Capital Acquisition Brokers (“CABS”) were created as a new FINRA Membership option after a long-standing battle in the industry to lessen the restrictions on limited purpose Broker Dealers. You can apply to be a CAB member at the onset of your new member application (assuming you meet the criteria per the rule) or you can apply to change your existing membership agreement.

The new rules define the term “capital acquisition broker” to mean 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, valuation services, expert testimony, litigation support, and negotiation and structuring services;
  • qualifying, identifying, soliciting, or acting as a placement agent or finder, on behalf of an issuer in connection with a sale of newly-issued, unregistered securities to institutional investors (or, on behalf of an issuer or control person in connection with a change of control of a privately-held company)
  • effecting securities transactions solely in connection with the transfer of ownership and control of a privately-held company to a buyer that will actively operate the company, in accordance with the terms and conditions of an SEC rule, release, interpretation, or “no-action” letter that permits a person to engage in such activities without having to register as a broker or dealer.

A few of the benefits of being a CAB member, include, but are not limited to, being relieved of the obligations to conduct an annual compliance meeting, obtaining an annual written CEO certification on the effectiveness of the firm’s compliance program, establishing and maintaining a business continuity plan (“BCP”) and having fidelity bond coverage. CABs must still implement a written anti-money laundering (“AML”) program but they may conduct the independent testing for AML compliance every two years (instead of annually).

While the new CAB framework appears to be de-regulating the industry and adding a more risk based approach to things, it is not clear how many firms will benefit (other than very limited private placement firms). It is hard to gauge who will be eager to jump on this bandwagon due to the limitations on who they can market their investments to.

For a complete set of CAB rules please see the attached pdf:

pdf SR-FINRA-2015-054-amendment-2.pdf

If you would like to learn more about how the CAB rules impact your small broker dealer from ACI’s perspective, please contact Jay Gettenberg at (212) 668-8700, extension 25 or use our web contact form.