On January 15, 2015, the Broker-Dealer Section of the North American Securities Administrators Association (NASAA) requested comments on a proposed uniform state model rule (the Model Rule) regarding the exemption of certain merger and acquisition brokers (M&A Brokers) from state registration requirements.1


The registration exemption for M&A Brokers is not a new idea at the federal level. Indeed, on January 14, 2014, the U.S. House of Representatives approved legislation that would permit certain M&A Brokers to effect securities transactions without registering as broker-dealers under the federal securities laws.2 In addition, shortly after this legislation was approved by the House of Representatives, the Securities and Exchange Commission (SEC) issued a no-action letter (SEC No-Action Letter) providing that enforcement action would not be recommended against certain M&A Brokers that did not register as broker-dealers pursuant to Section 15(b) of the Securities and Exchange Act of 1934 (Exchange Act).3Finally, although somewhat different from the SEC No-Action Letter, on February 26, 2014, the Financial Industry Regulatory Authority (FINRA) solicited public comments on a proposed rule set that would apply exclusively to “limited corporate financing brokers.”4

The federal efforts to exempt M&A Brokers from registration requirements prompted various initiatives at the state level prior to NASAA’s release of the Model Rule. For instance, in response to the SEC No-Action Letter on M&A Brokers, Utah issued a formal “Policy Position” on February 28, 2014, stating that it would rely on the SEC No-Action Letter and exempt M&A Brokers from its state broker-dealer registration requirements.5 Also, certain other states, including California, Colorado, and South Dakota, have enacted rules exempting certain M&A Brokers from its state registration requirements.6 Given this disparate treatment of M&A Brokers at the state level, the NASAA Model Rule attempts to harmonize the registration exemption for M&A Brokers across the states.

NASAA Model Rule

The Model Rule exempts M&A Brokers from state registration requirements. In order to qualify for the exemption, the M&A Broker must limit its activities to effecting securities transactions solely in connection with the transfer of ownership of a “privately held company” through, among other ways, the purchase, sale, or exchange of either the securities or assets of the privately held company. A “privately held company” must not have any SEC-registered securities, and must have less than $25 million in earnings or less than $250 million in gross revenues.7

In addition, the M&A Broker must reasonably believe that the buyer of the privately held company will “control” and be actively involved in the management of the privately held company.8 Under the Model Rule, “control” means the power, either directly or indirectly, to direct the management or policies of the privately held company. The Model Rule will presume control exists where the buyer is a director, manager, or officer exercising executive responsibility over the privately held company, or where the buyer has the right to vote, sell, or receive upon dissolution at least 20% of the privately held company’s voting securities or capital.9

The state registration exemption for M&A Brokers will not be available for certain bad actors that have been subject to a statutory disqualification or suspension under the Exchange Act.10 The exemption will also be unavailable to any M&A Broker that has custody of funds or securities exchanged by the buyer and seller of the privately held company.11 Moreover, the Model Rule’s registration exemption would not apply to an M&A Broker engaged in the public offering of any securities, or to any transaction involving a public shell company.12 It is important to remember that the Model Rule would exempt M&A Brokers only from state broker-dealer registration requirements and would not exempt M&A Brokers from other state provisions, such as state anti-fraud provisions.

Key Differences between NASAA Model Rule and SEC No-Action Letter

There are some important differences between the Model Rule and the SEC No-Action Letter. First, as noted above, the Model Rule  would impose limitations on the size of the acquired privately held company (either $25 million in earnings or $250 million in gross revenues), whereas the SEC No-Action Letter allows M&A Brokers to effect securities transactions without regard to the size of the privately held company. Second, the Model Rule would only require that the M&A Broker have a reasonable belief that the buyer of the privately held company will control and be actively involved in its management. By contrast, the SEC No-Action Letter requires that the buyer must actually control and actively operate the privately held company. Third, the requisite “control” of a privately held company under the Model Rule means at least a 20% voting interest in the company, whereas the SEC No-Action Letter raises the “control” threshold to at least a 25% voting interest.

Request for Comment

NASAA requested comments on specific aspects of the Model Rule, including the following:

  • How long the buyer must control and actively operate the acquired privately held company;
  • Whether the definition of a “privately held company” should be revised;
  • How the differences between the Model Rule and the SEC No-Action Letter might impact the business activities of M&A Brokers;
  • Whether the transactions effected by M&A Brokers should have size restrictions; and
  • Whether the definition of M&A Brokers should be expanded to include private equity firms.

If the Model Rule explicitly applied to private equity firms, it would provide the private equity industry with some important (and much-needed) guidance about the applicability of state broker-dealer registration requirements, particularly in light of the uncertainty surrounding the applicability of federal broker-dealer registration requirements to the private equity industry.13

If the Model Rule is approved by NASAA, the individual states must then adopt the Model Rule into their own securities laws before it would take effect.