, solicit, or 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.\29\ The proposed
rule change would broaden these permissible activities in two ways.
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\29\ CAB Rule 016(c)(1)(F)(i).
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First, the proposed rule change would expand the definition of
institutional investor for purposes of the CAB Rules.\30\ The proposed
rule change would add ``eligible employee'' to the list \31\ of persons
and entities that qualify as an ``institutional investor'' for purposes
of the CAB Rules.\32\ Under the proposed rule change, an ``eligible
employee'' would mean, ``with respect to an issuer for which the [CAB]
has provided services to the issuer or a person that controls the
issuer \33\ permitted under [CAB Rule 016(c)(1)(F) or (G)]'': (1) ``any
`Knowledgeable Employee,' as defined in Investment Company Act Rule 3c-
5 (``Rule 3c-5'') \34\ with respect to services provided to an issuer
that is a Covered Company as defined in Rule 3c-5 \35\ or services
[[Page 6956]]
provided to an Affiliated Management Person \36\ of such Covered
Company as defined in Rule 3c-5''; and (2) ``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 Rule 3c-5.'' \37\
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\30\ Notice at 25399.
\31\ CAB Rule 016(i) 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 Investment Company Act of 1940;
and (7) any person acting solely on behalf of any such institutional
investor.''
\32\ Notice at 25399; see Proposed CAB Rules 016(i)(8), 016(m).
The proposed rule change would also make two technical amendments to
CAB Rule 016(i): (1) it would remove a duplicate ``any'' in CAB Rule
016(i)(7); and (2) it would relocate the word ``and'' to appear
before the new, eighth item on the definition's list. Notice at
25401 n.44.
\33\ As originally proposed in the Notice, proposed CAB Rule
016(m) would have defined ``eligible employee'' ``with respect to an
issuer for which the capital acquisition broker has provided
services to the issuer or a control person permitted under
subparagraphs (F) or (G) of Rule 016(c)(1).'' Id. at 25399-25400 &
Exhibit 5 (emphasis added). Partial Amendment No. 1 would delete the
term ``control person'' in proposed CAB Rule 016(c)(1)(F)(ii), and
it would replace ``control person'' with ``person that controls the
issuer'' in proposed CAB Rule 016(m). Notice of Partial Amendment
No. 1 at 47020.
\34\ Rule 3c-5 defines ``Knowledgeable Employee'' as any natural
person, with respect to a Covered Company, who is: ``(i) [a]n
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) [a]n 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.'' 17 CFR 270.3c-5(a)(4)
(emphasis in original).
\35\ Rule 3c-5 defines a ``Covered Company'' as any company that
would be an investment company but for the exclusion provided by
Investment Company Act Section 3(c)(1) or 3(c)(7). 17 CFR 270.3c-
5(a)(2), (a)(5) and (a)(6). Investment Company Act Section 3(c)(1)
generally excludes from the definition of ``investment company''
``[a]ny issuer whose outstanding securities . . . are beneficially
owned by not more than one hundred persons . . . and which is not
making and does not presently propose to make a public offering of
its securities'' (hereinafter, ``Section 3(c)(1) fund''). 15 U.S.C.
80a-3(c)(1). Investment Company Act Section 3(c)(7) generally
excludes from the definition of ``investment company'' ``[a]ny
issuer, the outstanding securities of which are owned exclusively by
persons who, at the time of acquisition of such securities, are
qualified purchasers, and which is not making and does not at that
time propose to make a public offering of such securities''
(hereinafter, ``Section 3(c)(7) fund''). 15 U.S.C. 80a-3(c)(7). For
purposes of determining the number of beneficial owners of a Section
3(c)(1) fund and whether the outstanding securities of a Section
3(c)(7) fund are ``owned exclusively by qualified purchasers,'' Rule
3c-5 excludes any securities beneficially owned by a ``person who at
the time such securities were acquired was a Knowledgeable
Employee'' of such fund. 17 CFR 270.3c-5(b)(1).
\36\ Rule 3c-5 defines ``Affiliated Management Person'' as ``an
affiliated person, as such term is defined in section 2(a)(3) of the
[Investment Company Act], that manages the investment activities of
a Covered Company.'' 17 CFR 270.3c-5(a)(1).
\37\ Proposed CAB Rule 016(i)(8), 016(m).
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FINRA stated that the CAB Rules' current definition of
``institutional investor'' includes qualified purchasers, as defined in
the Investment Company Act, but does not include Knowledgeable
Employees.\38\ FINRA stated that 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 ``qualified purchaser''
definition.\39\ FINRA further stated that including Knowledgeable
Employees within the scope 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
Section 3(c)(7) funds.\40\
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\38\ Notice at 25400; CAB Rule 016(i). 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 15 U.S.C. 80a-2(a)(51).
\39\ Notice at 25400; see 17 CFR 270.3c-5(b).
\40\ Notice at 25400.
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In addition, FINRA stated that expanding the definition of
institutional investor to include certain specified officers,
directors, or employees of an issuer that is not a Covered Company
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.'' \41\ FINRA further
stated that ``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.'' \42\
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\41\ Id.
\42\ Id.
