Amendments to Capital Acquisition Broker (CAB) Rules

May 28th | 2020

In 2017, FINRA introduced a new regulatory regime for limited purpose broker dealers called Capital Acquisition Brokers (“CABS”). CABs are firms that engage in a limited range of activities, like acting as placement agents for sales of unregistered securities to institutional investors and advising companies and private equity funds on capital raising and corporate restructuring. The benefit of CAB status is that CABs are subject to fewer restrictions on some activities (e.g., advertising) and have less burdensome supervisory requirements.

On May 13, 2020, FINRA proposed amendments to the CAB rules to make them more useful to CABs without reducing investor protection. In short, the proposed amendments will:

  1. Allow CABs to register as investment advisers, so long as the advisory services are provided only to institutional investors;

  2. Allow CABs to, in some situations, act as placement agent for secondary trades of unregistered securities;

  3. Allow CABs to be compensated in the form of securities issued by a privately held CAB client, rather than in cash, as long as the receipt, exercise or subsequent sale of such securities will not cause the CAB to violate rule CAB Rule 016(c)(2);

  4. Allow CAB associated persons to invest in unregistered securities provided they give prior written notice of all purchases and sales of unregistered securities to their CAB.

  5. Adopt a new rule that requires CABs with insider trading risks to follow a rule similar to FINRA 3210, which covering obtaining permission to open accounts at other brokers and obtaining duplicate account statements;

The proposed amendment is open for public comments until June 30, 2020. So far, the comments are supportive, but also advocate that a few more changes would CAB status more enticing.

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