Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove Proposed Rule Change To Adopt FINRA Capital Acquisition Broker Rules, 15588-15596 [2016-06453]
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principal place of business of certain
parties to the Plan.
SECURITIES AND EXCHANGE
COMMISSION
III. Discussion
[Release No. 34–77391; File No. SR–FINRA–
2015–054]
After careful review, the Commission
finds that Amendment No. 3 is
appropriate in the public interest, for
the protection of investors and the
maintenance of fair and orderly markets,
and to remove impediments to, and
perfect the mechanisms of, a national
market system. By allowing a Party to
elect to release a symbol immediately
after its discontinued use, Amendment
No. 3 would encourage the efficient use
of symbols to the benefit of the Parties
and potential issuers. Additionally, the
proposed symbol reuse process, which
includes a presumptive 90-day waiting
period as well as the requirement that
a Party may not reuse (or consent to the
reuse of) a symbol to identify a new
security unless such Party reasonably
determines that such use would not
cause investor confusion, would help
ensure that the reuse of symbols would
not cause investor confusion. The
Commission notes that the Parties have
also stated that the amendment provides
for a fair and orderly approach that
would be applied consistently by all
Parties to facilitate investor protection.
Finally, the Commission believes that
the proposed technical and ministerial
changes should be adopted to reflect
updated Party names and addresses to
the Plan.
IV. Conclusion
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For the reasons discussed above, the
Commission finds that Amendment No.
3 is appropriate in the public interest,
for the protection of investors and the
maintenance of fair and orderly markets,
and to remove impediments to, and
perfect the mechanisms of, a national
market system, or otherwise in
furtherance of the purposes of the Act.
It is therefore ordered, pursuant to
Section 11A of the Act, and the rules
and regulations thereunder, that
Amendment No. 3 to the Plan (File No.
4–553) be, and it hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.7
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–06455 Filed 3–22–16; 8:45 am]
BILLING CODE 8011–01–P
7 17
CFR 200.30–3(a)(29).
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Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Instituting
Proceedings To Determine Whether To
Approve or Disapprove Proposed Rule
Change To Adopt FINRA Capital
Acquisition Broker Rules
March 17, 2016.
I. Introduction
On October 9, 2015, 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 adopt rules for capital
acquisition brokers (collectively, the
‘‘CAB Rules’’). The proposed rule
change was published for comment in
the Federal Register on December 23,
2015.3 The Commission received
seventeen comment letters on the
proposed rule change.4 On December 9,
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Exchange Act Release No. 76675 (Dec. 23,
2015), 80 FR 79969 (‘‘Notice’’).
4 See letters from Peter W. LaVigne, Esq., Chair,
Securities Regulation Committee, Business Law
Section, New York State Bar Association dated
January 22, 2016 (‘‘New York State Bar Association
Letter’’); Judith M. Shaw, President, North
American Securities Administrators Association
(‘‘NASAA’’), and Maine Securities Administrator,
Washington, District of Columbia dated January 15,
2016 (‘‘NASAA Letter’’); Michael S. Quinn, Member
and CCO, Q Advisors dated January 13, 2016 (‘‘Q
Advisors Letter’’); Howard Spindel, Senior
Managing Director, and Cassondra E. Joseph,
Managing Director, Integrated Management
Solutions USA LLC dated January 13, 2016 (‘‘IMS
Letter’’); Lisa Roth, President, Monahan & Roth,
LLC dated January 13, 2016 (‘‘Roth Letter’’); Mark
Fairbanks, President, Foreside Distributors dated
January 13, 2016 (‘‘Foreside Letter’’); Arne Rovell,
Coronado Investments, LLC dated January 6, 2016
(‘‘Coronado Letter’’); Daniel H. Kolber, President/
CEO, Intellivest Securities, Inc. dated December 30,
2016 (‘‘Intellivest Letter’’); Roger W. Mehle,
Washington, District of Columbia dated December
29, 2015 (‘‘Mehle Letter’’); Donna B. DiMaria,
Chairman of the Board of Directors, and Lisa Roth,
Board of Directors, Third Party Marketers
Association dated January 12, 2016 (‘‘3PM Letter’’)
(letters supporting the 3PM letter: Sajan K. Thomas,
President, and Stephen J. Myott, Chief Compliance
Officer, Thomas Capital Group, Inc. dated January
13, 2016; Richard A. Murphy, North Bridge Capital
LLC, Boston, Massachusetts dated January 13, 2016;
Steven Jafarzadeh, CAIA, CCO, Stonehaven, New
York dated January 13, 2016; Dan Glusker, Perkins
Fund Marketing LLC dated January 13, 2016; Ron
Oldenkamp, President, Genesis Marketing Group
dated January 13, 2016; Timothy Cahill, President,
Compass Securities Corporation dated January 13,
2016; Frank P. L. Minard, Managing Partner, XT
Capital Partners, LLC dated January 12, 2016).
2 17
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2015, FINRA extended the time period
for Commission action on this proposed
rule change until March 22, 2016.
The Commission is publishing this
order to solicit comments on the
proposed rule change and to institute
proceedings pursuant to Exchange Act
Section 19(b)(2)(B) 5 to determine
whether to approve or disapprove the
proposed rule change.
Institution of proceedings does not
indicate that the Commission has
reached any conclusions with respect to
the proposed rule change, nor does it
mean that the Commission will
ultimately disapprove the proposed rule
change. Rather, as discussed below, the
Commission seeks additional input on
the proposed rule change and issues
presented by the proposal.
II. Description of the Proposed Rule
Change 6
FINRA is proposing to create a
separate rule set that would apply to
firms that meet the definition of ‘‘capital
acquisition broker’’ (‘‘CAB’’) and elect to
be governed under this rule set. FINRA
states that there are firms that are solely
corporate financing firms that advise
companies on mergers and acquisitions,
advise issuers on raising debt and equity
capital in private placements with
institutional investors, or provide
advisory services on a consulting basis
to companies that need assistance
analyzing their strategic and financial
alternatives. These firms often are
registered as broker-dealers because of
their activities and because they may
receive transaction-based compensation
as part of their services.
Nevertheless, FINRA believes that
these firms do not engage in many of the
types of activities typically associated
with traditional broker-dealers. For
example, these firms typically do not
carry or act as an introducing broker
with respect to customer accounts,
handle customer funds or securities,
accept orders to purchase or sell
securities either as principal or agent for
the customer, exercise investment
discretion on behalf of any customer, or
engage in proprietary trading of
securities or market-making activities.
FINRA is proposing to establish a
separate rule set that would apply
exclusively to firms that meet the
definition of ‘‘capital acquisition
broker’’ and that elect to be governed
under this rule set. CABs would be
subject to the FINRA By-Laws, as well
as core FINRA rules that FINRA believes
5 15
U.S.C. 78s(b)(2)(B).
proposed rule change, as described in this
Item II, is excerpted, in part, from the Notice, which
was substantially prepared by FINRA. See supra
note 3.
6 The
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should apply to all firms. The rule set
would also include other FINRA rules
that are tailored to address CABs’
business activities. A brief description
of the proposed rule set for CABs is
contained below.
A. General Standards
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Proposed CAB Rule 014 provides that
all persons that have been approved for
membership in FINRA as a CAB and
persons associated with CABs shall be
subject to the Capital Acquisition Broker
rules and the FINRA By-Laws
(including the schedules thereto), unless
the context requires otherwise.
Proposed CAB Rule 015 provides that
FINRA Rule 0150(b) shall apply to the
CAB rules. FINRA Rule 0150(b)
provides that the FINRA rules do not
apply to transactions in, and business
activities relating to, municipal
securities as that term is defined in the
Exchange Act.
CAB Rule 016 sets forth basic
definitions modified as appropriate to
apply to CABs. The proposed
definitions of ‘‘capital acquisition
broker’’ and ‘‘institutional investor’’ are
particularly important to the application
of the rule set. The term ‘‘capital
acquisition broker’’ would mean any
broker that solely engages in any 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 with
respect to institutional investors in
connection with purchases or sales of
unregistered securities; and
• effecting 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 ‘‘noaction’’ 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.7
7 See
proposed CAB Rule 016(c)(1).
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A firm would be permitted to register
as, or change its status to, a CAB only
if the firm solely engages in one or more
of these activities.
The term ‘‘capital acquisition broker’’
would not include any broker or dealer
that:
• carries or acts as an introducing broker
with respect to customer accounts;
• holds or handles customers’ funds or
securities;
• accepts orders from customers to
purchase or sell securities either as principal
or as agent for the customer (except as
permitted by paragraphs (c)(1)(F) and (G) of
CAB Rule 016);
• has investment discretion on behalf of
any customer;
• engages in proprietary trading of
securities or market-making activities; or
• participates in or maintains an online
platform in connection with offerings of
unregistered securities pursuant to
Regulation Crowdfunding or Regulation A
under the Securities Act of 1933.8
The term ‘‘institutional investor’’
would have the same meaning as that
term has under FINRA Rule 2210
(Communications with the Public), with
one exception. The term would include
any:
• bank, savings and loan association,
insurance company or registered investment
company;
• governmental entity or subdivision
thereof;
• employee benefit plan, or multiple
employee benefit plans offered to employees
of the same employer, that meet the
requirements of Section 403(b) or Section 457
of the Internal Revenue Code and in the
aggregate have at least 100 participants, but
does not include any participant of such
plans;
• qualified plan, as defined in Section
3(a)(12)(C) of the Exchange Act, or multiple
qualified plans offered to employees of the
same employer, that in the aggregate have at
least 100 participants, but does not include
any participant of such plans;
• other person (whether a natural person,
corporation, partnership, trust, family office
or otherwise) with total assets of at least $50
million; and
• person acting solely on behalf of any
such institutional investor.
The definition also would include any
person meeting the definition of
‘‘qualified purchaser’’ as that term is
defined in Section 2(a)(51) of the
Investment Company Act of 1940.9
B. FINRA Membership
The proposed CAB Rule 100 Series
sets forth the requirements for firms that
wish to register as a CAB. The proposed
CAB Rule 100 Series generally
8 See
proposed CAB Rule 016(c)(2).
proposed CAB Rule 016(i). FINRA Rule
2210 does not include ‘‘qualified purchaser’’ within
its definition of ‘‘institutional investor.’’
incorporates by reference FINRA Rules
1010 (Electronic Filing Requirements for
Uniform Forms), and 1122 (Filing of
Misleading Information as to
Membership or Registration), and NASD
Rules 1011 (Definitions), 1012 (General
Provisions), 1013 (New Member
Application and Interview), 1014
(Department Decision), 1015 (Review by
National Adjudicatory Council), 1016
(Discretionary Review by FINRA Board),
1017 (Application for Approval of
Change in Ownership, Control, or
Business Operations), 1019 (Application
to Commission for Review), 1090
(Foreign Members), 1100 (Foreign
Associates) and IM–1011–1 (Safe Harbor
for Business Expansions). Accordingly,
a CAB applicant would follow the same
procedures for membership as any other
FINRA applicant, with four
modifications.
• First, an applicant for membership
that seeks to qualify as a CAB would
have to state in its application that it
intends to operate solely as such.
• Second, in reviewing an application
for membership as a CAB, the FINRA
Member Regulation Department would
consider, in addition to the standards
for admission set forth in NASD Rule
1014, whether the applicant’s proposed
activities are consistent with the
limitations imposed on CABs under
CAB Rule 016(c).
• Third, proposed CAB Rule 116(b)
sets forth the procedures for an existing
FINRA firm to change its status to a
CAB. If an existing firm is already
approved to engage in the activities of
a CAB, and the firm does not intend to
change its existing ownership, control
or business operations, it would not be
required to file either a New Member
Application (‘‘NMA’’) or a Change in
Membership Application (‘‘CMA’’).
Instead, such a firm would be required
to file a request to amend its
membership agreement or obtain a
membership agreement (if none exists
currently) to provide that: (i) The firm’s
activities will be limited to those
permitted for CABs under CAB Rule
016(c), and (ii) the firm agrees to comply
with the CAB rules.10
• Fourth, proposed CAB Rules 116(c)
and (d) set forth the procedures for an
existing CAB to terminate its status as
such and continue as a FINRA firm.
Under Rule 116(c), such a firm would be
required to file a CMA with the FINRA
Member Regulation Department, and to
amend its membership agreement to
9 See
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15589
10 There would not be an application fee
associated with this request.