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FINRA also stated that the proposed expansion of the definition of
``institutional investor'' to include ``eligible employees'' ``will not
materially impact investor protection'' and is ``consistent with CABs'
limited institutional business model'' because `` `eligible employees'
do not raise the same investor protection concerns as retail
investors.'' \43\ Specifically, FINRA stated that eligible employees
``are likely to understand and appreciate any risks and limitations
associated with investing in the issuer's securities'' and that they
``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.'' \44\ FINRA also stated that, to the
extent a CAB offers services or recommends a securities transaction to
an eligible employee who qualifies as a retail customer under
Regulation Best Interest or a retail investor for purposes of Form CRS,
those investor protections would apply.\45\
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\43\ Id. at 25399-25400. The CAB Rules do not define ``retail
investor.'' Notice at 25398 n.27. For purposes of this Order, and
unless otherwise stated, a ``retail investor'' is any investor that
does not qualify as an ``institutional investor'' under the CAB
Rules. See id.
\44\ Id. at 25400.
\45\ Id. at 25400-01.
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Second, the proposed rule change would provide that a CAB may
represent ``an issuer or institutional investor buyer in connection
with a sale of [newly issued], unregistered securities to institutional
investors.'' \46\ CAB Rule 016(c)(1)(F)(i) currently limits a CAB to
the representation of issuers in such transactions. FINRA stated that
``allowing a CAB also to act on behalf of an institutional investor
buyer in connection with the sale of newly issued unregistered
securities is consistent with CABs' limited institutional business
model and would not materially impact investor protection.'' \47\
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\46\ Proposed CAB Rule 016(c)(1)(F)(i) (emphasis added); see
Notice of Partial Amendment No. 1.
\47\ Notice of Partial Amendment No. 1 at 47018.
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2. Change-of-Control Transactions
The CAB Rules currently permit a CAB to, among other things,
qualify, identify, solicit, or act as a placement agent or finder ``on
behalf of an issuer or a control person in connection with a change of
control of a privately held company.'' \48\
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\48\ CAB Rule 016(c)(1)(F)(ii).
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FINRA stated that CAB Rule 016(c)(1)(F)(ii) was, in part, modeled
on the 2014 SEC staff-issued no-action letter relating to merger and
acquisition brokers (``M&A Brokers'') (the ``M&A Brokers Letter'').\49\
In 2022, Congress amended the Exchange Act to include a new
registration exemption (the ``M&A Brokers Exemption'') for M&A Brokers,
as defined in the statute, that provides relief similar to that in the
M&A Brokers Letter.\50\ Upon effectiveness of the statutory exemption,
SEC staff withdrew the M&A Brokers Letter.\51\ In light of differences
between CAB Rule 016(c)(1)(F)(ii) and the M&A Brokers Exemption, FINRA
proposed changes, as described below, to ``more closely align'' CAB
Rule 016(c)(1)(F)(ii) and the M&A Brokers Exemption.\52\ FINRA stated
that these changes are appropriate because CAB Rule 016(c)(1)(F)(ii)
overlaps with CAB Rule 016(c)(1)(G), which ``permits CABs to engage in
merger and acquisition transactions to the same extent as exempt
broker-dealers under the M&A Brokers Exemption.'' \53\ For this reason,
FINRA stated that CAB Rule 016(c)(1)(F)(ii) ``should more closely align
with the terms and conditions of the M&A Brokers Exemption to avoid
having potentially confusing or conflicting requirements under the CAB
Rules.'' \54\
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\49\ See letter from David Blass, Chief Counsel and Associate
Director, Division of Trading and Markets, Securities and Exchange
Commission (dated Jan. 31, 2014), <a href="https://www.sec.gov/divisions/marketreg/mr-noaction/2014/ma-brokers-.pdf">https://www.sec.gov/divisions/marketreg/mr-noaction/2014/ma-brokers-.pdf</a> (stating that the staff
would not recommend enforcement action to the Commission under
Section 15(a) of the Exchange Act if, under certain specified
circumstances, an M&A Broker, as defined in the no-action letter,
were to effect securities transactions solely in connection with the
transfer of ownership of a privately held company without
registering as a broker-dealer).
\50\ 15 U.S.C. 78o(b)(13); see Notice at 25403; Notice of
Partial Amendment No. 1 at 47019.
\51\ See letter from Emily Westerberg Russell, Chief Counsel and
Associate Director, Division of Trading and Markets, Securities and
Exchange Commission (dated Mar. 29, 2023), <a href="https://www.sec.gov/divisions/marketreg/mr-noaction/2014/ma-brokers-013114.pdf">https://www.sec.gov/divisions/marketreg/mr-noaction/2014/ma-brokers-013114.pdf</a>.
\52\ Notice of Partial Amendment No. 1 at 47019.
\53\ Id.
\54\ Id.
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First, CAB Rule 016(c)(1)(F)(ii) only permits a CAB to act on
behalf of an issuer or control person in connection with a change of
control of a privately
[[Page 6957]]
held company.\55\ The M&A Brokers Exemption, however, does not refer to
a ``control person''; instead, it uses the defined term ``control.''
