In October of 2016 the SEC approved FINRA’s Capital Acquisition Broker (CAB) rule set. This new rule set will allow broker-dealer firms that are engaged in a limited range of activities, advising firms on capital raising and corporate restructuring, or acting as a placement agent for sales of unregistered securities to institutional investors under limited conditions, to be governed under a smaller rule set. FINRA is encouraging firms that qualify as a CAB to consider converting to CAB status to enjoy the benefits of its more suitable regulatory rule set. CAB application for new or existing member firms to FINRA goes into effect on January 3, 2017. The CAB rules become effective April 14, 2017.
Who is NOT a Capital Acquisition Broker (CAB)?
A broker-dealer CANNOT be a CAB if they engage in any of the following:
- Carries or acts as an introducing broker with respect to customer accounts
- Holds or handles customers’ funds or securities
- Accepts orders from customers to purchase or sell securities either as principal or as agent for the customer (except as permitted by paragraphs (c)(1)(F) and (G) of CAB Rule 016)
- 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 of 1933
- Effects securities transactions that would require the broker or dealer to report the transaction under FINRA Rules 6300 Series, 6400 Series, 6500 Series, 6600 Series, 6700 Series, 7300 Series, or 7400 Series
Who can become a Capital Acquisition Broker (CAB)?
A broker-dealer can be a CAB if they SOLELY engage in any one or more of the following:
- Advising an issuer, including a private fund, concerning its securities offerings or other capital raising activities
- Advising a company regarding its purchase or sale of a business or assets or regarding its corporate restructuring, including a going-private transaction, divestiture or merger
- Advising a company regarding its selection of an investment banker
- Assisting in the preparation of offering materials on behalf of an issuer
- Providing fairness opinions, valuation services, expert testimony, litigation support, and negotiation and structuring services
- Qualifying, identifying, soliciting, or acting as a placement agent or finder (i) on behalf of an issuer in connection with a sale of newly-issued, unregistered securities to institutional investors or (ii) on behalf of an issuer or a control person in connection with a change of control of a privately-held company
- Effecting 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
How does a broker-dealer become a CAB?
CAB Rules 101-118 set forth the requirements for new firms that wish to register as a CAB and existing FINRA member firms that wish to elect CAB status.
If an existing FINRA member firm is already approved to engage in CAB activities and intends to continue engaging in those activities, does not intend to change its existing ownership, control or business operations, it can elect CAB status under the streamlined procedures set forth in CAB Rule 116(b). The firm must file a request to amend its membership agreement. The firm also needs to represent that its activities will be limited to those permitted for CABs and that it will comply with the CAB rules. There would be no application fee for this request.
An existing FINRA member firm NOT already approved to engage in CAB activities, or that intends to change its ownership, control or business operations must file a Continuing Membership Application (CMA) in order to elect CAB status.
A new CAB firm that is NOT registered as a broker-dealer must follow the same registration process as any other broker-dealer and use the New Member Application (NMA). The new applicant should indicate on the application that it intends to operate solely as a CAB pursuant to the FINRA CAB rules.
How does a broker-dealer terminate CAB status?
If a CAB desires to terminate its registration as a broker-dealer, the CAB must follow the same procedures as any other broker-dealer.
Under CAB rule 116(d) FINRA allows a full-service broker-dealer to elect CAB status, and then return back to full-service within a year. The broker-dealer simply notifies FINRA of this change through the Firm Gateway and only is required to file a request to amend its membership agreement to effect this change. Beyond the one-year period following conversion, the CAB will need to file a CMA with FINRA and execute an amended membership agreement.
Benefits of Capital Acquisition Broker (CAB) status?
CAB status affords broker-dealers a smaller regulatory framework more suitable to their limited activities. For example CABs are not subject to FINRA Rules 2121 (Fair Prices and Commissions), 2122 (Charges for Services Performed), 2124 (Net Transactions with Customers), 4370 (Business Continuity Plans and Emergency Contact Information), 4380 (Mandatory Participation in FINRA BC/DR Testing Under Regulation SCI), 8110 (Availability of Manual to Customers), 8211 (Automated Submission of Trading Data Requested by FINRA), 8213 (Automated Submission of Trading Data for Non-Exchange-Listed Securities Requested by FINRA), and the 9700 series (Procedures on Grievances Concerning the Automated Systems).
Further, some CAB rules subject the broker-dealer to a limited set of FINRA rules. CAB Rule 331 requires CABs to implement a written anti-money laundering program but only perform testing every two years instead of annually. CAB Rule 311 applies some, but not all, of FINRA Rule 3110 (Supervision). Likewise, CAB Rule 411 includes some, but not all, of the capital compliance requirements of FINRA Rule 4110.
Please note that CABs are still subject to FINRA Rule 12000 Series (Code of Arbitration Procedure for Customer Disputes), 13000 Series (Code of Arbitration Procedure for Industry Disputes), and 14000 Series (Code of Mediation Procedure). CAB principals and representatives are still subject to the same registration, qualification, and continuing education requirements as principals and representatives from a full-service broker-dealer.
To learn more about the new CAB rules and how they could apply to your firm, please contact your DeMarco Sciaccotta Wilkens & Dunleavy representative or Joe DeMarco at firstname.lastname@example.org.