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provide that the firm agrees to comply
with all FINRA rules.11
Under Rule 116(d), however, if during
the first year following an existing
FINRA member firm’s amendment to its
membership agreement to convert a fullservice broker-dealer to a CAB pursuant
to Rule 116(b) a CAB seeks to terminate
its status as such and continue as a
FINRA member firm, the CAB may
notify the FINRA Membership
Application Program group of this
change without having to file an
application for approval of a material
change in business operations pursuant
to NASD Rule 1017. The CAB would
instead file a request to amend its
membership agreement to provide that
the member firm agrees to comply with
all FINRA rules, and execute an
amended membership agreement that
imposes the same limitations on the
member firm’s activities that existed
prior to the member firm’s change of
status to a CAB.12
The proposed CAB Rule 100 Series
also would govern the registration and
qualification examinations of principals
and representatives that are associated
with CABs. These Rules incorporate by
reference NASD Rules 1021
(Registration Requirements—
Principals), 1022 (Categories of
Principal Registration), 1031
(Registration Requirements—
Representatives), 1032 (Categories of
Representative Registration), 1060
(Persons Exempt from Registration),
1070 (Qualification Examinations and
Waiver of Requirements), 1080
(Confidentiality of Examinations), IM–
1000–2 (Status of Persons Serving in the
Armed Forces of the United States), IM–
1000–3 (Failure to Register Personnel)
and FINRA Rule 1250 (Continuing
Education Requirements). Accordingly,
CAB firm principals and representatives
would be subject to the same
registration, qualification examination,
and continuing education requirements
as principals and representatives of
other FINRA firms. CABs also would be
subject to FINRA Rule 1230(b)(6)
regarding Operations Professional
registration.
C. Duties and Conflicts (CAB Rule 200
Series)
The proposed CAB Rule 200 Series
would establish a streamlined set of
conduct rules. CABs would be subject to
11 Absent a waiver, such a firm would have to pay
an application fee associated with the CMA. See
FINRA By-Laws, Schedule A, Section 4(i).
12 To the extent that the rules applicable to the
member firm had been amended since it had
changed its status to a CAB, FINRA would have the
discretion to modify any limitations to reflect any
new rule requirements.
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FINRA Rules 2010 (Standards of
Commercial Honor and Principles of
Trade), 2020 (Use of Manipulative,
Deceptive or Other Fraudulent Devices),
2040 (Payments to Unregistered
Persons),13 2070 (Transactions
Involving FINRA Employees), 2080
(Obtaining an Order of Expungement of
Customer Dispute Information from the
CRD System), 2081 (Prohibited
Conditions Relating to Expungement of
Customer Dispute Information), 2263
(Arbitration Disclosure to Associated
Persons Signing or Acknowledging
Form U4), and 2268 (Requirements
When Using Predispute Arbitration
Agreements for Customer Accounts).
CAB Rules 209 and 211 would impose
know-your-customer and suitability
obligations similar to those imposed
under FINRA Rules 2090 and 2111. CAB
Rule 211(b) includes an exception to the
customer-specific suitability obligations
for institutional investors similar to the
exception found in FINRA Rule 2111(b).
Proposed CAB Rule 221 is an
abbreviated version of FINRA Rule 2210
(Communications with the Public),
essentially prohibiting false and
misleading statements.
Under proposed CAB Rule 240, if a
CAB or associated person of a CAB had
engaged in activities that would require
the CAB to register as a broker or dealer
under the Exchange Act, and that are
inconsistent with the limitations
imposed on CABs under CAB Rule
016(c), FINRA could examine for and
enforce all FINRA rules against such a
broker or associated person, including
any rule that applies to a FINRA brokerdealer that is not a CAB or to an
associated person who is not a person
associated with a CAB.
FINRA has determined not to subject
CABs to FINRA Rules 2121 (Fair Prices
and Commissions), 2122 (Charges for
Services Performed), and 2124 (Net
Transactions with Customers), since
CABs’ business model does not raise the
same concerns that Rules 2121, 2122
and 2124 are intended to address.
Rule 2121 provides that, for securities
in both listed and unlisted securities, a
member that buys for its own account
from its customer, or sells for its own
account to its customer, shall buy or sell
at a price which is fair, taking into
consideration all relevant
circumstances, including market
conditions with respect to the security
at the time of the transaction, the
expense involved, and the fact that the
member is entitled to a profit. Further,
13 The SEC has approved FINRA’s rule change to
adopt rules relating to payments to unregistered
persons for the consolidated FINRA rulebook. See
Regulatory Notice 15–07 (March 2015). FINRA Rule
2040 became effective on August 24, 2015.
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if the member acts as agent for its
customer in any such transaction, the
member shall not charge its customer
more than a fair commission or service
charge, taking into consideration all
relevant circumstances, including
market conditions with respect to the
security at the time of the transaction,
the expense of executing the order and
the value of any service the member
may have rendered by reason of its
experience in and knowledge of such
security and the market therefor.
CABs would not be permitted to act
as a principal in a securities transaction.
Accordingly, the provisions of Rule
2121 that govern principal transactions
would not apply to a CAB’s permitted
activities.
CABs would be permitted act as agent
in a securities transaction only in very
narrow circumstances. CABs would be
allowed to act as an agent with respect
to institutional investors in connection
with purchases or sales of unregistered
securities. CABs also would be
permitted to effect 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 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.
In both instances, FINRA believes that
these circumstances either involve
institutional parties that negotiate the
terms of permitted securities
transactions without the need for the
conditions set forth in Rule 2121, or
involve the sale of a business as a going
concern, which differs in nature from
the types of transactions that typically
raise issues under Rule 2121.
Rule 2122 provides that charges, if
any, for services performed, including,
but not limited to, miscellaneous
services such as collections due for
principal, dividends, or interest;
exchange or transfer of securities;
appraisals, safekeeping or custody of
securities, and other services shall be
reasonable and not unfairly
discriminatory among customers. As
discussed above, CABs typically
provide services to institutional
customers that generally do not need the
protections that Rule 2122 offers, since
these customers are capable of
negotiating fair prices for the services
that CABs provide. Moreover, CABs are
not permitted to provide many of the
services listed in Rule 2122, such as
collecting principal, dividends or
interest, or providing safekeeping or
custody services.
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Rule 2124 sets forth specific
requirements for executing transactions
with customers on a ‘‘net’’ basis. ‘‘Net’’
transactions are defined as a type of
principal transaction, and CABs may
not trade securities on a principal basis.
For these reasons, FINRA does not
believe it is necessary to include FINRA
Rules 2121, 2122 and 2124 as part of the
CAB rule set.
CAB Rule 201 would subject CABs to
FINRA Rule 2010 (Standards of
Commercial Honor and Principles of
Trade), which requires a member, in the
conduct of its business, to observe high
standards of commercial honor and just
and equitable principles of trade.
Depending on the facts, other rules,
such as Rule 2010, may apply in
situations in which a CAB charged a
commission or fee that clearly is
unreasonable under the circumstances.
D. Supervision and Responsibilities
Related to Associated Persons (CAB
Rule 300 Series)
The proposed CAB Rule 300 Series
would establish a limited set of
supervisory rules for CABs. CABs would
be subject to FINRA Rules 3220
(Influencing or Rewarding Employees of
Others), 3240 (Borrowing from or
Lending to Customers), and 3270
(Outside Business Activities of
Registered Persons).
Proposed CAB Rule 311 would
subject CABs to some, but not all, of the
requirements of FINRA Rule 3110
(Supervision) and, consistent with Rule
3110, is designed to provide CABs with
the flexibility to tailor their supervisory
systems to their business models. CABs
would be subject to many of the
provisions of Rule 3110 concerning the
supervision of offices, personnel,
customer complaints, correspondence
and internal communications. However,
CABs would not be subject to the
provisions of Rule 3110 that require
annual compliance meetings (paragraph
(a)(7)), review and investigation of
transactions (paragraphs (b)(2) and (d)),
specific documentation and supervisory
procedures for supervisory personnel
(paragraph (b)(6)), and internal
inspections (paragraph (c)).
FINRA does not believe that the
annual compliance meeting requirement
in FINRA Rule 3110(a)(7) should apply
to CABs given the nature of CABs’
business model and structure. FINRA
has observed that most current FINRA
member firms that would qualify as
CABs tend to be small and often operate
out of a single office. In addition, the
range of rules that CABs would be
subject to is narrower than the rules that
apply to other broker-dealers. Moreover,
as noted above, CABs would be subject
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to both the Regulatory and Firm
Element continuing education
requirements. Accordingly, FINRA does
not believe that CABs need to conduct
an annual compliance meeting as
required under FINRA Rule
3110(a)(7).14 The fact that the annual
compliance meeting requirement would
not apply to CABs or their associated
persons in no way would reduce their
responsibility to have knowledge of and
comply with applicable securities laws
and regulations and the CAB rule set.
FINRA does not believe that FINRA
Rule 3110(b)(2), which requires
members to adopt and implement
procedures for the review by a
registered principal of all transactions
relating to the member’s investment
banking or securities business, or
FINRA Rule 3110(d), which imposes
requirements related to the investigation
of securities transactions and
heightened reporting requirements for
members engaged in investment
banking services, should apply to CABs.
CABs would not be permitted to carry
or act as an introducing broker with
respect to customer accounts, hold or
handle customers’ funds or securities,
accept orders from customers to
purchase or sell securities except under
the narrow circumstances discussed
above, have investment discretion on
behalf of any customer, engage in
proprietary trading or market-making
activities, or participate in
Crowdfunding or Regulation A
securities offerings. Accordingly, due to
these restrictions, FINRA does not
believe a CAB’s business model
necessitates the application of these
provisions, which primarily address
trading and investment banking
functions that are beyond the
permissible scope of a CAB’s
activities.15
FINRA does not believe that the
requirements of FINRA Rule 3110(b)(6)
should apply to CABs. Paragraph (b)(6)
generally requires a member to have
procedures to prohibit its supervisory
personnel from (1) supervising their
own activities; and (2) reporting to, or
having their compensation or continued
employment determined by, a person
the supervisor is supervising.16 FINRA
14 For
the same reasons, FINRA does not believe
that FINRA Rule 3110.04 should apply to CABs.
15 For the same reasons, FINRA does not believe
that FINRA Rule 3110.05 should apply to CABs.
16 FINRA Rule 3110(b)(6)(C)(i) and (ii). FINRA
Rule 3110(b)(6) also requires that a member’s
supervisory procedures include the titles,
registration status and locations of the required
supervisory personnel and the responsibilities of
each supervisory person as these relate to the types
of business engaged in, applicable securities laws
and regulations, and FINRA rules, as well as a
record of the names of its designated supervisory
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15591
also does not believe that FINRA Rule
3110(c), which requires members to
conduct internal inspections of their
businesses, should apply to CABs.
FINRA believes that a CAB’s business
model, which is geared toward acting as
a consultant in capital acquisition
transactions, or acting as an agent solely
in connection with purchases or sales of
unregistered securities to institutional
investors, or with the transfer of
ownership and control of a privatelyheld company, does not give rise to the
same conflicts of interest and
supervisory concerns that paragraph
(b)(6) is intended to address. As
discussed above, many CABs operate
out of a single office with a small staff,
which reduces the need for internal
inspections of numerous or remote
offices. In addition, part of the purpose
of creating a separate CAB rule set is to
streamline and reduce existing FINRA
rule requirements where it does not
hinder investor protection. FINRA
believes that the remaining provisions
of FINRA Rule 3110, coupled with the
CAB Rule 200 Series addressing duties
and conflicts, will sufficiently protect
CABs’ customers from potential harm
due to insufficient supervision.17
Proposed CAB Rule 313 would
require CABs to designate and identify
one or more principals to serve as a
firm’s chief compliance officer, similar
to the requirements of FINRA Rule
3130(a). CAB Rule 313 would not
require a CAB to have its chief executive
officer (‘‘CEO’’) certify that the member
has in place processes to establish,
maintain, review, test and modify
written compliance policies and written
supervisory procedures reasonably
designed to achieve compliance with
applicable federal securities laws and
regulations, and FINRA and MSRB
rules, which are required under FINRA
Rules 3130(b) and (c). FINRA does not
believe the CEO certification is
necessary given a CAB’s narrow
business model and smaller rule set.
Proposed Rule 328 would prohibit
any person associated with a CAB from
participating in any manner in a private
securities transaction as defined in
personnel and the dates for which such designation
is or was effective. FINRA Rule 3110(b)(6)(A) and
(B). In addition, paragraph (b)(6) requires a member
to have procedures reasonably designed to prevent
the standards of supervision required pursuant to
FINRA Rule 3110(a) from being compromised due
to the conflicts of interest that may be present with
respect to an associated person being supervised.
FINRA Rule 3110(b)(6)(D).