\56\ The M&A Brokers Exemption also permits an M&A Broker to
``represent both buyers and sellers, and to the extent the M&A [B]roker
represents both the buyer and seller in the same transaction, the M&A
[B]roker must provide clear written disclosure as to the parties it
represents and obtain written consent from both parties to the joint
representation.'' \57\ To address these differences, the proposed rule
change would eliminate the reference to ``control person'' and,
consistent with the definition of ``control'' in the M&A Brokers
Exemption,\58\ define ``control'' as ``the power, directly or
indirectly, to direct the management or policies of a company, whether
through ownership of securities, by contract, or otherwise.'' \59\ In
addition, the proposed rule change would provide that a CAB may
qualify, identify, solicit, or act as a placement agent or finder in
connection with a change of control of a privately held company,
regardless of whether the CAB acts on behalf of a seller or buyer.\60\
FINRA stated that a CAB ``should be permitted to represent both the
buyer and seller in a transaction involving a change of control of a
privately held company.'' \61\ Because ``such joint representation
could present conflicts of interest for the CAB,'' the proposed rule
change also would provide that a CAB ``may represent both the buyer and
the seller in the same transaction under [CAB Rule 016(c)(1)(F)(ii)]
after providing clear written disclosure as to the parties the [CAB]
represents and obtaining written consent from both parties to the joint
representation.'' \62\ FINRA stated that this proposed rule text
mirrors similar language in the M&A Brokers Exemption, which
``addresses the same potential conflicts of interest . . . and imposes
the same disclosure and consent requirements.'' \63\
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\55\ Id.; CAB Rule 016(c)(1)(F)(ii). FINRA also stated that this
proposed rule change is appropriate for ``similar reasons'' to those
offered for the proposed changes to permit CABs to represent
buyers--in addition to issuers or sellers--in connection with a sale
of newly issued, unregistered securities and in secondary market
transactions. Notice of Partial Amendment No. 1 at 47019.
\56\ Notice of Partial Amendment No. 1 at 47019; see 15 U.S.C.
78o(b)(13)(E)(ii) (defining ``M&A Broker''), (b)(13)(iv)(I)(aa)
(defining ``control'').
\57\ Notice of Partial Amendment No. 1 at 47019; see 15 U.S.C.
78o(b)(13)(B)(vi) (The exemption does not apply to a broker that
``[r]epresents both the buyer and the seller in the same transaction
without providing clear written disclosure as to the parties the
broker represents and obtaining written consent from both parties to
the joint representation.'').
\58\ The M&A Brokers Exemption defines ``control'' as ``the
power, directly or indirectly, to direct the management or policies
of a company, whether through ownership of securities, by contract,
or otherwise.'' Notice of Partial Amendment No. 1 at 47019 (emphasis
in original); see 15 U.S.C. 78o(b)(13)(E)(ii).
\59\ Proposed CAB Rule 016(c)(1)(F)(ii)a. (emphasis added); see
Notice of Partial Amendment No. 1 at 47019. The proposed rule change
would relocate the definition of ``control'' to new subparagraph a.
of Proposed CAB Rule 016(c)(1)(F)(ii). Notice at 47019 n.17.
\60\ Proposed CAB Rule 016(c)(1)(F)(ii) (emphasis added); see
Notice of Partial Amendment No. 1 at 47019.
\61\ Notice of Partial Amendment No. 1 at 47019.
\62\ Id.; Proposed CAB Rule 016(c)(1)(F)(ii)b.
\63\ Notice of Partial Amendment No. 1 at 47019; see 15 U.S.C.
78o(b)(13)(B)(vi).
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Second, CAB Rule 016(c)(1)(F) creates a presumption of control
based on circumstances as they exist prior to a transaction.\64\ The
M&A Brokers Exemption, however, ``consider[s] whether control exists
upon completion of the transaction.'' \65\ To address this difference,
the proposed rule change would provide that ``[c]ontrol will be
presumed to exist if, upon completion of the transaction, the buyer or
group of buyers \66\ has the right to vote or the power to sell or
direct the sale of 25% or more of a class of voting securities or in
the case of a partnership or limited liability company has the right to
receive upon dissolution or has contributed 25% or more of the
capital.'' \67\
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\64\ CAB Rule 016(c)(1)(F) (``Control will be presumed to exist
if, before the transaction, the person has the right to vote or the
power to sell or direct the sale of 25% or more of a class of voting
securities or in the case of a partnership or limited liability
company has the right to receive upon dissolution or has contributed
25% or more of the capital.'' (emphasis added)).
\65\ Notice at 47019 (emphasis in original); see 15 U.S.C.
78o(b)(13)(E)(ii).
\66\ As stated above, the proposed rule change would eliminate
the defined term ``control person'' and replace it with the defined
term ``control,'' consistent with the M&A Brokers Exemption.
Proposed CAB Rule 016(c)(1)(F)(ii)a. With the elimination of the
term ``control person,'' the proposed rule change would make a
corresponding amendment to replace ``person'' with ``buyer or group
of buyers,'' consistent with the M&A Brokers Exemption. Id.; see 15
U.S.C. 78o(b)(13)(E)(ii).
\67\ Proposed CAB 016(c)(1)(F)(ii)a.
