The Financial Industry Regulatory Authority, Inc. (“FINRA”) recently issued Regulatory Notice 14-09, which solicited comments on a proposed rule set for an entirely new category of broker-dealers called limited corporate financing brokers (“LCF Brokers”). LCF Brokers would be subject to the FINRA By-Laws together with a limited set of rules for LCF Brokers, which are available as Appendix A to Regulatory Notice 14-09.
What is an LCF Broker?
An LCF Broker is meant to cover firms that solely provide advice on mergers and acquisitions, strategic and financial alternatives, or issues on raising debt and equity capital in private placements with institutional investors. More specifically, an LCF Broker would include any broker that solely engages in one or more of the following activities:
- 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; and
- qualifying, identifying or soliciting potential institutional investors.
Prohibitions Applicable to LCF Brokers.
LCF Brokers could not:
- carry or maintain customer accounts;
- hold or handle customers’ funds or securities;
- accept orders from customers to purchase or sell securities either as principal or as agent for the customer;
- possess investment discretion on behalf of any customer; or
- engage in proprietary trading of securities or market-making activities.
The LCF Rule Set
As stated above, LCF Brokers would be subject to the FINRA By-Laws together with a limited set of rules, which FINRA refers to as the “Rules for Limited Corporate Financing Brokers.” While the Rules for Limited Corporate Financing Brokers (the “Rules”) consist of only 52 separate rules and, as published by FINRA, occupy only 24 pages, it should be noted that the Rules incorporate large portions of FINRA’s normal rule set. For example, the Rules largely incorporate, with minor changes, all of the FINRA Rule 8000 Series – Investigations and Sanctions; the 9000 Series – Code of Procedures – and the Arbitration and Mediation Rules – Series 10000 , 12000, 13000 and 14000. The Rules also incorporate many other FINRA and NASD rules though FINRA’s notice frequently characterizes these applicable rules as “streamlined,” i.e., reduced in scope.
Request for Comments
FINRA requests comments generally as well as on specific issues set forth in the notice. Specific questions include:
- whether the definition of “limited corporate financing broker” is appropriate and captures all relevant activities;
- whether the Rules provide sufficient protections to customers;
- whether the Rules appropriately accommodate the intended scope of business of an LCF Broker;
- the likely economic impact the adoption of the Rules will have on LCF Brokers and other brokerdealers; and
- the impact of the recent SEC No-Action Letter granting an exemption from registration to M&A Brokers, which was previously described in a Winston & Strawn Briefing, on whether a firm would become an LCF Broker.
The comment period expires on April 28, 2014.
This is the first time that FINRA has proposed the creation of a special class of broker-dealer with its own, limited, stand-alone rule set. While it is not clear that the rule set significantly reduces the actual burden that would be imposed by FINRA’s rules on a broker- dealer that operates in such a limited manner, having a limited rule set to reference at the least seems to make it easier to identify the applicable rules and, to that extent, simplifies the process of complying with FINRA’s overall rules.