FINRA’s Proposed Limited Broker Regime Falls Short of Private Fund Needs

by Latham & Watkins LLP
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FINRA proposes a new “lite” registration regime for private placements and M&A activity.

The Financial Industry Regulatory Authority’s (FINRA) recently issued Regulatory Notice regarding proposed rules (Proposed Rules) would apply to firms that fall within the definition of “broker” under the Securities Exchange Act of 1934 (Exchange Act), but that engage in only a limited range of activities — namely, advising companies and private equity funds on capital raising, mergers and acquisitions, and related activities. Under the Proposed Rules, these firms, called limited corporate finance brokers (LCFBs), would be subject to a reduced set of FINRA rules. This more limited rule set would presumably decrease the overall cost of maintaining a broker-dealer. Interested parties can comment on the Proposed Rules until April 28, 2014.

Background -

The Proposed Rules, published on February 26, 2014, come almost one year after a speech by David Blass, Chief Counsel of the Securities and Exchange Commission’s (SEC) Division of Trading and Markets, in which Blass indicated that in connection with the SEC’s examinations of newly registered private fund advisers, the SEC staff observed that (i) certain private fund advisers are paying transaction-based compensation to their personnel for selling interests in a fund and (ii) private fund advisers, their personnel and/or their affiliates are receiving transaction-based compensation for purported investment banking or other broker activities relating to one or more of the fund’s portfolio companies.2 Blass cautioned that these types of activities may trigger the requirement to register with the SEC as a broker-dealer under the Exchange Act. Blass noted, however, that the SEC staff has been considering a wide spectrum of options for addressing these issues, including working collaboratively with FINRA on a more customized approach for regulation of market participants who perform only limited broker functions. The Proposed Rules appear to be the product, at least in part, of these efforts.

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