---------------------------------------------------------------------------
3. Secondary Transactions
The CAB Rules currently prohibit a CAB from acting as a placement
agent or finder ``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.'' \68\ The proposed rule change would broaden the
circumstances in which a CAB could participate in a secondary
transaction.\69\ Specifically, the proposed rule change would permit
CABs to qualify, identify, solicit, or act as a placement agent or
finder on behalf of an institutional investor that seeks to sell or buy
unregistered securities, ``provided that: (i) the seller and buyer \70\
of such securities are both institutional investors; and (ii) the sale
of such securities qualifies for an exemption from registration under
the Securities Act.'' \71\
---------------------------------------------------------------------------
\68\ Notice at 25401.
\69\ See id.
\70\ As originally proposed in the Notice, the proposed rule
change would have used the term ``purchaser'' in proposed CAB Rule
016(c)(1)(H)(i). See Notice at 25401 & Exhibit 5. FINRA stated that
Partial Amendment No. 1 would replace ``purchaser'' with ``buyer''
to promote consistency throughout proposed CAB Rule 016(c). Notice
of Partial Amendment No. 1 at 47019 n.11.
\71\ Proposed CAB Rule 016(c)(1)(H).
---------------------------------------------------------------------------
FINRA stated that this proposed rule change is ``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.'' \72\ Specifically,
FINRA stated that CABs would only be permitted to act as an
intermediary with respect to such transactions where both the buyer and
seller are institutional investors.\73\ This limitation, FINRA stated,
``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.'' \74\ FINRA also stated that Regulation Best Interest, Form
CRS, and CAB Rule 211 (Suitability) offer additional layers of investor
protection to the extent a CAB participates in a secondary transaction
in circumstances that would trigger the application of these rules.\75\
FINRA also stated that ``CABs still would be subject to CAB [R]ules
prohibiting any communication concerning the unregistered securities or
the CAB's services from including false, exaggerated, unwarranted,
promissory or misleading statement[s] or claim[s].'' \76\ In addition,
FINRA stated that ``CABs would still be subject to FINRA's core
supervisory requirements, and would be subject to FINRA rules
[[Page 6958]]
restricting borrowing from or lending to customers.'' \77\
---------------------------------------------------------------------------
\72\ Notice at 25401; see Notice of Partial Amendment No. 1 at
47018.
\73\ Notice at 25401. As stated above, the proposed rule change
would expand the definition of ``institutional investor'' to include
``eligible employees.'' Id; see supra Part II(B)(1).
\74\ Notice at 25401.
\75\ See id.
\76\ Id. (citing CAB Rule 221).
\77\ Id. (citing CAB Rules 311, 324).
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4. Private Securities Transactions
CAB Rule 328 currently prohibits any person associated with a CAB
from participating in any manner in a private securities transaction,
which is defined as ``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.'' \78\ In contrast, FINRA Rule 3280
permits associated persons of non-CAB member firms to participate in
private securities transactions, so long as they comply with certain
obligations.\79\ The proposed rule change would eliminate the
prohibition for CABs, and it would permit associated persons of CABs to
participate in private securities transactions to the same extent as
associated persons of non-CAB member firms, subject to compliance with
FINRA Rule 3280.\80\
---------------------------------------------------------------------------
\78\ CAB Rule 328 (cross-referencing FINRA Rule 3280(e) for the
definition of a private securities transaction). The definition of
private securities transactions also excludes the following:
``transactions subject to the notification requirements of Rule
3210, transactions among immediate family members (as defined in
FINRA Rule 5130), for which no associated person receives any
selling compensation, and personal transactions in investment
company and variable annuity securities.'' FINRA Rule 3280(e)(1).
\79\ FINRA Rule 3280. FINRA Rule 3280 imposes certain notice,
approval, and supervision requirements where an associated person of
a FINRA member firm seeks to participate in a private securities
transaction.
\80\ Proposed CAB Rule 328.
---------------------------------------------------------------------------
FINRA stated that, at the time it adopted the CAB Rules in 2017, it
``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.'' \81\ However, FINRA stated that it now believes it is
``appropriate to amend the CAB Rules to permit [private securities
transactions] to remedy the challenges and unintended consequences
presented by the original prohibition.'' \82\ Specifically, FINRA
stated that the prohibition's impact on CABs and firms that might have
otherwise considered registering with FINRA as a CAB was not intended
at the time the CAB Rules were adopted, and that it is unnecessarily
restrictive.\83\ For example, FINRA stated that some firms have
declined to elect CAB status because of the ``inability of their
associated persons to act as supervised persons of registered
investment advisers (`RIAs') if they participate in private securities
transactions.'' \84\
---------------------------------------------------------------------------
\81\ Notice at 25402.
\82\ Id.
\83\ Id.
\84\ Id.
---------------------------------------------------------------------------
Further, FINRA stated that expanding the range of activities in
which CABs can participate may help support capital formation without
materially impacting investor protection.\85\ Specifically, FINRA
stated that although this proposed rule change would expand the scope
of permissible activities for CABs and their associated persons, it
also would expand the CAB's related supervisory responsibilities
regarding those permissible activities.\86\ In particular, where the
CAB approves its associated person's participation in a transaction for
which the person will receive selling compensation, the CAB would be
required to record the transaction on its books and records and
supervise the person's participation in the transaction as if the
transaction were executed on behalf of the member.\87\ Thus, the
proposed rule change would require both CABs and non-CAB member firms
to adhere to ``the same risk controls and compliance procedures''
related to private securities transactions.\88\
---------------------------------------------------------------------------
\85\ Id.
