SEC Solicits Further Comment on FINRA’s Proposed Rules for Capital Acquisition Brokers (Fed. Reg.)

The SEC requested additional comments on FINRA’s proposal to create a separate rule set that would apply to firms that met the definition of “capital acquisition broker” (“CAB”) and elected to be governed under that rule set. The SEC’s request for additional comments on the proposal was published in the Federal Register.

In the new request, the SEC paraphrased several responses to the initial comment request. Those initial comments recommended that FINRA should:

  • approve the membership application of a new CAB within 60 days of the filing of its application, subject to certain provisions;
  • confirm that CABs may hold all licenses previously sought and attained by their associated persons, including Series 53 and other licenses;
  • exempt CABs’ Chief Compliance Officers (“CCO”) from the proposed requirement that they obtain and maintain the proposed Series 14 CCO license because of the broad and comprehensive scope of that license;
  • create new examinations specifically for the registered representatives and supervisory principals of CABs that will test only that subject matter which is relevant to the business of CABs;
  • revise proposed FINRA Rule 328 (“Prohibition on Private Securities Transactions”) to exclude (1) the investment advisory activities of associated persons who are also the employees or supervised persons of an investment adviser registered with the SEC or a state, and (2) bank or trust company employees who are engaged in securities or advisory activities in which a bank may engage;
  • confirm the intent to include secondary transactions in the permitted activities of a CAB;
  • allow the continued operations of a firm as a CAB (provided that the firm is in regulatory compliance) during the interim in which an active Change in Membership Application (“CMA”) is being reviewed by FINRA, with the firm remaining subject to all CAB strictures pending a final decision by FINRA on the CMA; and
  • consider allowing a grace period for the registration of firms that unwittingly conduct activities that lie beyond the scope of CABs’ permissible activities;

Further recommendations included various changes to the proposed CAB rules concerning (i) the definition of “institutional investor,” (ii) suitability, (iii) commissions/fees, (iv) supervisory procedures and (v) cybersecurity.

In addition, the SEC asserted that FINRA’s proposal provides “grounds for disapproval under consideration.”

Additional comments on FINRA’s proposal must be submitted by April 13, 2016. Rebuttal comments must be submitted by May 9, 2016.

Lofchie Comment: A separate rule set for CABs is a good idea. The current system of broker-dealer registration and regulation is simply too much for firms that are engaged in limited kinds of securities activities. As a result, firms either must give up on registering, forgo the broker-dealer business, or get hit with excessive regulatory costs. Providing an appropriately tailored form of regulation should boost compliance significantly. When it comes to the details, firms should comment on what works and what doesn’t in light of their particular circumstances.