[Federal Register Volume 90, Number 177 (Tuesday, September 16, 2025)]
[Notices]
[Pages 44747-44749]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-17810]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-103945; File No. SR-FINRA-2025-005]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Instituting Proceedings To Determine Whether To
Approve or Disapprove a Proposed Rule Change To Amend the FINRA Capital
Acquisition Broker (``CAB'') Rules
September 11, 2025.
I. Introduction
On June 4, 2025, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend certain FINRA Capital
Acquisition Broker Rules (``CAB Rules''). Specifically, the proposed
rule change would amend the CAB Rules to: permit CABs to qualify,
identify, solicit, or act as placement agents or finders on behalf of
an issuer in connection with a sale of newly issued unregistered
securities to an expanded scope of investors; allow CABs, in limited
circumstances, to qualify, identify, solicit, or act as placement
agents or finders on behalf of an institutional investor that seeks to
sell unregistered securities that it owns; amend CAB Rule 328 to permit
CAB associated persons to participate in private securities
transactions, subject to the requirements of FINRA Rule 3280 (Private
Securities Transactions of an Associated Person); codify existing FINRA
guidance on CAB compensation; and replace a reference to a withdrawn
SEC no-action letter with a reference to a corresponding Exchange Act
provision.\3\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Exchange Act Release No. 103216 (June 10, 2025), 90 FR
25396 (June 16, 2025) (File No. SR-FINRA-2025-005) (``Notice'').
---------------------------------------------------------------------------
The proposed rule change was published for comment in the Federal
Register on June 16, 2025.\4\ The public comment period closed on July
7, 2025. The Commission received comment letters related to this
filing.\5\ On July 17, 2025, FINRA consented to extend until September
12, 2025, the time period in which the Commission must approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to approve or disapprove the proposed
rule change.\6\
---------------------------------------------------------------------------
\4\ See id.
\5\ The comment letters are available at https://www.sec.gov/comments/sr-finra-2025-005/srfinra2025005.htm.
\6\ See letter from Joseph Savage, Vice President and Associate
General Counsel, FINRA (dated Jul. 17, 2025), https://www.finra.org/sites/default/files/2025-07/sr-finra-2025-005-extension1.pdf.
---------------------------------------------------------------------------
The Commission is publishing this order pursuant to Section
19(b)(2)(B) of the Exchange Act \7\ to institute proceedings to
determine whether to approve or disapprove the proposed rule change.
---------------------------------------------------------------------------
\7\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
A. Background
A capital acquisition broker (``CAB'') is a FINRA member firm that
limits its activities to certain specified functions: ``essentially
acting as placement agents for sales of unregistered securities to
institutional investors; acting as intermediaries in connection with
the change of control of privately held companies; and advising
companies and private equity funds on capital raising and corporate
restructuring.'' \8\ CABs are not permitted to engage in broader
broker-dealer activities, such as ``accepting customers' trading
orders, carrying customer accounts, handling customers' funds or
securities, or engaging in proprietary trading or market-making.'' \9\
In light of the limited CAB business model, FINRA permits eligible
member firms to elect CAB status and supervision under the CAB
Rules.\10\ As compared to the FINRA rules applicable to non-CAB member
firms, the CAB Rules impose ``fewer restrictions'' and ``less extensive
supervisory requirements'' on CABs given their limited activities.\11\
---------------------------------------------------------------------------
\8\ Notice at 25396; see also CAB Rule 016(c) (identifying the
limited functions of a CAB).
\9\ Notice at 25396 (citing CAB Rule 016(c)(2)).
\10\ Id.; see CAB Rules 112, 116(b).
\11\ Notice at 25396.
---------------------------------------------------------------------------
B. The Proposed Rule Change
The proposed rule change addresses multiple aspects of the CAB
Rules, and this Order addresses each proposed rule change in turn.
1. Sales of Newly Issued Unregistered Securities
The CAB Rules currently permit a CAB to, among other things,
``qualify[ ], identify[ ], solicit[ ], or act[ ] as a placement agent
or finder [ ] on behalf of an issuer in connection with a sale of
[newly issued], unregistered securities to institutional investors.''
\12\ The
[[Page 44748]]
proposed rule change would broaden this permissible activity by
expanding the definition of institutional investor to include any
``eligible employee,'' as defined under proposed CAB Rules 016(i)(8)
and 016(m).\13\ Under the proposed rule change, an ``eligible
employee'' would mean, ``with respect to an issuer for which the [CAB]
has provided services to the issuer or a control person permitted under
[CAB Rule 016(c)(1)(F) or (G)]: (1) any `Knowledgeable Employee' as
defined in Investment Company Act Rule 3c-5 (`Rule 3c-5') with respect
to services provided to an issuer that is a Covered Company as defined
in Rule 3c-5 or services provided to an Affiliated Management Person of
such Covered Company as defined in Rule 3c-5; and (2) the president,
any vice president in charge of a principal business unit, division, or
function (such as sales, administration, or finance), any other officer
who performs a policy-making function, or any other person who performs
similar policy-making functions, director, trustee, general partner,
advisory board member, or person serving in a similar capacity, of an
issuer that is not a Covered Company as defined in Rule 3c-5.'' \14\
---------------------------------------------------------------------------
\12\ CAB Rule 016(c)(1)(F).