\86\ Id.
\87\ Id.; see FINRA Rule 3280(c).
\88\ Notice at 25402.
---------------------------------------------------------------------------
5. Compensation
The CAB Rules do not currently address whether a CAB may receive
equity securities as compensation for its services.\89\ In 2019, FINRA
issued an interpretative letter indicating 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).'' \90\
The proposed rule change would codify this interpretation, permitting a
CAB to receive compensation in the form of equity securities of a
privately held issuer on behalf of which the CAB provided services
permitted under Rule 016(c)(1),\91\ provided that the receipt, exercise
or subsequent sale of such securities will not cause the CAB to engage
in any activity prohibited under CAB Rule 016(c)(2).\92\
---------------------------------------------------------------------------
\89\ Letter from Joseph P. Savage, FINRA, to Jonathan D. Wiley,
The Forbes Securities Group (dated May 30, 2019) (``Forbes
Letter''), <a href="https://www.finra.org/rules-guidance/guidance/interpretive-letters/jonathan-d-wiley-forbes-securities-group">https://www.finra.org/rules-guidance/guidance/interpretive-letters/jonathan-d-wiley-forbes-securities-group</a>; see
Notice at 25403.
\90\ Notice at 25403; see Forbes Letter, supra note 89.
\91\ As originally proposed in the Notice, the proposed rule
change would have referred to ``paragraphs (c)(1) of Rule 016.''
Notice at 25403 & Exhibit 5. FINRA stated that Partial Amendment No.
1 would replace ``paragraphs (c)(1) of Rule 016'' with ``Rule
016(c)(1)'' to ``correct the inadvertent plural form used in the
original proposed text'' and promote consistency with the subsequent
reference to a proposed rule in the same sentence. Notice of Partial
Amendment No. 1 at 47020.
\92\ Proposed CAB Rule 511.
---------------------------------------------------------------------------
6. M&A Brokers Exemption
CAB Rule 016(c)(1)(G) currently 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 or the business
conducted with the assets of the company, in accordance with the terms
and conditions of an SEC rule, release, interpretation or `no-action'
letter that permits a person to engage in such activities without
having to register as a broker or dealer pursuant to Section 15(b) of
the Exchange Act.'' \93\ FINRA stated that this rule was designed 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'' \94\ before it was superseded by the M&A Brokers
Exemption.\95\
---------------------------------------------------------------------------
\93\ CAB Rule 016(c)(1)(G) (emphasis added).
\94\ Notice at 25403; see M&A Brokers Letter, supra note 49.
\95\ See supra Part II(B)(2).
---------------------------------------------------------------------------
The proposed rule change would update CAB Rule 016(c)(1)(G) to
reflect the subsequent promulgation of the M&A Brokers Exemption.\96\
Specifically, the proposed rule change would permit 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 or the business
conducted with the assets of the company, in accordance with the terms
and conditions of Section 15(b)(13) of the Exchange Act or any
provision of an SEC rule, release, interpretation or `no-action' letter
that permits a person to engage in the same or materially similar
activities without having to register as a broker or dealer pursuant to
Section
[[Page 6959]]
15(b) of the Exchange Act.'' \97\ FINRA stated that this proposed rule
change would clarify that CABs may effect M&A transactions to the same
extent as an exempt M&A Broker under the M&A Brokers Exemption.\98\
---------------------------------------------------------------------------
\96\ See Notice at 25403.
\97\ Proposed CAB Rule 016(c)(1)(G) (emphasis added).
\98\ Notice at 25403.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
After careful review of the proposed rule change, the comment
letters, and FINRA's response to the comments, the Commission finds
that the proposed rule change is consistent with the requirements of
the Exchange Act and the rules and regulations thereunder that are
applicable to a national securities association.\99\ As discussed in
more detail below, the Commission finds that the proposed rule change
is consistent with Section 15A(b)(6) of the Exchange Act, 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.\100\
---------------------------------------------------------------------------
\99\ In approving this rule change, the Commission has
considered the rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\100\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
A. Sales of Newly Issued Unregistered Securities
As noted above, the CAB Rules currently permit a CAB to, among
other things, qualify, identify, solicit, or act as a placement agent
or finder on behalf of an issuer in connection with a sale of newly
issued, unregistered securities to institutional investors.\101\ As
originally proposed, the proposed rule change would have broadened this
permissible activity by expanding the definition of institutional
investor to include any ``eligible employee,'' as defined in proposed
CAB Rule 016(m).\102\ Under the proposed rule change, an ``eligible
employee'' would mean: (1) any Knowledgeable Employee, as defined in
Rule 3c-5, with respect to services provided to an issuer that is a
Covered Company as defined in Rule 3c-5 or services provided to an
Affiliated Management Person of such Covered Company as defined in Rule
3c-5; and (2) 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 Rule 3c-5.\103\
---------------------------------------------------------------------------
\101\ CAB Rule 016(c)(1)(F)(i).