17 For the same reasons, FINRA does not believe
that FINRA Rules 3110.10, .12, .13, or .14 should
apply to CABs. FINRA also believes that it is
unnecessary to apply FINRA Rule 3110.15 to CABs,
since the temporary program authorized by the rule
expired on December 1, 2015.
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FINRA Rule 3280(e).18 FINRA does not
believe that an associated person of a
CAB should be engaged in selling
securities away from the CAB, nor
should a CAB have to oversee and
review such transactions, given its
limited business model. This restriction
would not prohibit associated persons
from investing in securities on their
own behalf, or engaging in securities
transactions with immediate family
members, provided that the associated
person does not receive selling
compensation.
Proposed CAB Rule 331 would
require each CAB to implement a
written anti-money laundering (‘‘AML’’)
program. This is consistent with the
SEC’s requirements and Chapter X of
Title 31 of the Code of Federal
Regulations. Accordingly, the proposed
rule is similar to FINRA Rule 3310
(Anti-Money Laundering Compliance
Program); however, the proposed rule
contemplates that all CABs would be
eligible to conduct the required
independent testing for compliance
every two years.
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E. Financial and Operational Rules
(CAB Rule 400 Series)
The proposed CAB Rule 400 Series
would establish a streamlined set of
rules concerning firms’ financial and
operational obligations. CABs would be
subject to FINRA Rules 4140 (Audit),
4150 (Guarantees by, or Flow through
Benefits for, Members), 4160
(Verification of Assets), 4511 (Books and
Records—General Requirements), 4513
(Records of Written Customer
Complaints), 4517 (Member Filing and
Contact Information Requirements),
4524 (Supplemental FOCUS
Information), 4530 (Reporting
Requirements), and 4570 (Custodian of
Books and Records).
Proposed CAB Rule 411 includes
some, but not all, of the capital
compliance requirements of FINRA Rule
4110. CABs would be required to
suspend business operations during any
period a firm is not in compliance with
the applicable net capital requirements
set forth in Exchange Act Rule 15c3–1,
and the rule also would authorize
FINRA to direct a CAB to suspend its
18 FINRA Rule 3280(e) defines ‘‘private securities
transaction’’ as ‘‘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, provided however
that transactions subject to the notification
requirements of NASD Rule 3050, 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, shall be excluded.’’
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operation under those circumstances.
Proposed CAB Rule 411 also sets forth
requirements concerning withdrawal of
capital, subordinated loans, notes
collateralized by securities, and capital
borrowings.
CABs would not be subject to FINRA
Rules 4370 (Business Continuity Plans
and Emergency Contact Information) or
4380 (Mandatory Participation in
FINRA BC/DR Testing Under Regulation
SCI). FINRA does not believe it would
be necessary for a CAB to maintain a
business continuity plan (BCP), given a
CAB’s limited activities, particularly
since a CAB would not engage in retail
customer account transactions or
clearance, settlement, trading,
underwriting or similar investment
banking activities. Moreover, FINRA
Rule 4380 relates to Rule SCI under the
Exchange Act, which is not applicable
to a member that limits its activities to
those permitted under the CAB rule set.
Because CABs would not carry or act
as an introducing broker with respect to
customer accounts, they would have
more limited customer information
requirements than is imposed under
FINRA Rule 4512.19 CABs would have
to maintain each customer’s name and
residence, whether the customer is of
legal age (if applicable), and the names
of any persons authorized to transact
business on behalf of the customer.
CABs would still have to make and
preserve all books and records required
under Exchange Act Rules 17a–3 and
17a–4.
CAB Rule 452(a) establishes a limited
set of requirements for the supervision
and review of a firm’s general ledger
accounts.
F. Securities Offerings (CAB Rule 500
Series)
The proposed CAB Rule 500 Series
would subject CABs to certain rules
concerning securities offerings. CABs
would be subject to FINRA Rules 5122
(Private Placements of Securities Issued
by Members) and 5150 (Fairness
Opinions).
G. Investigations and Sanctions, Code of
Procedure, and Arbitration and
Mediation (CAB Rules 800, 900 and
1000)
CABs would be subject to the FINRA
Rule 8000 Series governing
investigations and sanctions of firms,
other than FINRA Rules 8110
(Availability of Manual to Customers),
8211 (Automated Submission of Trading
Data Requested by FINRA), and 8213
(Automated Submission of Trading Data
19 See
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for Non-Exchange-Listed Securities
Requested by FINRA).
CABs would not be subject to FINRA
Rule 8110 (Availability of Manual to
Customers), which requires members to
make available a current copy of the
FINRA manual for examination by
customers upon request. If the
Commission approves this proposed
rule change, the CAB rule set would be
available through the FINRA Web site.
Accordingly, FINRA does not believe
this rule is necessary for CABs.
CABs also would not be subject to
FINRA Rules 8211 (Automated
Submission of Trading Data Requested
by FINRA) or 8213 (Automated
Submission of Trading Data for NonExchange-Listed Securities Requested
by FINRA). Given that these rules are
intended to assist FINRA in requesting
trade data from firms engaged in
securities trading, and that CABs would
not engage in securities trading, FINRA
does not believe that these rules should
apply to CABs.
CABs would be subject to the FINRA
Rule 9000 Series governing disciplinary
and other proceedings involving firms,
other than the FINRA Rule 9700 Series
(Procedures on Grievances Concerning
the Automated Systems). Proposed CAB
Rule 900(c) would provide that any CAB
may be subject to a fine under FINRA
Rule 9216(b) with respect to an
enumerated list of FINRA By-Laws, CAB
rules and SEC rules under the Exchange
Act. Proposed CAB Rule 900(d) would
authorize FINRA staff to require a CAB
to file communications with the FINRA
Advertising Regulation Department at
least ten days prior to use if the staff
determined that the CAB had departed
from CAB Rule 221’s standards.
CABs would be subject to the FINRA
Rule 12000 Series (Code of Arbitration
Procedure for Customer Disputes),
13000 Series (Code of Arbitration
Procedure for Industry Disputes) and
14000 Series (Code of Mediation
Procedure).
III. Summary of Comments
Commenters generally supported
FINRA’s proposal to develop a new rule
set for CABs. As discussed below, some
commenters recommended that the
proposal include additional
requirements or explanations in certain
aspects.
A. Review of Membership Application
One commenter suggested that FINRA
should approve the membership
applications of new CABs within 60
days of the filing of the application,
provided that certain conditions are
met, including: A completed
application; the required supervisory
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principals, who have each taken and
passed the applicable examinations; and
no significant disciplinary history or
other red flag indications of potential
compliance problems.20
B. Registration and Licensing
Two commenters requested that
FINRA confirm that CABs may hold all
licenses previously sought and attained
by their associated persons, including
Series 53, 4 and other licenses.21 One of
these commenters also suggested that
CABs should not be subject to FINRA
Rule 1230(b)(6) 22 regarding Operations
Professional registration because of the
scope and nature of the examination.23
The other commenter suggested that
FINRA should exempt CAB Chief
Compliance Officers (‘‘CCOs’’) from the
proposed requirement to obtain and
maintain the Series 14 CCO license
because of the broad and comprehensive
scope of the proposed license.24 This
commenter also sought clarification as
to whether a CAB’s responsibility under
Rule 209 25 is limited to learning the
essential facts of the agent.26
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C. Registered Representative Exams
One commenter suggested that FINRA
(outside of the rulemaking context)
establish new examinations specifically
for the registered representatives and
supervisory principals of CABs that will
test only that subject matter relevant to
the business of CABs.27
20 See New York State Bar Association Letter.
NASD Rule 1014 permits up to a 180 day review
period absent an extension.
21 See 3PM and M&R Letters.
22 Rule 1230 requires that each of the following
persons be registered with FINRA as an Operations
Professional: (i) Senior management with direct
responsibility over the covered functions under the
Rule; (ii) any person designated by senior
management under the Rule as a supervisor,
manager or other person responsible for approving
or authorizing work, including work of other
persons, in direct furtherance of each of the covered
functions in the Rule, as applicable, provided that
there is sufficient designation of such persons by
senior management to address each of the
applicable covered functions; and (iii) persons with
the authority or discretion materially to commit a
member’s capital in direct furtherance of the
covered functions in the Rule or to commit a
member to any material contract or agreement
(written or oral) in direct furtherance of the covered
functions in the Rule.
23 See 3PM Letter.
24 See M&R Letter.
25 Proposed Rule 209 states that every capital
acquisition broker shall use reasonable diligence to
know (and retain) the essential facts concerning
every customer and concerning the authority of
each person acting on behalf of such customer. For
purposes of this Rule, facts ‘‘essential’’ to ‘‘knowing
the customer’’ are those required to (a) effectively
service the customer, (b) understand the authority
of each person acting on behalf of the customer, and
(c) comply with applicable laws, regulations and
rules.
26 See M&R Letter.
27 See New York State Bar Association Letter.
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D. Prohibition on Private Securities
Transactions
One commenter suggested that
proposed Rule 328 (Prohibition on
Private Securities Transactions) 28
should be revised to exclude: (1) The
investment advisory activities of
associated persons who are also
employees or supervised persons of an
investment adviser registered with the
SEC or a state, and (2) employees of a
bank or trust company engaged in
securities or advisory activities that a
bank may engage in pursuant to the
exceptions from the definition of broker
or dealer in Exchange Act Sections
3(a)(4) or (5) of Regulation R.29
Another commenter believes that
FINRA’s proposed CAB rule set unduly
prohibits sales of private placements to
accredited investors and therefore
vitiates any usefulness or appeal of the
CAB rules to certain firms.30
E. Secondary Transactions
As discussed above, the definition of
CAB in proposed Rule 016(c) includes,
among the permissible activities of a
CAB, ‘‘qualifying, identifying, soliciting,
or acting as a placement agent or finder
with respect to institutional investors in
connection with purchases or sales of
unregistered securities.’’ One
commenter interpreted that description
as including both primary issuances and
secondary transaction in unregistered
securities and requested that FINRA
confirm the intent to include secondary
transactions among the permitted
activities of a CAB.31
F. Grace Period for Reverses CAB
Registration
One commenter states although a CAB
firm has a year to decide if it wants to
become a registered broker-dealer, it is
not convinced that this one-year grace
period is a sufficient amount of time for
a firm to determine if CAB status is
appropriate for its business model.32
The commenter states that a converted
firm may not have sufficient data within
the first year to evaluate its decision
fully and recommends that this grace
period be extended to at least 24 months
or that there be no grace time
restrictions at all.33 This commenter
suggested that FINRA allow interim
continued operations as a CAB
(provided the firm is in regulatory
28 Proposed
Rule 328 would prohibit persons
associated with a CAB from participating in any
manner in a private securities transaction as
defined in FINRA Rule 3280(e).
29 See New York State Bar Association Letter.
30 See Mehle Letter.
31 See New York State Bar Association Letter.
32 Id.
33 Id.
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15593
compliance) while an active CMA is
being reviewed by FINRA, with the firm
remaining subject to all the CAB
strictures pending a final decision by
FINRA on the CMA.34
G. Impermissible Activities
One commenter recommended that
FINRA consider a grace period for firms
that unintentionally conduct activities
beyond the scope of a CAB’s permissible
activities.35
H. CAB Rule Suggested Changes
Several commenters suggested various
changes to FINRA’s proposed CAB
rules. The significant suggested changes
are described below.
1. Institutional Investor Definition
One comment suggested that FINRA
consider lowering the threshold for
institutional investor preferably to $5
million or even less.36 This commenter
also suggested that many broker-dealers
would otherwise qualify as a CAB
except that sometimes investors
investing in clients’ offerings may have
less than $50 million in assets but are
otherwise sophisticated, knowledgeable
and advised by competent attorneys.37
In addition to institutional investors,
one commenter suggested that FINRA
permit CAB transactions with certain
other categories of persons, specifically:
(1) A ‘‘knowledgeable employee’’ as
defined in Investment Company Act
Rule 3C–5, except that for purposes of
the institutional investor definition,
‘‘covered company’’ would mean either
the CAB or the issuer of the securities
sold in the transaction; and (2) a person
designated by the issuer of the securities
sold in the transaction, provided that
the CAB did not solicit the person or
make a recommendation to the person
with respect to purchase of the
securities.38
This commenter also stated that there
may be circumstances where the issuer
wishes to sell securities to persons who
would not otherwise qualify as
institutional investors, but wants the
transaction to be effected by the CAB.39
In addition, the commenter believes that
CAB rules should not prohibit sales to
those categories of persons, since the
34 Id.
35 See
36 See
3PM Letter.
Intellivest Letter.
