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FINRA Requests Comments on Proposed Amendments to the Capital Acquisition Broker Rules
Saturday, February 8, 2020

On January 30, the Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 20-04 requesting comment on the proposed amendments to the Capital Acquisition Broker (CAB) rules.

CABs are firms that only engage in a limited number of activities, such as acting as placement agents for sales of unregistered securities to institutional investors and advising companies and private equity funds on capital raising and corporate restructuring. Firms electing CAB status are subject to fewer restrictions on specified activities such as advertising and have less burdensome supervisory requirements. However, CAB firms are not permitted to engage in other 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.

The proposed amendments would:

  • allow CABs to register as investment advisers, so long as the advisory services are provided only to institutional investors;

  • broaden the definition of institutional investor to include “knowledgeable employees” under Rule 3c-5 of the Investment Company Act of 1940 and persons performing similar roles at other private issuers for which CABs act as placement agents;

  • expand the ability of CABs to act as placement agent for secondary trades of unregistered securities;

  • allow CABs to be compensated in the form of securities issued by a privately held 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); and

  • require CABs 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.

Comments must be received by FINRA by March 30. The Notice is available here.

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