\102\ Notice at 25399 & Exhibit 5; see Proposed CAB Rules
016(i)(8), 016(m).
\103\ Proposed CAB Rule 016(m).
---------------------------------------------------------------------------
Commenters generally supported the proposed rule change.\104\ One
of these commenters, however, recommended that FINRA provide
interpretive guidance or amend the proposed rule change to clarify that
a CAB may--in addition to acting as a placement agent or finder on
behalf of an issuer--also act as a placement agent or finder on behalf
of an institutional investor buyer.\105\ This commenter stated that
FINRA's historical statements about CAB Rule 016(c)(1)(F) do not
include any ``policy rationale for limiting CABs to one side of primary
[private-placement] transactions or a specific intent to do so.'' \106\
In addition, this commenter stated that ``there is no material investor
protection or other policy rationale for limiting CABs to acting as
agent on the issuer/seller side of the market for institutional
investor private placements.'' \107\
---------------------------------------------------------------------------
\104\ Letter from the Managing Director, Egwele & Company, dated
Jun. 14, 2025, <a href="https://www.sec.gov/comments/sr-finra-2025-005/srfinra2025005-613087-1796094.html">https://www.sec.gov/comments/sr-finra-2025-005/srfinra2025005-613087-1796094.html</a> (``Egwele Letter'') (stating that
it fully supports the proposed rule change and sees several
benefits, including the opportunity to generate new business and the
ability to better retain and attract talent); letter from Jeffrey L
Robins, Debevoise & Plimpton LLP, dated July 7, 2025, <a href="https://www.sec.gov/comments/sr-finra-2025-005/srfinra2025005-621228-1824474.pdf">https://www.sec.gov/comments/sr-finra-2025-005/srfinra2025005-621228-1824474.pdf</a> (``Debevoise Letter'') (stating that it and its client
``strongly support'' the proposed rule change, agreeing that it
would make the CAB Rules more useful); see letter from Matthew
Hoffman, Chief Compliance Officer, Cascadia Capital, LLC, dated Dec.
10, 2025, <a href="https://www.sec.gov/comments/sr-finra-2025-005/srfinra2025005-2113354.htm">https://www.sec.gov/comments/sr-finra-2025-005/srfinra2025005-2113354.htm</a> (``Cascadia Letter'') (expressing support
for amendments to CAB Rule 328 without offering a specific position
on the rest of the proposed rule change).
\105\ Debevoise Letter at 1-2.
\106\ Id.
\107\ Id. at 3.
---------------------------------------------------------------------------
In response, FINRA agreed and stated that ``allowing a CAB also to
act on behalf of an institutional investor buyer in connection with the
sale of newly issued unregistered securities is consistent with CABs'
limited institutional business model and would not materially impact
investor protection.'' \108\ For this reason, FINRA amended the
proposed rule change ``to allow CABs to represent institutional
investor buyers in connection with sales of [newly issued] unregistered
securities.'' \109\ Specifically, the proposed rule change, as modified
by Partial Amendment No. 1, would provide that a CAB may qualify,
identify, solicit, or act as a placement agent or finder on behalf of
an issuer or institutional investor buyer in connection with a sale of
newly issued, unregistered securities to institutional investors.\110\
---------------------------------------------------------------------------
\108\ Notice of Partial Amendment No. 1 at 47018.
\109\ FINRA Response at 3.
\110\ Proposed CAB Rule 016(c)(1)(F)(i).
---------------------------------------------------------------------------
No commenters directly addressed Partial Amendment No. 1.
The proposed expansion of the definition of ``institutional
investor'' to include any ``eligible employee,'' as defined in proposed
CAB Rule 016(m), is reasonably designed to provide a limited expansion
of the scope of permissible CAB activities without materially impacting
investor protection. As discussed above, the proposed expansion of the
term ``institutional investor'' to include such eligible employees is
reasonable because they are likely to understand and appreciate any
risks and limitations associated with investing in the issuer's
securities and are likely have expertise and knowledge about the
issuer.
In addition, the proposed expansion to permit CABs to represent an
institutional investor buyer in connection with the sale of newly
issued, unregistered securities is reasonably designed to expand the
scope of permissible CAB activities without materially impacting
investor protection. It is reasonable for FINRA to conclude that there
is no policy reason to limit CABs to the representation of issuers in
sales of newly issued, unregistered securities to institutional
investors. Institutional investors are likely to have the expertise or
resources necessary to understand and appreciate the risks and
limitations associated with private-placement investments. In addition,
Regulation Best Interest, Form CRS, and CAB Rule 211 (Suitability) help
to ensure investor protection to the extent a CAB participates in a
transaction in circumstances that would trigger the application of
these rules.
For these reasons, the proposed rule change is reasonably 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.