37 Id.
38 New York State Bar Association Letter. See also
Coronado Letter (requesting a de minimis and/or
knowledgeable employee exemption to allow for
one-off capital-raises (under various scenarios
where accredited individuals working at alternative
investment firms and the funds they manage or
other closely affiliated individuals desire to invest)
without violating the proposed CAB rules).
39 New York State Bar Association Letter.
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demonstrable best efforts basis may be
a satisfactory alternative in such
instances.46
usual concerns about suitability
determinations and content of
communications by member firms to
retail investors would not apply.40
2. Know Your Customer
One commenter requested
clarification of FINRA’s statement that
‘‘[i]t also recognizes that a CAB or its
associated person may look to an
institutional investor’s agent if the
investor is represented by an agent.’’ 41
Specifically, clarification as to what
‘‘look to’’ requires and whether this can
be interpreted to mean that a CAB’s
responsibility under Rule 209 is limited
to learning the essential facts of the
agent.42
3. Suitability
One commenter generally agreed with
Rule 211 (Suitability), but believes that
the rule as proposed fails by requiring
the suitability analyses to be performed
before any recommendation is made.43
The commenter believes that the rule
does not recognize that the process of
diligence is ongoing, in many cases can
take several months to several years
before an investment decision is made,
and often does not, and should not
conclude until the deal is closed. The
commenter also believes that Rule 211
should emphasize this point and
encourage registered representatives to
periodically review their suitability
analysis throughout the offering process,
but no less frequently than once before
the subscription agreement or relevant
contract is signed and due diligence is
as complete as it can be at that
particular time.44
One commenter stated that CABs are
not making recommendations in the
traditional definition of the term, and
therefore, as an example, will not have
insight into the overall composition of
the institutional investor’s portfolio—as
a retail broker would have over one of
their accounts.45 Accordingly, this
commenter suggested that the rules
should address some type of minimum
compliance that would be appropriate
in these situations. Further, the
commenter suggested that a
40 Id.
41 See
3PM Letter.
42 Id.
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43 Id.
Rule 211 states that a capital acquisition
broker or an associated person of a capital
acquisition broker must have a reasonable basis to
believe that a recommended transaction or
investment strategy (as defined in FINRA Rule
2111) involving a security or securities is suitable
for the customer, based on the information obtained
through the reasonable diligence of the broker or
associated person to ascertain the customer’s
investment profile.
44 3PM Letter.
45 Id.
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4. Commissions/Fees
One commenter stated that applying
Rule 2010 (Standards of Commercial
Honor and Principles of Trade) in
situations in which a CAB charged a
commission or fee that clearly is
unreasonable under the circumstances
may create an interpretive issue
between the two sets of rules.47
5. Supervisory Procedures
One commenter stated that
requirements related to supervisory
procedures for supervisors should not
be required for CABs.48 This commenter
also recommended that FINRA clarify
its expectations with respect to email
review.49 Specifically, the commenter
suggested that the rules should note that
expectations for email review should be
tailored according to the CAB’s business
and that such expectations would not be
as stringent as those for broker-dealers
engaged in non-CAB activities.50
6. Cybersecurity
One commenter recommended that
FINRA clarify the expectations with
respect to cybersecurity.51 Specifically,
while the proposal suggests that a CAB
not be required to have a business
continuity plan, the commenter
suggested that the final rules include a
requirement to have appropriate
cybersecurity/information security
programs in place, tailored to the CAB’s
business.52
I. Rules Beyond FINRA’s CAB Rules
1. SIPC
One commenter stated that the CAB
designation should be added to the list
of exempt entities contained in the SIPC
rules (although the commenter
understands that FINRA is not in a
position to alter the current SIPC
requirement).53
2. Net Capital
One commenter expressed concern
that FINRA will force existing FINRA
members and new applicants who now
or will operate as so-called ‘‘nickel BDs’’
to become CABs, if for no other reason
than to vindicate FINRA’s questionable
statistics of eligible firms.54 This
Letter.
Letter.
48 Foreside
49 Id.
50 Id.
51 Id.
52 Id.
53 Q
Advisors Letter.
Letter.
54 IMS
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3. Audit
One commenter believed FINRA
should eliminate the audit requirement
altogether for broker-dealers that never
hold securities or cash belonging to
others.61 Another commenter also
suggested that FINRA has not made any
effort to have the SEC change Rule 17a–
5 to exclude CABs from the annual
audit requirement, or to require a review
instead of an audit.62
Another commenter suggested that
annual compliance meetings and annual
55 Id.
56 Id.
57 See
M&R Letter.
411 states that unless otherwise permitted
by FINRA, a capital acquisition broker must
suspend all business operations during any period
in which it is not in compliance with applicable net
capital requirements set forth in Exchange Act Rule
15c3–1.
59 See 3PM Letter.
60 Id.
61 See IMS Letter.
62 See Mehle Letter.
58 Rule
46 Id.
47 IMS
commenter also disagreed with the fact
that although CABs may nominally
advise an issuer of private funds on its
capital raising efforts, FINRA’s customer
limitations for CABs only allow them to
contact institutional investors.
One commenter objected to what it
believes is FINRA’s failure to change or
in any way modify the net capital,
recordkeeping and reporting
requirements applicable to CABs.55 This
commenter stated that compliance with
the Financial Responsibility and Net
Capital rules remains the same for both
CABs and FINRA-registered BDs, and
that there is no relief from the annual
audit requirement, which, in light of
auditors having to comply with onerous
PCAOB and SEC rules, has become a
significant expense to all FINRA
member firms regardless of size.56
Similarly, one commenter stated that
the FINRA proposal should address the
capital requirements, which appear to
be unnecessary based on the business
model of CABs and also address the
requirement for a PCAOB audit in light
of the streamlined rule set seems wholly
out of line, excessive and meaningless
to investor protections.57
One commenter suggested that
proposed CAB Rule 411 58 should
remove the minimum net capital
requirement of $5,000 currently applied
to CAB members.59 While the
commenter understood that this is
outside of FINRA’s authority, the
commenter urged the SEC to review the
calculation of net capital for CABs and
modify the rule so that the nature of a
CAB’s business does not cause it to have
to improperly report its financial
condition to FINRA.60
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inspections should not be required for
CABs.63
4. Anti-Money Laundering
One commenter requests that the SEC
work with the appropriate authorities to
revisit the AML responsibilities of CABs
and consider requiring U.S. registered
entities, such as registered investment
advisers, to share certain data with
FINRA member firms so that all
registered participants may satisfy their
respective compliance obligations in the
most complete and accurate manner
possible.64 In addition, this commenter
sought the SEC’s confirmation that the
terms and conditions of the no-action
letters initially dated 2004 and extended
by subsequent no-action letter in
January 2015 apply to CABs to the
extent that customer identification is
reasonable performed by a federally
regulated entity under a contractual
obligation.65
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5. Form Custody
One commenter urged FINRA to make
efforts to have the SEC eliminate the
quarterly ‘‘Form Custody’’ FOCUS
report for CABs.66
J. State Regulation
One commenter suggested that the
Commission, FINRA, and NASAA
should cooperate to more fully analyze
the interaction between the CAB
proposal and state registration
requirements to better harmonize the
application of these provisions.67 This
commenter suggested that the most
relevant provisions to it are the
proposal’s inclusion of firms that effect
securities transactions solely in
connection with the transfer of
ownership and control of a privatelyheld 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.68
The commenter indicated that it
would welcome the opportunity to work
with FINRA and the Commission on the
issues presented by the proposal, and
63 See
64 See
Foreside Letter.
3PM Letter.
65 Id.
66 Mehle
Letter.
Letter.
67 NASAA
68 Id.
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encouraged the Commission to delay
approval of the proposal until there has
been an opportunity to more fully
explore these issues.69
IV. Proceedings to Determine Whether
to Approve or Disapprove SR–FINRA–
2015–054 and Grounds for Disapproval
Under Consideration
The Commission is instituting
proceedings pursuant to Exchange Act
Section 19(b)(2)(B) to determine
whether the proposed rule change
should be approved or disapproved.70
Institution of proceedings appears
appropriate at this time in view of the
legal and policy issues raised by the
proposal. As noted above, institution of
proceedings does not indicate that the
Commission has reached any
conclusions with respect to any of the
issues involved. Rather, the Commission
seeks and encourages interested persons
to comment on the issues presented by
the proposed rule change and provide
the Commission with arguments to
support the Commission’s analysis as to
whether to approve or disapprove the
proposal.
Pursuant to Exchange Act Section
19(b)(2)(B),71 the Commission is
providing notice of the grounds for
disapproval under consideration. In
particular, Exchange Act Section
15A(b)(6) 72 requires, among other
things, that FINRA rules must be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, and, in general, to protect
investors and the public interest. In
addition, Exchange Act Section
15A(b)(9) 73 requires that FINRA rules
not impose any unnecessary or
inappropriate burden on competition.
The Commission believes FINRA’s
proposed rule change raises questions as
to whether it is consistent with the
requirements of Exchange Act Sections
15A(b)(6) and 15A(b)(9).
V. Request for Written Comments
The Commission requests that
interested persons provide written
submissions of their views, data, and
69 Id.
70 15 U.S.C. 78s(b)(2). Exchange Act Section
19(b)(2)(B) provides that proceedings to determine
whether to disapprove a proposed rule change must
be concluded within 180 days of the date of
publication of notice of the filing of the proposed
rule change. The time for conclusion of the
proceedings may be extended for up to an
additional 60 days if the Commission finds good
cause for such extension and publishes its reasons
for so finding or if the self-regulatory organization
consents to the extension.
71 15 U.S.C. 78s(b)(2)(B).
72 15 U.S.C. 78o–3(b)(6).
73 15 U.S.C. 78o–3(b)(9).
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15595
arguments with respect to the issues
raised by the proposed rule change. In
particular, the Commission invites the
written views of interested persons on
whether the proposed rule change is
inconsistent with Sections 15A(b)(6)
and 15A(b)(9), or any other provision, of
the Exchange Act, or the rules and
regulations 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.74
Interested persons are invited to
submit written data, views, and
arguments by April 13, 2016 concerning
whether the proposed rule change
should be approved or disapproved.
Any person who wishes to file a rebuttal
to any other person’s submission must
file that rebuttal by May 9, 2016.
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 rule-comments@
sec.gov. Please include File Number SR–
FINRA–2015–02 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–2015–054. 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 Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
74 Exchange Act Section 19(b)(2), as amended by
the Securities Acts Amendments of 1975, Pub. L.
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).
E:\FR\FM\23MRN1.SGM
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15596
Federal Register / Vol. 81, No. 56 / Wednesday, March 23, 2016 / Notices
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principle
office of FINRA. All comments received
will be posted without change. The
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
publicly available.
All submissions should refer to File
Number SR–FINRA–2015–054 and
should be submitted on or before April
13, 2016. If comments are received, any
rebuttal comments should be submitted
by May 9, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.75
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–06453 Filed 3–22–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–77394; File No. SR–
BatsEDGX–2016–02]
Self-Regulatory Organizations; Bats
EDGX Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change Related to Fees
for Use of the Exchange
jstallworth on DSK7TPTVN1PROD with NOTICES
March 17, 2016.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on March 17,
2016, Bats EDGX Exchange, Inc. f/k/a
EDGX Exchange, Inc. (the ‘‘Exchange’’
or ‘‘EDGX’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Exchange has
designated the proposed rule change as
one establishing or changing a member
due, fee, or other charge imposed by the
Exchange under Section 19(b)(3)(A)(ii)
of the Act 3 and Rule 19b–4(f)(2)
75 17 CFR 200.30–3(a)(12); 17 CFR 200.30–
3(a)(57).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(ii).
VerDate Sep<11>2014
15:26 Mar 22, 2016
Jkt 238001
thereunder,4 which renders the
proposed rule change effective upon
filing with the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange filed a proposal to
amend the fee schedule applicable to
Members 5 and non-members of the
Exchange pursuant to EDGX Rules
15.1(a) and (c) (‘‘Fee Schedule’’) to: (i)
Increase the rebate for Retail Orders 6
that yield fee code ZA; (ii) delete the
Retail Order Tier under footnote 4; (iii)
amend or delete various Add Volume
Tiers under footnote 1; and (iv) amend
the Tape B Step Up Tier under footnote
2.
The text of the proposed rule change
is available at the Exchange’s Web site
at www.batstrading.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1 Purpose
The Exchange proposes to amend its
Fee Schedule to: (i) Increase the rebate
for Retail Orders that yield fee code ZA;
(ii) delete the Retail Order Tier under
footnote 4; (iii) amend or delete various
Add Volume Tiers under footnote 1; and
4 17
CFR 240.19b–4(f)(2).
term ‘‘Member’’ is defined as ‘‘any
registered broker or dealer that has been admitted
to membership in the Exchange.’’ See Exchange
Rule 1.5(n).