\13\ Notice at 25399; see CAB Rules 016(i)(8), 016(m).
\14\ Proposed CAB Rule 016(i)(8), 016(m).
---------------------------------------------------------------------------
2. Secondary Transactions
The CAB Rules currently prohibit a CAB from acting as a placement
agent or finder ``in connection with secondary transactions involving
unregistered securities, except when the transaction is in connection
with the change of ownership or control of a [privately held]
company.'' \15\ The proposed rule change would broaden the
circumstances in which a CAB could participate in a secondary
transaction.\16\ Specifically, the proposed rule change would permit
CABs to ``qualify[ ], identify[ ], solicit[ ], or act[ ] as a placement
agent or finder on behalf of an institutional investor that seeks to
sell unregistered securities that it owns, provided that: (i) the
purchaser of such securities is an institutional investor; and (ii) the
sale of such securities qualifies for an exemption from registration
under the Securities Act.'' \17\
---------------------------------------------------------------------------
\15\ Notice at 25401.
\16\ See id.
\17\ Proposed CAB Rule 016(c)(1)(H).
---------------------------------------------------------------------------
3. Private Securities Transactions
CAB Rule 328 currently prohibits any person associated with a CAB
from participating ``in any manner in a private securities
transaction.'' \18\ For purposes of this rule, a ``private securities
transaction'' is ``any securities transaction outside the regular
course or scope of an associated person's employment with a member,
including, though not limited to, new offerings of securities which are
not registered with the Commission.'' \19\ In contrast, FINRA Rule 3280
permits associated persons of non-CAB member firms to participate in
private securities transactions, so long as they comply with certain
restrictions.\20\ The proposed rule change would eliminate the
prohibition for CABs, and it would permit associated persons of CABs to
participate in private securities transactions to the same extent as
those of non-CAB FINRA member firms, subject to compliance with FINRA
Rule 3280.\21\
---------------------------------------------------------------------------
\18\ CAB Rule 328.
\19\ See id. (cross-referencing FINRA Rule 3280(e) for the
definition of a private securities transaction). The definition also
excludes the following from the scope of a private securities
transaction: ``transactions subject to the notification requirements
of Rule 3210, transactions among immediate family members (as
defined in FINRA Rule 5130), for which no associated person receives
any selling compensation, and personal transactions in investment
company and variable annuity securities.'' FINRA Rule 3280(e); CAB
Rule 328.
\20\ FINRA Rule 3280. FINRA Rule 3280 imposes certain notice,
approval, and supervision requirements where an associated person of
a FINRA member firm seeks to participate in a private securities
transaction.
\21\ Proposed CAB Rule 328.
---------------------------------------------------------------------------
4. Compensation
The CAB Rules do not currently address whether a CAB may receive
equity securities as compensation for its services.\22\ In 2019, FINRA
issued an interpretative letter indicating that ``CABs may be
compensated in the form of securities issued by a privately held CAB
client, rather than in cash, provided that the receipt, exercise or
subsequent sale of such securities will not cause the CAB to engage in
activities prohibited under CAB Rule 016(c)(2) (Definitions).'' \23\
The proposed rule change would codify this interpretation.\24\
Specifically, the proposed rule change would provide that a CAB ``may
receive compensation in the form of equity securities of a privately
held issuer on behalf of which the [CAB] provided services permitted
under paragraphs (c)(1) of Rule 016, provided that the receipt,
exercise or subsequent sale of such securities will not cause the
capital acquisition broker to engage in any activity prohibited under
[CAB] Rule 016(c)(2).'' \25\
---------------------------------------------------------------------------
\22\ Letter from Joseph P. Savage, FINRA, to Jonathan D. Wiley,
The Forbes Securities Group (dated May 30, 2019), https://www.finra.org/rules-guidance/guidance/interpretive-letters/jonathan-d-wiley-forbes-securities-group; see Notice at 25403.
\23\ Notice at 25403; see letter from Joseph P. Savage, FINRA,
to Jonathan D. Wiley, The Forbes Securities Group, supra note 22.
\24\ Notice at 25403.
\25\ Proposed CAB Rule 511.
---------------------------------------------------------------------------
5. M&A Brokers Exemption
CAB Rule 016(c)(1)(G) currently permits a CAB to ``effect[ ]
securities transactions solely in connection with the transfer of
ownership and control of a [privately held] company 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 company or the business
conducted with the assets of 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 pursuant to Section 15(b) of
the Exchange Act.'' \26\ FINRA stated that this rule was designed to
``allow CABs to engage in merger and acquisition activities to the same
extent as unregistered persons who were relying on'' an SEC Staff-
issued no-action letter relating to merger and acquisition brokers
(``M&A Brokers'') (hereinafter, the ``M&A Brokers Letter'').'' \27\
---------------------------------------------------------------------------
\26\ CAB Rule 016(c)(1)(G) (emphasis added).
