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Broker-Dealer Regulatory Developments

The SEC and FINRA have made recent changes to broker-dealer registration requirements for firms engaging in limited M&A and financing activities. FINRA has proposed a streamlined set of rules that would create a new registration category specifically for firms that advise companies and private equity funds on capital raising and corporate restructuring. Additionally, the SEC recently issued a no-action letter allowing certain intermediaries to act as "M&A Brokers" under certain circumstances without registration. Both developments are described in more detail below.

Proposed Rules for Limited Corporate Financing Brokers

According to FINRA’s rule proposal, a "limited corporate financing broker" (LCFB) would include 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; and/or

  • qualifying, identifying, or soliciting potential institutional investors.

An LCFB must not maintain customer accounts, hold or handle customer funds or securities, accept customers’ trading orders, exercise investment discretion on behalf of any customer, or engage in proprietary trading or market-making. Traditionally, many firms engaged in these activities have been required to register as broker-dealers because they receive transaction-based compensation, even though they do not engage in other traditional broker-dealer activities. The proposed rules are designed to decrease the regulatory burden on these firms.

The FINRA proposal would establish the Limited Corporate Financing Broker Rules, which would apply exclusively to LCFB firms and would be designed to address an LCFB’s limited range of activities. The FINRA By-Laws and certain core FINRA rules would continue to apply to LCFBs.

FINRA has requested comment on the proposed rules. Comments should be received on or before April 28, 2014.

Sources: Financial Industry Regulatory Authority, Inc., Regulatory Notice 14-09, FINRA Requests Comment on a Proposed Rule Set for Limited Corporate Financing Brokers (February 2014); FINRA Proposed Rules, available at

M&A Broker No-Action Letter

The SEC staff recently issued a no-action letter stating that certain merger and acquisition intermediaries may, under certain circumstances, effect M&A transactions for private companies without registering as broker-dealers under the Securities Exchange Act of 1934 (the Exchange Act). The no-action letter (M&A Broker Letter) represents a significant expansion of prior SEC interpretations in the business broker area.

The M&A Broker Letter defines "M&A Broker" as any person engaged in the business of facilitating securities transactions to transfer the ownership and control of privately-held companies, through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the company, to a buyer that will actively operate the business of the target company.

An M&A Broker will not have to register as a broker-dealer under the Exchange Act if all of the following conditions are met:

  • The M&A Broker must not be able to bind a party to the M&A Transaction and must not provide financing for the M&A Transaction.

  • The M&A Broker may not have custody of, or control, possess or otherwise handle, funds or securities in connection with the M&A Transaction.

  • The M&A Transaction must not involve a public offering, and no party to the transaction can be a shell company (other than a business combination-related shell company)

  • If an M&A Broker represents both the buyer and seller, it must obtain informed consent to the joint representation, after disclosure of the arrangement to both parties.

  • The M&A Broker will not be permitted to form a group of buyers for an M&A Transaction.

  • Upon completion of the M&A Transaction, the buyer must control and actively operate the business of the target. The M&A Transaction should not result in the transfer of interests to a passive buyer. "Control" will be presumed to exist if the buyer has the right to vote 25% or more of a class of voting securities; has the power to sell or direct the sale of 25% or more of a class of voting securities; or in the case of a partnership or limited liability company, has the right to receive upon dissolution or has contributed 25% or more of the capital.

  • The M&A Broker, its officers, directors or employees must not have been barred or suspended from association with a broker-dealer by the SEC, any state or any self-regulatory organization.

  • Because an M&A Transaction is, by definition, not a public offering, any securities received by a buyer or an M&A Broker in the M&A Transaction will be "restricted securities" pursuant to Rule 144(a)(3) under the Securities Act of 1933.

Although the M&A Broker Letter does not explicitly address the type of compensation that M&A Brokers may receive, it appears that the SEC staff intends to allow M&A Brokers to receive transaction-based compensation.

M&A intermediaries should keep in mind that an SEC no-action letter is not law. No-action relief is a staff interpretation limited to the specific facts detailed in the request, and can be modified or rescinded at any time.

Source: M&A Brokers, SEC No-Action Letter (January 31, 2014, as revised February 4, 2014).

Copyright © 2021 Godfrey & Kahn S.C.National Law Review, Volume IV, Number 122

About this Author

Chris Cahlamer Investment Management Attorney

Chris Cahlamer is the team leader of the firm’s Investment Management Practice Group, where he practices in investment management and securities law, focusing on investment companies, investment advisers, regulatory examinations, new product development, SEC compliance and reporting obligations, CCO support, private fund formation and operation, investment company reorganizations, investment advisor mergers and acquisitions, and general corporate and board fiduciary issues.

Chris earned his law degree, summa cum laude, at Marquette University Law School. While there, he...

Susan Hoaglund, Investment Management Attorney, Godfrey Kahn law firm

Susan Hoaglund is a member of the Investment Management Practice Group. Susan provides advice to investment advisers, investment companies, broker-dealers and banks regarding legal, regulatory and compliance matters.