6 A ‘‘Retail Order’’ is ‘‘an order that: (i) Is an
agency order or riskless principal order that meets
the criteria of FINRA Rule 5320.03 that originates
from a natural person; (ii) is submitted to EDGX by
a Member, provided that no change is made to the
terms of the order; and (iii) does not originate from
a trading algorithm or any other computerized
methodology.’’ See Exchange Rule 11.24(a).
5 The
PO 00000
Frm 00099
Fmt 4703
Sfmt 4703
(iv) amend the Tape B Step Up Tier
under footnote 2.
Fee Code ZA and the Retail Order Tier
The Exchange proposes to increase
the rebate for Retail Orders that yield fee
code ZA and delete the Retail Order
Tier under footnote 4.7 First, the
Exchange proposes to increase the
rebate for Retail Orders that yield fee
code ZA from $0.0032 per share to
$0.0034 per share. Fee code ZA is
appended to Retail Orders that add
liquidity on the Exchange. In a related
change, the Exchange proposes to delete
the Retail Order Tier under footnote 4.8
Currently, under the Retail Order Tier,
a Retail Order that yields fee code ZA
will receive a rebate of $0.0034 per
share where that Member adds Retail
Orders that average at least 0.07% of
TCV.9 Going forward, Members would
receive a receive rebate of $0.0034 per
share for their Retail Orders that yield
fee code ZA without having to satisfy
certain add volume criteria. Providing
all Retail Orders that yield fee code ZA
a rebate of $0.0034 per share would
mirror the rebate currently provided by
the Nasdaq Stock Market LLC
(‘‘Nasdaq’’).10
Add Volume Tiers—Footnote 1
Currently, the Exchange determines
the liquidity adding rebate that it will
provide to Members using the
Exchange’s tiered pricing structure.
Under such pricing structure, a Member
will receive a rebate of anywhere
between $0.0025 and $0.0035 per share
executed, depending on the volume tier
for which such Member qualifies. The
Exchange currently offers thirteen
separate Add Volume Tiers under
footnote 1 of its Fee schedule which
provide various enhanced rebates based
on the Members satisfying certain
monthly volume thresholds. The
Exchange now proposes to amend or
delete various tiers under footnote 1 in
order to update, streamline, and simply
its tiered pricing structure.
Tiers To Be Deleted
First, the Exchange proposes to delete
the Market Depth Tier 1 and Market
7 Footnote 4 would continue to note that
Members will only be able to designate their orders
as Retail Orders on either an order-by-order basis
using FIX ports or by designating certain of their
FIX ports at the Exchange as ‘‘Retail Order Ports.’’
8 As a result of deleting the Retail Order Tier
under footnote 4, the Exchange proposes to delete
a reference to footnote 4 in the Standard Rates table
of its Fee Schedule.
9 As defined in the Exchange’s Fee Schedule.
10 See Nasdaq Price List—Trading Connectivity
available at https://www.nasdaqtrader.com/
Trader.aspx?id=PriceListTrading2 (offering a rebate
of $0.0034 per share to add displayed designated
retail liquidity).
E:\FR\FM\23MRN1.SGM
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]]>Agencies
[Federal Register Volume 81, Number 56 (Wednesday, March 23, 2016)]
[Notices]
[Pages 15588-15596]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-06453]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77391; File No. SR-FINRA-2015-054]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Instituting Proceedings To Determine Whether To
Approve or Disapprove Proposed Rule Change To Adopt FINRA Capital
Acquisition Broker Rules
March 17, 2016.
I. Introduction
On October 9, 2015, 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 adopt rules for capital
acquisition brokers (collectively, the ``CAB Rules''). The proposed
rule change was published for comment in the Federal Register on
December 23, 2015.\3\ The Commission received seventeen comment letters
on the proposed rule change.\4\ On December 9, 2015, FINRA extended the
time period for Commission action on this proposed rule change until
March 22, 2016.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Exchange Act Release No. 76675 (Dec. 23, 2015), 80 FR
79969 (``Notice'').
\4\ See letters from Peter W. LaVigne, Esq., Chair, Securities
Regulation Committee, Business Law Section, New York State Bar
Association dated January 22, 2016 (``New York State Bar Association
Letter''); Judith M. Shaw, President, North American Securities
Administrators Association (``NASAA''), and Maine Securities
Administrator, Washington, District of Columbia dated January 15,
2016 (``NASAA Letter''); Michael S. Quinn, Member and CCO, Q
Advisors dated January 13, 2016 (``Q Advisors Letter''); Howard
Spindel, Senior Managing Director, and Cassondra E. Joseph, Managing
Director, Integrated Management Solutions USA LLC dated January 13,
2016 (``IMS Letter''); Lisa Roth, President, Monahan & Roth, LLC
dated January 13, 2016 (``Roth Letter''); Mark Fairbanks, President,
Foreside Distributors dated January 13, 2016 (``Foreside Letter'');
Arne Rovell, Coronado Investments, LLC dated January 6, 2016
(``Coronado Letter''); Daniel H. Kolber, President/CEO, Intellivest
Securities, Inc. dated December 30, 2016 (``Intellivest Letter'');
Roger W. Mehle, Washington, District of Columbia dated December 29,
2015 (``Mehle Letter''); Donna B. DiMaria, Chairman of the Board of
Directors, and Lisa Roth, Board of Directors, Third Party Marketers
Association dated January 12, 2016 (``3PM Letter'') (letters
supporting the 3PM letter: Sajan K. Thomas, President, and Stephen
J. Myott, Chief Compliance Officer, Thomas Capital Group, Inc. dated
January 13, 2016; Richard A. Murphy, North Bridge Capital LLC,
Boston, Massachusetts dated January 13, 2016; Steven Jafarzadeh,
CAIA, CCO, Stonehaven, New York dated January 13, 2016; Dan Glusker,
Perkins Fund Marketing LLC dated January 13, 2016; Ron Oldenkamp,
President, Genesis Marketing Group dated January 13, 2016; Timothy
Cahill, President, Compass Securities Corporation dated January 13,
2016; Frank P. L. Minard, Managing Partner, XT Capital Partners, LLC
dated January 12, 2016).
---------------------------------------------------------------------------
The Commission is publishing this order to solicit comments on the
proposed rule change and to institute proceedings pursuant to Exchange
Act Section 19(b)(2)(B) \5\ to determine whether to approve or
disapprove the proposed rule change.
---------------------------------------------------------------------------
\5\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
Institution of proceedings does not indicate that the Commission
has reached any conclusions with respect to the proposed rule change,
nor does it mean that the Commission will ultimately disapprove the
proposed rule change. Rather, as discussed below, the Commission seeks
additional input on the proposed rule change and issues presented by
the proposal.
II. Description of the Proposed Rule Change \6\
---------------------------------------------------------------------------
\6\ The proposed rule change, as described in this Item II, is
excerpted, in part, from the Notice, which was substantially
prepared by FINRA. See supra note 3.
---------------------------------------------------------------------------
FINRA is proposing to create a separate rule set that would apply
to firms that meet the definition of ``capital acquisition broker''
(``CAB'') and elect to be governed under this rule set. FINRA states
that there are firms that are solely corporate financing firms that
advise companies on mergers and acquisitions, advise issuers on raising
debt and equity capital in private placements with institutional
investors, or provide advisory services on a consulting basis to
companies that need assistance analyzing their strategic and financial
alternatives. These firms often are registered as broker-dealers
because of their activities and because they may receive transaction-
based compensation as part of their services.
Nevertheless, FINRA believes that these firms do not engage in many
of the types of activities typically associated with traditional
broker-dealers. For example, these firms typically do not carry or act
as an introducing broker with respect to customer accounts, handle
customer funds or securities, accept orders to purchase or sell
securities either as principal or agent for the customer, exercise
investment discretion on behalf of any customer, or engage in
proprietary trading of securities or market-making activities.
FINRA is proposing to establish a separate rule set that would
apply exclusively to firms that meet the definition of ``capital
acquisition broker'' and that elect to be governed under this rule set.
CABs would be subject to the FINRA By-Laws, as well as core FINRA rules
that FINRA believes
[[Page 15589]]
should apply to all firms. The rule set would also include other FINRA
rules that are tailored to address CABs' business activities. A brief
description of the proposed rule set for CABs is contained below.
A. General Standards
Proposed CAB Rule 014 provides that all persons that have been
approved for membership in FINRA as a CAB and persons associated with
CABs shall be subject to the Capital Acquisition Broker rules and the
FINRA By-Laws (including the schedules thereto), unless the context
requires otherwise. Proposed CAB Rule 015 provides that FINRA Rule
0150(b) shall apply to the CAB rules. FINRA Rule 0150(b) provides that
the FINRA rules do not apply to transactions in, and business
activities relating to, municipal securities as that term is defined in
the Exchange Act.
CAB Rule 016 sets forth basic definitions modified as appropriate
to apply to CABs. The proposed definitions of ``capital acquisition
broker'' and ``institutional investor'' are particularly important to
the application of the rule set. The term ``capital acquisition
broker'' would mean any broker that solely engages in any 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 with respect to institutional investors in
connection with purchases or sales of unregistered securities; and
effecting 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.\7\
\7\ See proposed CAB Rule 016(c)(1).
---------------------------------------------------------------------------
A firm would be permitted to register as, or change its status to,
a CAB only if the firm solely engages in one or more of these
activities.
The term ``capital acquisition broker'' would not include any
broker or dealer that:
carries or acts as an introducing broker with respect
to customer accounts;
holds or handles customers' funds or securities;
accepts orders from customers to purchase or sell
securities either as principal or as agent for the customer (except
as permitted by paragraphs (c)(1)(F) and (G) of CAB Rule 016);
has investment discretion on behalf of any customer;
engages in proprietary trading of securities or market-
making activities; or
participates in or maintains an online platform in
connection with offerings of unregistered securities pursuant to
Regulation Crowdfunding or Regulation A under the Securities Act of
1933.\8\
\8\ See proposed CAB Rule 016(c)(2).
---------------------------------------------------------------------------
The term ``institutional investor'' would have the same meaning as
that term has under FINRA Rule 2210 (Communications with the Public),
with one exception. The term would include any:
bank, savings and loan association, insurance company
or registered investment company;
governmental entity or subdivision thereof;
employee benefit plan, or multiple employee benefit
plans offered to employees of the same employer, that meet the
requirements of Section 403(b) or Section 457 of the Internal
Revenue Code and in the aggregate have at least 100 participants,
but does not include any participant of such plans;
qualified plan, as defined in Section 3(a)(12)(C) of
the Exchange Act, or multiple qualified plans offered to employees
of the same employer, that in the aggregate have at least 100
participants, but does not include any participant of such plans;
other person (whether a natural person, corporation,
partnership, trust, family office or otherwise) with total assets of
at least $50 million; and
person acting solely on behalf of any such
institutional investor.
The definition also would include any person meeting the definition
of ``qualified purchaser'' as that term is defined in Section 2(a)(51)
of the Investment Company Act of 1940.\9\
---------------------------------------------------------------------------
\9\ See proposed CAB Rule 016(i). FINRA Rule 2210 does not
include ``qualified purchaser'' within its definition of
``institutional investor.''
---------------------------------------------------------------------------
B. FINRA Membership
The proposed CAB Rule 100 Series sets forth the requirements for
firms that wish to register as a CAB. The proposed CAB Rule 100 Series
generally incorporates by reference FINRA Rules 1010 (Electronic Filing
Requirements for Uniform Forms), and 1122 (Filing of Misleading
Information as to Membership or Registration), and NASD Rules 1011
(Definitions), 1012 (General Provisions), 1013 (New Member Application
and Interview), 1014 (Department Decision), 1015 (Review by National
Adjudicatory Council), 1016 (Discretionary Review by FINRA Board), 1017
(Application for Approval of Change in Ownership, Control, or Business
Operations), 1019 (Application to Commission for Review), 1090 (Foreign
Members), 1100 (Foreign Associates) and IM-1011-1 (Safe Harbor for
Business Expansions). Accordingly, a CAB applicant would follow the
same procedures for membership as any other FINRA applicant, with four
modifications.
First, an applicant for membership that seeks to qualify
as a CAB would have to state in its application that it intends to
operate solely as such.
Second, in reviewing an application for membership as a
CAB, the FINRA Member Regulation Department would consider, in addition
to the standards for admission set forth in NASD Rule 1014, whether the
applicant's proposed activities are consistent with the limitations
imposed on CABs under CAB Rule 016(c).
