FINRA Proposes Amendments to the Capital Acquisition Broker Rules

Kramer Levin Naftalis & Frankel LLP

On Jan. 30, 2020, the Financial Industry Regulatory Authority (FINRA) proposed amendments to the Capital Acquisition Broker (CAB) rules to expand the range of permitted activities for CABs and their associated persons. Below is a summary of the proposed amendments.

  • Investment Adviser Activities. The proposed amendments would permit CABs to register as investment advisers, so long as their only advisory clients were institutional investors.
  • Institutional Investor Definition. A CAB may act as a placement agent or finder in the sale of newly issued unregistered securities to institutional investors. The proposed amendments would expand the definition of "institutional investors" to include the "knowledgeable employees" of a private fund or issuer to which the firm provided CAB services.
  • Secondary Transactions. The proposed amendments would permit a CAB to act as a placement agent for secondary trades of unregistered securities of an issuer for which the CAB had previously acted as a placement agent for such securities, so long as the purchaser of such securities were an institutional investor and the new sale fell within a Securities Act of 1933 exemption from registration (e.g., Securities Act Rules 144 and 144A).
  • Compensation. The proposed amendments would codify the FINRA staff interpretation permitting a CAB to receive compensation in the form of securities issued by a privately held CAB client, instead of cash, provided that the receipt, exercise or subsequent sale of such securities would not cause the CAB to engage in any prohibited activities.
  • Personal Investments. The proposed amendments would permit CAB-associated persons to invest in unregistered securities, provided that they give prior notice of any purchases and sales. The proposed amendments would require CABs whose business model posed insider trading risks to adopt written policies and procedures to prevent and mitigate those risks, including compliance with the personal account trading requirements and transaction review requirements.

Under the FINRA proposal, advisers to private funds falling within Section 3(c)(7) of the ICA (whose investors are limited to "qualified purchasers" and "knowledgeable employees") may register as broker-dealers and charge brokerage commissions for sales of fund interests. In addition, private placement agents would be eligible to agent secondary sales of securities that were privately placed for an issuer in private transactions with "institutional investors," including "qualified purchasers" and "knowledgeable employees."

Comments on the proposal, which is available here, must be submitted by March 30, 2020.

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

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