B. Change-of-Control Transactions
The proposed rule change would amend CAB Rule 016(c)(1)(F)(ii) to
provide that a CAB may qualify, identify, solicit, or act as a
placement agent or finder in connection with a change of control of a
privately held company, regardless of whether the CAB
[[Page 6960]]
acts on behalf of a seller or buyer.\111\ The proposed rule change
would also permit joint representation of both a buyer and a seller in
connection with a change of control of a privately held company,
subject to a disclosure and consent requirement; \112\ modify the
definition of ``control''; \113\ and modify the presumption for the
existence of control.\114\ FINRA stated that the proposed changes are
``consistent with CABs' limited institutional business model and would
not materially impact investor protection.'' \115\ FINRA also stated
that it proposed both modifications to ``more closely align'' CAB Rule
016(c)(1)(F)(ii) and the M&A Brokers Exemption ``to avoid having
potentially confusing or conflicting requirements under the CAB
Rules.'' \116\
---------------------------------------------------------------------------
\111\ Proposed CAB Rule 016(c)(1)(F)(ii).
\112\ Proposed CAB Rule 016(c)(1)(F)(ii)b.
\113\ Proposed CAB Rule 016(c)(1)(F)(ii)a.
\114\ Id.
\115\ Notice of Partial Amendment No. 1 at 47019-20; see FINRA
Response at 3.
\116\ Notice of Partial Amendment No. 1 at 47019.
---------------------------------------------------------------------------
No commenters directly addressed this proposed rule change.
The proposed rule change is reasonably designed to promote
consistency among related regulatory obligations and to provide
investor protection in the context of CABs' limited activities and
their associated tailored regulatory regime. Because CAB Rule
016(c)(1)(F)(ii) addresses transactions similar to those permitted
under CAB Rule 016(c)(1)(G) and the M&A Brokers Exemption, the proposed
rule change's modifications would help to promote consistency of
terminology, scope, and obligations among these related provisions.
Specifically, the proposed rule change would align CAB Rule
016(c)(1)(F)(ii) with the M&A Brokers Exemption by: (1) permitting CABs
to represent both the buyer and seller in connection with a change of
control of a privately held company; and (2) adopting the M&A Brokers
Exemption's definition of ``control,'' presumption of control, and
disclosure and consent requirement for any joint representation. For
these reasons, the proposed rule change is reasonably 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.
C. Secondary Transactions
As originally proposed in the Notice, the proposed rule change
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, provided that: (1)
the purchaser of such securities is an institutional investor; and (2)
the sale of such securities qualifies for an exemption from
registration under the Securities Act.\117\
---------------------------------------------------------------------------
\117\ See Notice at 25401 & Exhibit 5.
---------------------------------------------------------------------------
Commenters generally supported the proposed rule change.\118\ One
of these commenters recommended that FINRA issue interpretive guidance
or amend the proposed rule change to provide that a CAB may--in
addition to acting as a placement agent or finder on behalf of an
issuer--also act as a placement agent or finder on behalf of an
institutional investor buyer.\119\ Specifically, this commenter stated
that ``it would be consistent with the amended definition of `capital
acquisition broker' for a CAB to act as a [private-placement] agent or
finder in connection with the sale of . . . securities by an
institutional investor to another institutional investor . . . where [
] the CAB is engaged as the agent of an institutional investor acting
as buyer to find and/or solicit potential issuers or institutional
investor sellers.'' \120\ This commenter stated that FINRA's
articulated basis for the proposed rule change does not justify a
limitation to institutional investor sellers.\121\ For that reason,
this commenter stated that this limitation appears ``both unnecessary
and potentially unintentional.'' \122\ In addition, this commenter
stated that ``there is no material investor protection or other policy
rationale for limiting CABs to acting as agent on the issuer/seller
side of the market for institutional investor private placements.''
\123\
---------------------------------------------------------------------------
\118\ Egwele Letter; Debevoise Letter; Cascadia Letter.
\119\ Debevoise Letter at 1-2.
\120\ Id.
\121\ Id. at 3.
\122\ Id.
\123\ Id.
---------------------------------------------------------------------------
In response, FINRA stated that it agrees that ``allowing a CAB also
to act on behalf of an institutional investor buyer in connection with
secondary transactions of unregistered securities is consistent with
CABs' limited institutional business model and would not materially
impact investor protection.'' \124\ For this reason, FINRA amended the
proposed rule change to allow CABs to represent institutional investor
buyers in connection with secondary transactions of unregistered
securities.\125\ Specifically, the proposed rule change, as modified by
Partial Amendment No. 1, would permit CABs to qualify, identify,
solicit, or act as a placement agent or finder on behalf of an
institutional investor that seeks to sell or buy unregistered
securities, provided that: (1) the seller and buyer of such securities
are both institutional investors; and (2) the sale of such securities
qualifies for an exemption from registration under the Securities
Act.\126\
---------------------------------------------------------------------------
\124\ Notice of Partial Amendment No. 1 at 47018.
\125\ FINRA Response at 3.
\126\ Proposed CAB Rule 016(c)(1)(H).
---------------------------------------------------------------------------
No commenters directly addressed Partial Amendment No. 1.
