The Securities and Exchange Commission has approved the Financial Industry Regulatory Authority’s new rules governing firms that meet the definition of “capital acquisition broker” (CAB) and elect to be governed by the new CAB rules. (The Corporate & Financial Weekly Digest edition of January 8, 2016 summarized FINRA’s proposed CAB rules.)
Under the new rules, CABs are firms that engage in a limited set of activities related to advising companies and private equity funds on capital raising and corporate restructuring, and acting as a placement agent for sales of unregistered securities to institutional investors. As discussed in greater detail below, CABs are subject to a streamlined set of FINRA rules. However, CABs are prohibited from various activities that are otherwise permitted for full-service broker-dealers, including carrying or acting as an introducing broker with respect to customer accounts, holding or handling customers’ funds or securities, accepting customers’ orders, and engaging in proprietary trading or market-making activities.
Under the new rules, CABs are subject to a streamlined set of rules governing conduct, supervision, financial and operational obligations, and investigations, sanctions and disciplinary proceedings. With respect to conduct rules, CABs are subject to CAB Rule 221 (Communications with the Public), which is a streamlined version of FINRA Rule 2210 (Communications with the Public). CABs are not subject to FINRA Rule 2121 (Fair Prices and Commissions), 2122 (Charges for Services Performed) or FINRA Rule 2124 (Net Transactions with Customers).
With respect to supervisory rules, CABs are subject to FINRA Rule 3220 (Influencing or Rewarding Employees of Others), FINRA Rule 3240 (Borrowing from or Lending to Customers) and FINRA Rule 3270 (Outside Business Activities of Registered Persons). In addition, CAB Rule 311 (Capital Acquisition Broker Compliance and Supervision), CAB Rule 313 (Designation of Chief Compliance Officer) and CAB Rule 331 (Anti-Money Laundering Compliance Program) include some, but not all, of the obligations set forth in existing FINRA Rule 3110 (Supervision), FINRA Rule 3130 (Annual Certification of Compliance and Supervisory Processes) and FINRA Rule 3310 (Anti-Money Laundering Compliance Program), respectively.
With respect to financial and operational rules, CABs are subject to CAB Rule 411 (Capital Compliance), which includes some, but not all, of the capital compliance requirements of FINRA Rule 4110 (Capital Compliance). CABs are not subject to FINRA Rule 4370 (Business Continuity Plans and Emergency Contact Information) or FINRA Rule 4380 (Mandatory Participation in FINRA BC/DR Testing Under Regulation SCI).
With respect to rules governing investigations, sanctions and disciplinary proceedings, CABs are subject to a narrower set of rules. For example, CABs are not subject to FINRA Rule 8110 (Availability of Manual to Customers), FINRA Rule 8211 (Automated Submission of Trading Data Requested by FINRA) and FINRA Rule (Automated Submission of Trading Data for Non-Exchange-Listed Securities Requested by FINRA). CABs also are not subject to the FINRA Rule 9700 Series (Procedures on Grievances Concerning the Automated Systems).
The new rules also provide that CABs are subject to FINRA Rule 5122 (Private Placements of Securities Issued by Members) and FINRA Rule 5150 (Fairness Opinions), as well as FINRA Rule 12000 Series (Code of Arbitration Procedure for Customer Disputes), FINRA Rule 13000 Series (Code of Arbitration Procedure for Industry Disputes) and FINRA Rule 14000 Series (Code of Mediation Procedure).
The CAB rules will go into effect on April 14, 2017. FINRA will begin accepting applications for firms seeking to become CABs on January 3, 2017.