Last week, the Financial Industry Regulatory Authority issued one of its most important rule proposals in some time. Regulatory Notice 14-09 solicits comments on a proposed new regulatory structure for firms that limit their activities to advising companies and private equity funds on capital raising and corporate restructuring. (See DLA Piper Financial Services Alert).
Many firms limit their business activities to corporate advisory services, but this nevertheless can fall within the broad definition of broker-dealer activity. Such firms advise companies on mergers and acquisitions, assist in raising capital in private placements to institutional investors and/or help assess strategic and financial options. The SEC and FINRA (and, from time to time, the courts) have taken the position that such firms must register as broker-dealers because they are involved in key points in the distribution of securities. This is especially true when such firms receive transaction-based compensation for their services. Realizing that such firms do not engage in most of the activities typically associated with broker-dealers, FINRA is now proposing a bespoke set of rules for what they refer to as “limited corporate financing brokers” (LCFBs). While LCFBs would be subject to FINRA bylaws and those core rules that FINRA believes rightly apply to all firms, they otherwise would be subject only to rules tailored to the LCFB business.
A firm would not qualify as an LCFB if it carries or maintains customer accounts, holds or handles customer funds or securities, accepts customer orders for the purchase or sale of securities, exercises investment discretion on behalf of any customer, or engages in proprietary trading or market-making.
Many industry commentators have noted that the issuance of the proposed rules should be construed as a clear statement that firms currently engaging in activities that would qualify for LCFB treatment are likely required to be registered as broker-dealers currently. Therefore, even firms believing that they may fall within the proposed limited regulatory regime, if and when adopted, need to consider whether they currently are complying with all applicable broker-dealer regulatory requirements.
FINRA has requested comments by April 28, 2014.