The proposed rule change is reasonably designed to expand the scope
of permissible CAB activities without materially impacting investor
protection. Specifically, the proposed rule change would expand the
scope of permissible CAB activities to include qualifying, identifying,
soliciting, or acting as a placement agent or finder on behalf of an
institutional investor in connection with the purchase or sale of
unregistered securities between institutional investors where the sale
of such securities qualifies for an exemption from registration under
the Securities Act. FINRA reasonably concluded that there is no policy
reason to limit CABs' participation in transactions involving
institutional investors to only the sale of newly issued, unregistered
securities. Institutional investors are likely to have the expertise or
resources necessary to understand and appreciate the risks and
limitations associated with private-placement investments. In addition,
Regulation Best Interest, Form CRS, and CAB Rule 211 (Suitability) help
to ensure investor protection to the extent a CAB participates in a
secondary transaction in circumstances that would trigger the
application of these rules. For these reasons, the proposed rule change
is reasonably 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.
D. Private Securities Transactions
Proposed CAB Rule 328 would eliminate the prohibition on any
associated person of a CAB participating in any manner in a private
securities transaction.\127\ Specifically, the proposed rule change
would permit associated persons of CABs to participate in private
securities transactions to the same extent as non-CAB member firms,
subject to the requirements of FINRA Rule 3280.\128\
---------------------------------------------------------------------------
\127\ Proposed CAB Rule 328.
\128\ Id.
---------------------------------------------------------------------------
Commenters generally supported the proposed rule change.\129\ One
[[Page 6961]]
supportive commenter stated that the current prohibition is
``unnecessarily restrictive'' as it prevents a CAB associated person
from making the same ``simple, non-compensated co-investment'' that a
non-CAB associated person could make under FINRA Rule 3280.\130\ This
commenter further stated that eliminating the current prohibition would
align the treatment of private securities transactions among CABs and
non-CAB member firms.\131\
---------------------------------------------------------------------------
\129\ Egwele Letter; Debevoise Letter; Cascadia Letter.
\130\ Cascadia Letter.
\131\ Id.
---------------------------------------------------------------------------
The proposed rule change is reasonably designed to expand the scope
of permissible activities for CABs and their associated persons without
materially impacting investor protection. The proposed rule change
would eliminate an existing prohibition that prevents CAB associated
persons from participating in private securities transactions but would
subject those transactions to the same notice, approval, and
supervision obligations as those imposed on other non-CAB member firms.
For these reasons, the proposed rule change is reasonably 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.
E. Compensation
The proposed rule change would codify existing FINRA guidance by
providing 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 permitted under Rule 016(c)(1), provided that the
receipt, exercise or subsequent sale of such securities will not cause
the CAB to engage in any activity prohibited under CAB Rule
016(c)(2).\132\
---------------------------------------------------------------------------
\132\ Proposed CAB Rule 511; see Forbes Letter, supra note 89.
---------------------------------------------------------------------------
Commenters generally supported the proposed rule change.\133\
---------------------------------------------------------------------------
\133\ Egwele Letter; Debevoise Letter; Cascadia Letter.
---------------------------------------------------------------------------
The proposed rule change, which codifies existing guidance, is
reasonably designed to promote compliance and increase transparency
regarding permissible forms of CAB compensation. For these reasons, the
proposed rule change is reasonably 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.
F. M&A Brokers Exemption
The proposed rule change would permit 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 or the business
conducted with the assets of the company, in accordance with the terms
and conditions of Section 15(b)(13) of the Exchange Act or any
provision of an SEC rule, release, interpretation or `no-action' letter
that permits a person to engage in the same or materially similar
activities without having to register as a broker or dealer pursuant to
Section 15(b) of the Exchange Act.'' \134\
---------------------------------------------------------------------------
\134\ Proposed CAB Rule 016(c)(1)(G) (emphasis added).
---------------------------------------------------------------------------
Commenters generally supported the proposed rule change.\135\
---------------------------------------------------------------------------
\135\ Egwele Letter; Debevoise Letter; Cascadia Letter.
---------------------------------------------------------------------------
The proposed rule change is reasonably designed to promote clarity
and transparency by updating the CAB Rules to reflect subsequent
regulatory developments. Current CAB Rule 016(c)(1)(G) was drafted to
incorporate the M&A Brokers Letter, which SEC staff subsequently
withdrew after Congress promulgated the M&A Brokers Exemption.\136\ The
proposed rule change would update the CAB Rules to directly reference
the M&A Brokers Exemption, thereby reflecting the current regulatory
landscape and expressly providing that CABs may engage in the same
activities as those permitted under the M&A Brokers Exemption. For
these reasons, the proposed rule change is reasonably 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.
---------------------------------------------------------------------------
\136\ See supra Part II(B)(2).
---------------------------------------------------------------------------
IV. Conclusion
For the reasons set forth above, the Commission finds that the
proposed rule change is consistent with Section 15A(b)(6) of the
Exchange Act, which requires, among other things, that FINRA rules be
designed to prevent fraudulent and manipulative acts and practices,
promote just and equitable principles of trade, and, in general,
protect investors and the public interest.\137\
---------------------------------------------------------------------------
\137\ 15 U.S.C. 78o-3(b)(6).
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It is therefore ordered pursuant to Section 19(b)(2) of the
Exchange Act \138\ that the proposed rule change (SR-FINRA-2025-005)
be, and hereby is, approved.
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\138\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\139\
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\139\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2026-02899 Filed 2-12-26; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on February 13, 2026.
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