Third, proposed CAB Rule 116(b) sets forth the procedures
for an existing FINRA firm to change its status to a CAB. If an
existing firm is already approved to engage in the activities of a CAB,
and the firm does not intend to change its existing ownership, control
or business operations, it would not be required to file either a New
Member Application (``NMA'') or a Change in Membership Application
(``CMA''). Instead, such a firm would be required to file a request to
amend its membership agreement or obtain a membership agreement (if
none exists currently) to provide that: (i) The firm's activities will
be limited to those permitted for CABs under CAB Rule 016(c), and (ii)
the firm agrees to comply with the CAB rules.\10\
---------------------------------------------------------------------------
\10\ There would not be an application fee associated with this
request.
---------------------------------------------------------------------------
Fourth, proposed CAB Rules 116(c) and (d) set forth the
procedures for an existing CAB to terminate its status as such and
continue as a FINRA firm. Under Rule 116(c), such a firm would be
required to file a CMA with the FINRA Member Regulation Department, and
to amend its membership agreement to
[[Page 15590]]
provide that the firm agrees to comply with all FINRA rules.\11\
---------------------------------------------------------------------------
\11\ Absent a waiver, such a firm would have to pay an
application fee associated with the CMA. See FINRA By-Laws, Schedule
A, Section 4(i).
---------------------------------------------------------------------------
Under Rule 116(d), however, if during the first year following an
existing FINRA member firm's amendment to its membership agreement to
convert a full-service broker-dealer to a CAB pursuant to Rule 116(b) a
CAB seeks to terminate its status as such and continue as a FINRA
member firm, the CAB may notify the FINRA Membership Application
Program group of this change without having to file an application for
approval of a material change in business operations pursuant to NASD
Rule 1017. The CAB would instead file a request to amend its membership
agreement to provide that the member firm agrees to comply with all
FINRA rules, and execute an amended membership agreement that imposes
the same limitations on the member firm's activities that existed prior
to the member firm's change of status to a CAB.\12\
---------------------------------------------------------------------------
\12\ To the extent that the rules applicable to the member firm
had been amended since it had changed its status to a CAB, FINRA
would have the discretion to modify any limitations to reflect any
new rule requirements.
---------------------------------------------------------------------------
The proposed CAB Rule 100 Series also would govern the registration
and qualification examinations of principals and representatives that
are associated with CABs. These Rules incorporate by reference NASD
Rules 1021 (Registration Requirements--Principals), 1022 (Categories of
Principal Registration), 1031 (Registration Requirements--
Representatives), 1032 (Categories of Representative Registration),
1060 (Persons Exempt from Registration), 1070 (Qualification
Examinations and Waiver of Requirements), 1080 (Confidentiality of
Examinations), IM-1000-2 (Status of Persons Serving in the Armed Forces
of the United States), IM-1000-3 (Failure to Register Personnel) and
FINRA Rule 1250 (Continuing Education Requirements). Accordingly, CAB
firm principals and representatives would be subject to the same
registration, qualification examination, and continuing education
requirements as principals and representatives of other FINRA firms.
CABs also would be subject to FINRA Rule 1230(b)(6) regarding
Operations Professional registration.
C. Duties and Conflicts (CAB Rule 200 Series)
The proposed CAB Rule 200 Series would establish a streamlined set
of conduct rules. CABs would be subject to FINRA Rules 2010 (Standards
of Commercial Honor and Principles of Trade), 2020 (Use of
Manipulative, Deceptive or Other Fraudulent Devices), 2040 (Payments to
Unregistered Persons),\13\ 2070 (Transactions Involving FINRA
Employees), 2080 (Obtaining an Order of Expungement of Customer Dispute
Information from the CRD System), 2081 (Prohibited Conditions Relating
to Expungement of Customer Dispute Information), 2263 (Arbitration
Disclosure to Associated Persons Signing or Acknowledging Form U4), and
2268 (Requirements When Using Predispute Arbitration Agreements for
Customer Accounts).
---------------------------------------------------------------------------
\13\ The SEC has approved FINRA's rule change to adopt rules
relating to payments to unregistered persons for the consolidated
FINRA rulebook. See Regulatory Notice 15-07 (March 2015). FINRA Rule
2040 became effective on August 24, 2015.
---------------------------------------------------------------------------
CAB Rules 209 and 211 would impose know-your-customer and
suitability obligations similar to those imposed under FINRA Rules 2090
and 2111. CAB Rule 211(b) includes an exception to the customer-
specific suitability obligations for institutional investors similar to
the exception found in FINRA Rule 2111(b).
Proposed CAB Rule 221 is an abbreviated version of FINRA Rule 2210
(Communications with the Public), essentially prohibiting false and
misleading statements.
Under proposed CAB Rule 240, if a CAB or associated person of a CAB
had engaged in activities that would require the CAB to register as a
broker or dealer under the Exchange Act, and that are inconsistent with
the limitations imposed on CABs under CAB Rule 016(c), FINRA could
examine for and enforce all FINRA rules against such a broker or
associated person, including any rule that applies to a FINRA broker-
dealer that is not a CAB or to an associated person who is not a person
associated with a CAB.
FINRA has determined not to subject CABs to FINRA Rules 2121 (Fair
Prices and Commissions), 2122 (Charges for Services Performed), and
2124 (Net Transactions with Customers), since CABs' business model does
not raise the same concerns that Rules 2121, 2122 and 2124 are intended
to address.
Rule 2121 provides that, for securities in both listed and unlisted
securities, a member that buys for its own account from its customer,
or sells for its own account to its customer, shall buy or sell at a
price which is fair, taking into consideration all relevant
circumstances, including market conditions with respect to the security
at the time of the transaction, the expense involved, and the fact that
the member is entitled to a profit. Further, if the member acts as
agent for its customer in any such transaction, the member shall not
charge its customer more than a fair commission or service charge,
taking into consideration all relevant circumstances, including market
conditions with respect to the security at the time of the transaction,
the expense of executing the order and the value of any service the
member may have rendered by reason of its experience in and knowledge
of such security and the market therefor.
CABs would not be permitted to act as a principal in a securities
transaction. Accordingly, the provisions of Rule 2121 that govern
principal transactions would not apply to a CAB's permitted activities.
CABs would be permitted act as agent in a securities transaction
only in very narrow circumstances. CABs would be allowed to act as an
agent with respect to institutional investors in connection with
purchases or sales of unregistered securities. CABs also would be
permitted to effect 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 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.
In both instances, FINRA believes that these circumstances either
involve institutional parties that negotiate the terms of permitted
securities transactions without the need for the conditions set forth
in Rule 2121, or involve the sale of a business as a going concern,
which differs in nature from the types of transactions that typically
raise issues under Rule 2121.
Rule 2122 provides that charges, if any, for services performed,
including, but not limited to, miscellaneous services such as
collections due for principal, dividends, or interest; exchange or
transfer of securities; appraisals, safekeeping or custody of
securities, and other services shall be reasonable and not unfairly
discriminatory among customers. As discussed above, CABs typically
provide services to institutional customers that generally do not need
the protections that Rule 2122 offers, since these customers are
capable of negotiating fair prices for the services that CABs provide.
Moreover, CABs are not permitted to provide many of the services listed
in Rule 2122, such as collecting principal, dividends or interest, or
providing safekeeping or custody services.
[[Page 15591]]
Rule 2124 sets forth specific requirements for executing
transactions with customers on a ``net'' basis. ``Net'' transactions
are defined as a type of principal transaction, and CABs may not trade
securities on a principal basis. For these reasons, FINRA does not
believe it is necessary to include FINRA Rules 2121, 2122 and 2124 as
part of the CAB rule set.
CAB Rule 201 would subject CABs to FINRA Rule 2010 (Standards of
Commercial Honor and Principles of Trade), which requires a member, in
the conduct of its business, to observe high standards of commercial
honor and just and equitable principles of trade. Depending on the
facts, other rules, such as Rule 2010, may apply in situations in which
a CAB charged a commission or fee that clearly is unreasonable under
the circumstances.
D. Supervision and Responsibilities Related to Associated Persons (CAB
Rule 300 Series)
The proposed CAB Rule 300 Series would establish a limited set of
supervisory rules for CABs. CABs would be subject to FINRA Rules 3220
(Influencing or Rewarding Employees of Others), 3240 (Borrowing from or
Lending to Customers), and 3270 (Outside Business Activities of
Registered Persons).
Proposed CAB Rule 311 would subject CABs to some, but not all, of
the requirements of FINRA Rule 3110 (Supervision) and, consistent with
Rule 3110, is designed to provide CABs with the flexibility to tailor
their supervisory systems to their business models. CABs would be
subject to many of the provisions of Rule 3110 concerning the
supervision of offices, personnel, customer complaints, correspondence
and internal communications. However, CABs would not be subject to the
provisions of Rule 3110 that require annual compliance meetings
(paragraph (a)(7)), review and investigation of transactions
(paragraphs (b)(2) and (d)), specific documentation and supervisory
procedures for supervisory personnel (paragraph (b)(6)), and internal
inspections (paragraph (c)).
FINRA does not believe that the annual compliance meeting
requirement in FINRA Rule 3110(a)(7) should apply to CABs given the
nature of CABs' business model and structure. FINRA has observed that
most current FINRA member firms that would qualify as CABs tend to be
small and often operate out of a single office. In addition, the range
of rules that CABs would be subject to is narrower than the rules that
apply to other broker-dealers. Moreover, as noted above, CABs would be
subject to both the Regulatory and Firm Element continuing education
requirements. Accordingly, FINRA does not believe that CABs need to
conduct an annual compliance meeting as required under FINRA Rule
3110(a)(7).\14\ The fact that the annual compliance meeting requirement
would not apply to CABs or their associated persons in no way would
reduce their responsibility to have knowledge of and comply with
applicable securities laws and regulations and the CAB rule set.
---------------------------------------------------------------------------
\14\ For the same reasons, FINRA does not believe that FINRA
Rule 3110.04 should apply to CABs.
---------------------------------------------------------------------------
FINRA does not believe that FINRA Rule 3110(b)(2), which requires
members to adopt and implement procedures for the review by a
registered principal of all transactions relating to the member's
investment banking or securities business, or FINRA Rule 3110(d), which
imposes requirements related to the investigation of securities
transactions and heightened reporting requirements for members engaged
in investment banking services, should apply to CABs. CABs would not be
permitted to carry or act as an introducing broker with respect to
customer accounts, hold or handle customers' funds or securities,
accept orders from customers to purchase or sell securities except
under the narrow circumstances discussed above, have investment
discretion on behalf of any customer, engage in proprietary trading or
market-making activities, or participate in Crowdfunding or Regulation
A securities offerings. Accordingly, due to these restrictions, FINRA
does not believe a CAB's business model necessitates the application of
these provisions, which primarily address trading and investment
banking functions that are beyond the permissible scope of a CAB's
activities.\15\
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\15\ For the same reasons, FINRA does not believe that FINRA
Rule 3110.05 should apply to CABs.
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FINRA does not believe that the requirements of FINRA Rule
3110(b)(6) should apply to CABs. Paragraph (b)(6) generally requires a
member to have procedures to prohibit its supervisory personnel from
(1) supervising their own activities; and (2) reporting to, or having
their compensation or continued employment determined by, a person the
supervisor is supervising.\16\ FINRA also does not believe that FINRA
Rule 3110(c), which requires members to conduct internal inspections of
their businesses, should apply to CABs.
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\16\ FINRA Rule 3110(b)(6)(C)(i) and (ii). FINRA Rule 3110(b)(6)
also requires that a member's supervisory procedures include the
titles, registration status and locations of the required
supervisory personnel and the responsibilities of each supervisory
person as these relate to the types of business engaged in,
applicable securities laws and regulations, and FINRA rules, as well
as a record of the names of its designated supervisory personnel and
the dates for which such designation is or was effective. FINRA Rule
3110(b)(6)(A) and (B). In addition, paragraph (b)(6) requires a
member to have procedures reasonably designed to prevent the
standards of supervision required pursuant to FINRA Rule 3110(a)
from being compromised due to the conflicts of interest that may be
present with respect to an associated person being supervised. FINRA
Rule 3110(b)(6)(D).