\27\ Notice at 25403; see letter from David Blass, Chief Counsel
and Associate Director, Division of Trading and Markets, Securities
and Exchange Commission (dated Jan. 31, 2014), https://www.sec.gov/divisions/marketreg/mr-noaction/2014/ma-brokers-013114.pdf (stating
that the staff would not recommend enforcement action to the
Commission under Section 15(a) of the Exchange Act if, under certain
specified circumstances, an M&A Broker, as defined in the no-action
letter, were to effect securities transactions solely in connection
with the transfer of ownership of a privately held company without
registering as a broker-dealer).
---------------------------------------------------------------------------
After the issuance of the M&A Brokers Letter and the adoption of
CAB Rule 016(c)(1)(G), the Exchange Act was amended to include a new
registration exemption for M&A Brokers, as defined in the statute,\28\
and the SEC Staff withdrew its no-action letter.\29\ The proposed rule
change would amend CAB Rule 016(c)(1)(G) to reference the new Exchange
Act registration exemption.\30\ Specifically, the proposed rule change
would permit a CAB to ``effect[ ] securities transactions solely in
connection with the transfer of ownership and control of a [privately
held] company through the purchase, sale, exchange, issuance,
repurchase, or
[[Page 44749]]
redemption of, or a business combination involving, securities or
assets of the company, to a buyer that will actively operate the
company or the business conducted with the assets of the company, in
accordance with the terms and conditions of Section 15(b)(13) of the
Exchange Act or any provision of an SEC rule, release, interpretation
or `no-action' letter that permits a person to engage in the same or
materially similar activities without having to register as a broker or
dealer pursuant to Section 15(b) of the Exchange Act.'' \31\
---------------------------------------------------------------------------
\28\ Notice at 25403; see 15 U.S.C. 78o(b)(13).
\29\ See letter from Emily Westerberg Russell, Chief Counsel and
Associate Director, Division of Trading and Markets, Securities and
Exchange Commission (dated Mar. 29, 2023), https://www.sec.gov/divisions/marketreg/mr-noaction/2014/ma-brokers-013114.pdf.
\30\ See Notice at 24503.
\31\ Proposed CAB Rule 016(c)(1)(G) (emphasis added).
---------------------------------------------------------------------------
III. Proceedings To Determine Whether To Approve or Disapprove File No.
SR-FINRA-2025-005 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Exchange Act to determine whether the proposed rule
change should be approved or disapproved.\32\ Institution of
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposed rule change. Institution of proceedings
does not indicate that the Commission has reached any conclusions with
respect to the proposed rule change.
---------------------------------------------------------------------------
\32\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
Pursuant to Section 19(b)(2)(B) of the Exchange Act, the Commission
is providing notice of the grounds for disapproval under
consideration.\33\ The Commission is instituting proceedings to allow
for additional analysis and input concerning whether the proposed rule
change is consistent with the Exchange Act and the rules thereunder.
---------------------------------------------------------------------------
\33\ Id.
---------------------------------------------------------------------------
IV. Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposed rule change. In particular, the Commission invites
the written views of interested persons concerning whether the proposed
rule change is consistent with the Exchange Act and the rules
thereunder.
Although there do not appear to be any issues relevant to approval
or disapproval that would be facilitated by an oral presentation of
views, data, and arguments, the Commission will consider, pursuant to
Rule 19b-4, any request for an opportunity to make an oral
presentation.\34\
---------------------------------------------------------------------------
\34\ Section 19(b)(2) of the Exchange Act, as amended by the
Securities Acts Amendments of 1975, Public Law 94-29, 89 Stat. 97
(1975), grants the Commission flexibility to determine what type of
proceeding--either oral or notice and opportunity for written
comments--is appropriate for consideration of a particular proposal
by a self-regulatory organization. See Securities Acts Amendments of
1975, Report of the Senate Committee on Banking, Housing and Urban
Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess.
30 (1975).
---------------------------------------------------------------------------
Interested persons are invited to submit written data, views, and
arguments regarding whether the proposed rule change should be approved
or disapproved by October 7, 2025. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
October 21, 2025.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-FINRA-2025-005 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-FINRA-2025-005. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of such filing will be available for inspection and
copying at the principal office of FINRA. Do not include personal
identifiable information in submissions; you should submit only
information that you wish to make available publicly. We may redact in
part or withhold entirely from publication submitted material that is
obscene or subject to copyright protection. All submissions should
refer to file number SR-FINRA-2025-005 and should be submitted on or
before October 7, 2025. If comments are received, any rebuttal comments
should be submitted on or before October 21, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\35\
---------------------------------------------------------------------------
\35\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-17810 Filed 9-15-25; 8:45 am]
BILLING CODE 8011-01-P