FINRA -- The Financial Industry Regulatory Authority -- has announced a rulemaking initiative aimed at the creation of a new class of FINRA registered securities broker-dealers that engage exclusively in a limited range of activities identified by FINRA as, essentially, advising companies and private funds on capital raising and restructuring transactions. Investment banking or mergers and acquisition (M&A) firms meeting the definition of “limited corporate financing broker” (LCFB) would be eligible to register with FINRA under a proposed streamlined rule set that would apply exclusively to those firms. LCFB membership status would be open to new applicants as well as existing FINRA member firms that elect to convert their status to an LCFB based on the limited scope of their activities.
Few issues cause as much consternation among smaller investment banking and M&A firms as the prospect of required registration and licensing as a securities broker-dealer under federal and state securities laws by reason of activities and transactions actually or potentially involving the purchase or sale of securities. Whether involving capital raising or facilitating corporate transactions by means of equity transfers, firms that are not broker-dealers or affiliated with a broker-dealer tread carefully in rendering their services, and are necessarily constrained in the range of services they may provide and the manner in which they may be compensated.
Legislative initiatives aimed at exempting M&A intermediaries from federal broker-dealer registration for small transactions involving the sale of privately owned businesses are underway, and most recently the Staff of the U.S. Securities and Exchange Commission (SEC) has recognized that activities of an “M&A Broker,” as that term is defined in the same privately held company setting, will not trigger the federal broker-dealer registration requirement where services of the intermediary satisfy certain limitations.
In the main, however, investment banking and M&A firms continue to grapple with the potential for being found to be an unregistered broker-dealer in the larger context of their engagements that involve securities transactions and any form of transaction-based compensation. The solution for some firms is to become a broker-dealer, in which the major undertaking is becoming and operating as a FINRA member firm, subject to the full range of FINRA rules without regard to the limited nature of the firm’s securities-related activities.
Defining LCFB and the Scope of Permissible Activities
Recognizing that firms not engaged in the types of activities typically associated with traditional brokerdealers should be subjected only to rules that match the limited scope of their business, FINRA proposes an LCFB membership status open to any firm engaged solely in limited activities. Under the proposed rules (for which comments by all interested parties may be submitted to FINRA up to April 28, 2014), the term “limited corporate financing broker” would be defined as any firm 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 corp