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FINRA believes that a CAB's business model, which is geared toward
acting as a consultant in capital acquisition transactions, or acting
as an agent solely in connection with purchases or sales of
unregistered securities to institutional investors, or with the
transfer of ownership and control of a privately-held company, does not
give rise to the same conflicts of interest and supervisory concerns
that paragraph (b)(6) is intended to address. As discussed above, many
CABs operate out of a single office with a small staff, which reduces
the need for internal inspections of numerous or remote offices. In
addition, part of the purpose of creating a separate CAB rule set is to
streamline and reduce existing FINRA rule requirements where it does
not hinder investor protection. FINRA believes that the remaining
provisions of FINRA Rule 3110, coupled with the CAB Rule 200 Series
addressing duties and conflicts, will sufficiently protect CABs'
customers from potential harm due to insufficient supervision.\17\
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\17\ For the same reasons, FINRA does not believe that FINRA
Rules 3110.10, .12, .13, or .14 should apply to CABs. FINRA also
believes that it is unnecessary to apply FINRA Rule 3110.15 to CABs,
since the temporary program authorized by the rule expired on
December 1, 2015.
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Proposed CAB Rule 313 would require CABs to designate and identify
one or more principals to serve as a firm's chief compliance officer,
similar to the requirements of FINRA Rule 3130(a). CAB Rule 313 would
not require a CAB to have its chief executive officer (``CEO'') certify
that the member has in place processes to establish, maintain, review,
test and modify written compliance policies and written supervisory
procedures reasonably designed to achieve compliance with applicable
federal securities laws and regulations, and FINRA and MSRB rules,
which are required under FINRA Rules 3130(b) and (c). FINRA does not
believe the CEO certification is necessary given a CAB's narrow
business model and smaller rule set.
Proposed Rule 328 would prohibit any person associated with a CAB
from participating in any manner in a private securities transaction as
defined in
[[Page 15592]]
FINRA Rule 3280(e).\18\ FINRA does not believe that an associated
person of a CAB should be engaged in selling securities away from the
CAB, nor should a CAB have to oversee and review such transactions,
given its limited business model. This restriction would not prohibit
associated persons from investing in securities on their own behalf, or
engaging in securities transactions with immediate family members,
provided that the associated person does not receive selling
compensation.
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\18\ FINRA Rule 3280(e) defines ``private securities
transaction'' as ``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, provided however that
transactions subject to the notification requirements of NASD Rule
3050, 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, shall be excluded.''
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Proposed CAB Rule 331 would require each CAB to implement a written
anti-money laundering (``AML'') program. This is consistent with the
SEC's requirements and Chapter X of Title 31 of the Code of Federal
Regulations. Accordingly, the proposed rule is similar to FINRA Rule
3310 (Anti-Money Laundering Compliance Program); however, the proposed
rule contemplates that all CABs would be eligible to conduct the
required independent testing for compliance every two years.
E. Financial and Operational Rules (CAB Rule 400 Series)
The proposed CAB Rule 400 Series would establish a streamlined set
of rules concerning firms' financial and operational obligations. CABs
would be subject to FINRA Rules 4140 (Audit), 4150 (Guarantees by, or
Flow through Benefits for, Members), 4160 (Verification of Assets),
4511 (Books and Records--General Requirements), 4513 (Records of
Written Customer Complaints), 4517 (Member Filing and Contact
Information Requirements), 4524 (Supplemental FOCUS Information), 4530
(Reporting Requirements), and 4570 (Custodian of Books and Records).
Proposed CAB Rule 411 includes some, but not all, of the capital
compliance requirements of FINRA Rule 4110. CABs would be required to
suspend business operations during any period a firm is not in
compliance with the applicable net capital requirements set forth in
Exchange Act Rule 15c3-1, and the rule also would authorize FINRA to
direct a CAB to suspend its operation under those circumstances.
Proposed CAB Rule 411 also sets forth requirements concerning
withdrawal of capital, subordinated loans, notes collateralized by
securities, and capital borrowings.
CABs would not be subject to FINRA Rules 4370 (Business Continuity
Plans and Emergency Contact Information) or 4380 (Mandatory
Participation in FINRA BC/DR Testing Under Regulation SCI). FINRA does
not believe it would be necessary for a CAB to maintain a business
continuity plan (BCP), given a CAB's limited activities, particularly
since a CAB would not engage in retail customer account transactions or
clearance, settlement, trading, underwriting or similar investment
banking activities. Moreover, FINRA Rule 4380 relates to Rule SCI under
the Exchange Act, which is not applicable to a member that limits its
activities to those permitted under the CAB rule set.
Because CABs would not carry or act as an introducing broker with
respect to customer accounts, they would have more limited customer
information requirements than is imposed under FINRA Rule 4512.\19\
CABs would have to maintain each customer's name and residence, whether
the customer is of legal age (if applicable), and the names of any
persons authorized to transact business on behalf of the customer. CABs
would still have to make and preserve all books and records required
under Exchange Act Rules 17a-3 and 17a-4.
---------------------------------------------------------------------------
\19\ See proposed CAB Rule 451(b).
---------------------------------------------------------------------------
CAB Rule 452(a) establishes a limited set of requirements for the
supervision and review of a firm's general ledger accounts.
F. Securities Offerings (CAB Rule 500 Series)
The proposed CAB Rule 500 Series would subject CABs to certain
rules concerning securities offerings. CABs would be subject to FINRA
Rules 5122 (Private Placements of Securities Issued by Members) and
5150 (Fairness Opinions).
G. Investigations and Sanctions, Code of Procedure, and Arbitration and
Mediation (CAB Rules 800, 900 and 1000)
CABs would be subject to the FINRA Rule 8000 Series governing
investigations and sanctions of firms, other than FINRA Rules 8110
(Availability of Manual to Customers), 8211 (Automated Submission of
Trading Data Requested by FINRA), and 8213 (Automated Submission of
Trading Data for Non-Exchange-Listed Securities Requested by FINRA).
CABs would not be subject to FINRA Rule 8110 (Availability of
Manual to Customers), which requires members to make available a
current copy of the FINRA manual for examination by customers upon
request. If the Commission approves this proposed rule change, the CAB
rule set would be available through the FINRA Web site. Accordingly,
FINRA does not believe this rule is necessary for CABs.
CABs also would not be subject to FINRA Rules 8211 (Automated
Submission of Trading Data Requested by FINRA) or 8213 (Automated
Submission of Trading Data for Non-Exchange-Listed Securities Requested
by FINRA). Given that these rules are intended to assist FINRA in
requesting trade data from firms engaged in securities trading, and
that CABs would not engage in securities trading, FINRA does not
believe that these rules should apply to CABs.
CABs would be subject to the FINRA Rule 9000 Series governing
disciplinary and other proceedings involving firms, other than the
FINRA Rule 9700 Series (Procedures on Grievances Concerning the
Automated Systems). Proposed CAB Rule 900(c) would provide that any CAB
may be subject to a fine under FINRA Rule 9216(b) with respect to an
enumerated list of FINRA By-Laws, CAB rules and SEC rules under the
Exchange Act. Proposed CAB Rule 900(d) would authorize FINRA staff to
require a CAB to file communications with the FINRA Advertising
Regulation Department at least ten days prior to use if the staff
determined that the CAB had departed from CAB Rule 221's standards.
CABs would be subject to the FINRA Rule 12000 Series (Code of
Arbitration Procedure for Customer Disputes), 13000 Series (Code of
Arbitration Procedure for Industry Disputes) and 14000 Series (Code of
Mediation Procedure).
III. Summary of Comments
Commenters generally supported FINRA's proposal to develop a new
rule set for CABs. As discussed below, some commenters recommended that
the proposal include additional requirements or explanations in certain
aspects.
A. Review of Membership Application
One commenter suggested that FINRA should approve the membership
applications of new CABs within 60 days of the filing of the
application, provided that certain conditions are met, including: A
completed application; the required supervisory
[[Page 15593]]
principals, who have each taken and passed the applicable examinations;
and no significant disciplinary history or other red flag indications
of potential compliance problems.\20\
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\20\ See New York State Bar Association Letter. NASD Rule 1014
permits up to a 180 day review period absent an extension.
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B. Registration and Licensing
Two commenters requested that FINRA confirm that CABs may hold all
licenses previously sought and attained by their associated persons,
including Series 53, 4 and other licenses.\21\ One of these commenters
also suggested that CABs should not be subject to FINRA Rule 1230(b)(6)
\22\ regarding Operations Professional registration because of the
scope and nature of the examination.\23\ The other commenter suggested
that FINRA should exempt CAB Chief Compliance Officers (``CCOs'') from
the proposed requirement to obtain and maintain the Series 14 CCO
license because of the broad and comprehensive scope of the proposed
license.\24\ This commenter also sought clarification as to whether a
CAB's responsibility under Rule 209 \25\ is limited to learning the
essential facts of the agent.\26\
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\21\ See 3PM and M&R Letters.
\22\ Rule 1230 requires that each of the following persons be
registered with FINRA as an Operations Professional: (i) Senior
management with direct responsibility over the covered functions
under the Rule; (ii) any person designated by senior management
under the Rule as a supervisor, manager or other person responsible
for approving or authorizing work, including work of other persons,
in direct furtherance of each of the covered functions in the Rule,
as applicable, provided that there is sufficient designation of such
persons by senior management to address each of the applicable
covered functions; and (iii) persons with the authority or
discretion materially to commit a member's capital in direct
furtherance of the covered functions in the Rule or to commit a
member to any material contract or agreement (written or oral) in
direct furtherance of the covered functions in the Rule.
\23\ See 3PM Letter.
\24\ See M&R Letter.
\25\ Proposed Rule 209 states that every capital acquisition
broker shall use reasonable diligence to know (and retain) the
essential facts concerning every customer and concerning the
authority of each person acting on behalf of such customer. For
purposes of this Rule, facts ``essential'' to ``knowing the
customer'' are those required to (a) effectively service the
customer, (b) understand the authority of each person acting on
behalf of the customer, and (c) comply with applicable laws,
regulations and rules.
\26\ See M&R Letter.
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C. Registered Representative Exams
One commenter suggested that FINRA (outside of the rulemaking
context) establish new examinations specifically for the registered
representatives and supervisory principals of CABs that will test only
that subject matter relevant to the business of CABs.\27\
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\27\ See New York State Bar Association Letter.
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D. Prohibition on Private Securities Transactions
One commenter suggested that proposed Rule 328 (Prohibition on
Private Securities Transactions) \28\ should be revised to exclude: (1)
The investment advisory activities of associated persons who are also
employees or supervised persons of an investment adviser registered
with the SEC or a state, and (2) employees of a bank or trust company
engaged in securities or advisory activities that a bank may engage in
pursuant to the exceptions from the definition of broker or dealer in
Exchange Act Sections 3(a)(4) or (5) of Regulation R.\29\
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\28\ Proposed Rule 328 would prohibit persons associated with a
CAB from participating in any manner in a private securities
transaction as defined in FINRA Rule 3280(e).
\29\ See New York State Bar Association Letter.
---------------------------------------------------------------------------
Another commenter believes that FINRA's proposed CAB rule set
unduly prohibits sales of private placements to accredited investors
and therefore vitiates any usefulness or appeal of the CAB rules to
certain firms.\30\
---------------------------------------------------------------------------
\30\ See Mehle Letter.
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E. Secondary Transactions
As discussed above, the definition of CAB in proposed Rule 016(c)
includes, among the permissible activities of a CAB, ``qualifying,
identifying, soliciting, or acting as a placement agent or finder with
respect to institutional investors in connection with purchases or
sales of unregistered securities.'' One commenter interpreted that
description as including both primary issuances and secondary
transaction in unregistered securities and requested that FINRA confirm
the intent to include secondary transactions among the permitted
activities of a CAB.\31\
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\31\ See New York State Bar Association Letter.
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F. Grace Period for Reverses CAB Registration
One commenter states although a CAB firm has a year to decide if it
wants to become a registered broker-dealer, it is not convinced that
this one-year grace period is a sufficient amount of time for a firm to
determine if CAB status is appropriate for its business model.\32\ The
commenter states that a converted firm may not have sufficient data
within the first year to evaluate its decision fully and recommends
that this grace period be extended to at least 24 months or that there
be no grace time restrictions at all.\33\ This commenter suggested that
FINRA allow interim continued operations as a CAB (provided the firm is
in regulatory compliance) while an active CMA is being reviewed by
FINRA, with the firm remaining subject to all the CAB strictures
pending a final decision by FINRA on the CMA.\34\
---------------------------------------------------------------------------
\32\ Id.
\33\ Id.
\34\ Id.
---------------------------------------------------------------------------
G. Impermissible Activities
One commenter recommended that FINRA consider a grace period for
firms that unintentionally conduct activities beyond the scope of a
CAB's permissible activities.\35\
---------------------------------------------------------------------------
\35\ See 3PM Letter.
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H. CAB Rule Suggested Changes
Several commenters suggested various changes to FINRA's proposed
CAB rules. The significant suggested changes are described below.
1. Institutional Investor Definition
One comment suggested that FINRA consider lowering the threshold
for institutional investor preferably to $5 million or even less.\36\
This commenter also suggested that many broker-dealers would otherwise
qualify as a CAB except that sometimes investors investing in clients'
offerings may have less than $50 million in assets but are otherwise
sophisticated, knowledgeable and advised by competent attorneys.\37\
---------------------------------------------------------------------------
\36\ See Intellivest Letter.
\37\ Id.
---------------------------------------------------------------------------
In addition to institutional investors, one commenter suggested
that FINRA permit CAB transactions with certain other categories of
persons, specifically: (1) A ``knowledgeable employee'' as defined in
Investment Company Act Rule 3C-5, except that for purposes of the
institutional investor definition, ``covered company'' would mean
either the CAB or the issuer of the securities sold in the transaction;
and (2) a person designated by the issuer of the securities sold in the
transaction, provided that the CAB did not solicit the person or make a
recommendation to the person with respect to purchase of the
securities.\38\
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\38\ New York State Bar Association Letter. See also Coronado
Letter (requesting a de minimis and/or knowledgeable employee
exemption to allow for one-off capital-raises (under various
scenarios where accredited individuals working at alternative
investment firms and the funds they manage or other closely
affiliated individuals desire to invest) without violating the
proposed CAB rules).
---------------------------------------------------------------------------
This commenter also stated that there may be circumstances where
the issuer wishes to sell securities to persons who would not otherwise
qualify as institutional investors, but wants the transaction to be
effected by the CAB.\39\ In addition, the commenter believes that CAB
rules should not prohibit sales to those categories of persons, since
the
[[Page 15594]]
usual concerns about suitability determinations and content of
communications by member firms to retail investors would not apply.\40\
---------------------------------------------------------------------------
\39\ New York State Bar Association Letter.
\40\ Id.
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2. Know Your Customer
One commenter requested clarification of FINRA's statement that
``[i]t also recognizes that a CAB or its associated person may look to
an institutional investor's agent if the investor is represented by an
agent.'' \41\ Specifically, clarification as to what ``look to''
requires and whether this can be interpreted to mean that a CAB's
responsibility under Rule 209 is limited to learning the essential
facts of the agent.\42\
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\41\ See 3PM Letter.
\42\ Id.
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3. Suitability
One commenter generally agreed with Rule 211 (Suitability), but
believes that the rule as proposed fails by requiring the suitability
analyses to be performed before any recommendation is made.\43\ The
commenter believes that the rule does not recognize that the process of
diligence is ongoing, in many cases can take several months to several
years before an investment decision is made, and often does not, and
should not conclude until the deal is closed. The commenter also
believes that Rule 211 should emphasize this point and encourage
registered representatives to periodically review their suitability
analysis throughout the offering process, but no less frequently than
once before the subscription agreement or relevant contract is signed
and due diligence is as complete as it can be at that particular
time.\44\
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\43\ Id. Rule 211 states that a capital acquisition broker or an
associated person of a capital acquisition broker must have a
reasonable basis to believe that a recommended transaction or
investment strategy (as defined in FINRA Rule 2111) involving a
security or securities is suitable for the customer, based on the
information obtained through the reasonable diligence of the broker
or associated person to ascertain the customer's investment profile.
\44\ 3PM Letter.
---------------------------------------------------------------------------
One commenter stated that CABs are not making recommendations in
the traditional definition of the term, and therefore, as an example,
will not have insight into the overall composition of the institutional
investor's portfolio--as a retail broker would have over one of their
accounts.\45\ Accordingly, this commenter suggested that the rules
should address some type of minimum compliance that would be
appropriate in these situations. Further, the commenter suggested that
a demonstrable best efforts basis may be a satisfactory alternative in
such instances.\46\
---------------------------------------------------------------------------
\45\ Id.
\46\ Id.
---------------------------------------------------------------------------
4. Commissions/Fees
One commenter stated that applying Rule 2010 (Standards of
Commercial Honor and Principles of Trade) in situations in which a CAB
charged a commission or fee that clearly is unreasonable under the
circumstances may create an interpretive issue between the two sets of
rules.\47\
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\47\ IMS Letter.
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5. Supervisory Procedures
One commenter stated that requirements related to supervisory
procedures for supervisors should not be required for CABs.\48\ This
commenter also recommended that FINRA clarify its expectations with
respect to email review.\49\ Specifically, the commenter suggested that
the rules should note that expectations for email review should be
tailored according to the CAB's business and that such expectations
would not be as stringent as those for broker-dealers engaged in non-
CAB activities.\50\
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\48\ Foreside Letter.
\49\ Id.
\50\ Id.
---------------------------------------------------------------------------
6. Cybersecurity
One commenter recommended that FINRA clarify the expectations with
respect to cybersecurity.\51\ Specifically, while the proposal suggests
that a CAB not be required to have a business continuity plan, the
commenter suggested that the final rules include a requirement to have
appropriate cybersecurity/information security programs in place,
tailored to the CAB's business.\52\
---------------------------------------------------------------------------
\51\ Id.
\52\ Id.
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I. Rules Beyond FINRA's CAB Rules
1. SIPC
One commenter stated that the CAB designation should be added to
the list of exempt entities contained in the SIPC rules (although the
commenter understands that FINRA is not in a position to alter the
current SIPC requirement).\53\
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\53\ Q Advisors Letter.
---------------------------------------------------------------------------
2. Net Capital
One commenter expressed concern that FINRA will force existing
FINRA members and new applicants who now or will operate as so-called
``nickel BDs'' to become CABs, if for no other reason than to vindicate
FINRA's questionable statistics of eligible firms.\54\ This commenter
also disagreed with the fact that although CABs may nominally advise an
issuer of private funds on its capital raising efforts, FINRA's
customer limitations for CABs only allow them to contact institutional
investors.
---------------------------------------------------------------------------
\54\ IMS Letter.
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One commenter objected to what it believes is FINRA's failure to
change or in any way modify the net capital, recordkeeping and
reporting requirements applicable to CABs.\55\ This commenter stated
that compliance with the Financial Responsibility and Net Capital rules
remains the same for both CABs and FINRA-registered BDs, and that there
is no relief from the annual audit requirement, which, in light of
auditors having to comply with onerous PCAOB and SEC rules, has become
a significant expense to all FINRA member firms regardless of size.\56\
---------------------------------------------------------------------------
\55\ Id.
\56\ Id.
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Similarly, one commenter stated that the FINRA proposal should
address the capital requirements, which appear to be unnecessary based
on the business model of CABs and also address the requirement for a
PCAOB audit in light of the streamlined rule set seems wholly out of
line, excessive and meaningless to investor protections.\57\
---------------------------------------------------------------------------
\57\ See M&R Letter.
---------------------------------------------------------------------------
One commenter suggested that proposed CAB Rule 411 \58\ should
remove the minimum net capital requirement of $5,000 currently applied
to CAB members.\59\ While the commenter understood that this is outside
of FINRA's authority, the commenter urged the SEC to review the
calculation of net capital for CABs and modify the rule so that the
nature of a CAB's business does not cause it to have to improperly
report its financial condition to FINRA.\60\
---------------------------------------------------------------------------
\58\ Rule 411 states that unless otherwise permitted by FINRA, a
capital acquisition broker must suspend all business operations
during any period in which it is not in compliance with applicable
net capital requirements set forth in Exchange Act Rule 15c3-1.
\59\ See 3PM Letter.
\60\ Id.
---------------------------------------------------------------------------
3. Audit
One commenter believed FINRA should eliminate the audit requirement
altogether for broker-dealers that never hold securities or cash
belonging to others.\61\ Another commenter also suggested that FINRA
has not made any effort to have the SEC change Rule 17a-5 to exclude
CABs from the annual audit requirement, or to require a review instead
of an audit.\62\
---------------------------------------------------------------------------
\61\ See IMS Letter.
\62\ See Mehle Letter.
---------------------------------------------------------------------------
Another commenter suggested that annual compliance meetings and
annual
[[Page 15595]]
inspections should not be required for CABs.\63\
---------------------------------------------------------------------------
\63\ See Foreside Letter.
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4. Anti-Money Laundering
One commenter requests that the SEC work with the appropriate
authorities to revisit the AML responsibilities of CABs and consider
requiring U.S. registered entities, such as registered investment
advisers, to share certain data with FINRA member firms so that all
registered participants may satisfy their respective compliance
obligations in the most complete and accurate manner possible.\64\ In
addition, this commenter sought the SEC's confirmation that the terms
and conditions of the no[hyphen]action letters initially dated 2004 and
extended by subsequent no[hyphen]action letter in January 2015 apply to
CABs to the extent that customer identification is reasonable performed
by a federally regulated entity under a contractual obligation.\65\
---------------------------------------------------------------------------
\64\ See 3PM Letter.
\65\ Id.
---------------------------------------------------------------------------
5. Form Custody
One commenter urged FINRA to make efforts to have the SEC eliminate
the quarterly ``Form Custody'' FOCUS report for CABs.\66\
---------------------------------------------------------------------------
\66\ Mehle Letter.
---------------------------------------------------------------------------
J. State Regulation
One commenter suggested that the Commission, FINRA, and NASAA
should cooperate to more fully analyze the interaction between the CAB
proposal and state registration requirements to better harmonize the
application of these provisions.\67\ This commenter suggested that the
most relevant provisions to it are the proposal's inclusion of firms
that 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.\68\
---------------------------------------------------------------------------
\67\ NASAA Letter.
\68\ Id.
---------------------------------------------------------------------------
The commenter indicated that it would welcome the opportunity to
work with FINRA and the Commission on the issues presented by the
proposal, and encouraged the Commission to delay approval of the
proposal until there has been an opportunity to more fully explore
these issues.\69\
---------------------------------------------------------------------------
\69\ Id.
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IV. Proceedings to Determine Whether to Approve or Disapprove SR-FINRA-
2015-054 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Exchange Act
Section 19(b)(2)(B) to determine whether the proposed rule change
should be approved or disapproved.\70\ Institution of proceedings
appears appropriate at this time in view of the legal and policy issues
raised by the proposal. As noted above, institution of proceedings does
not indicate that the Commission has reached any conclusions with
respect to any of the issues involved. Rather, the Commission seeks and
encourages interested persons to comment on the issues presented by the
proposed rule change and provide the Commission with arguments to
support the Commission's analysis as to whether to approve or
disapprove the proposal.
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\70\ 15 U.S.C. 78s(b)(2). Exchange Act Section 19(b)(2)(B)
provides that proceedings to determine whether to disapprove a
proposed rule change must be concluded within 180 days of the date
of publication of notice of the filing of the proposed rule change.
The time for conclusion of the proceedings may be extended for up to
an additional 60 days if the Commission finds good cause for such
extension and publishes its reasons for so finding or if the self-
regulatory organization consents to the extension.
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Pursuant to Exchange Act Section 19(b)(2)(B),\71\ the Commission is
providing notice of the grounds for disapproval under consideration. In
particular, Exchange Act Section 15A(b)(6) \72\ requires, among other
things, that FINRA rules must be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. In addition, Exchange Act Section 15A(b)(9) \73\
requires that FINRA rules not impose any unnecessary or inappropriate
burden on competition.
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\71\ 15 U.S.C. 78s(b)(2)(B).
\72\ 15 U.S.C. 78o-3(b)(6).
\73\ 15 U.S.C. 78o-3(b)(9).
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The Commission believes FINRA's proposed rule change raises
questions as to whether it is consistent with the requirements of
Exchange Act Sections 15A(b)(6) and 15A(b)(9).
V. Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues raised by the proposed rule change. In particular, the
Commission invites the written views of interested persons on whether
the proposed rule change is inconsistent with Sections 15A(b)(6) and
15A(b)(9), or any other provision, of the Exchange Act, or the rules
and regulations 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.\74\
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\74\ Exchange Act Section 19(b)(2), as amended by the Securities
Acts Amendments of 1975, Pub. L. 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).
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Interested persons are invited to submit written data, views, and
arguments by April 13, 2016 concerning whether the proposed rule change
should be approved or disapproved. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
May 9, 2016. 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 rule-comments@sec.gov. Please include
File Number SR-FINRA-2015-02 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-2015-054. 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 Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than
[[Page 15596]]
those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principle office of FINRA. All
comments received will be posted without change. The Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make publicly available.
All submissions should refer to File Number SR-FINRA-2015-054 and
should be submitted on or before April 13, 2016. If comments are
received, any rebuttal comments should be submitted by May 9, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\75\
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\75\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-06453 Filed 3-22-16; 8:45 am]
BILLING CODE 8011-01-P
