House legislature has been introduced to provide for a notice-filing registration procedure for
brokers performing services in connection with the transfer of ownership of
smaller privately held companies and to provide for regulation appropriate to
the limited scope of the activities of such brokers. Sponsored by Rep. Bill
Huizenga (R-Mich), the Small Business Mergers, Acquisitions, Sales, and
Brokerage Simplification Act, HR 2274, is designed to scale federal regulation of
securities broker-dealers with respect to privately negotiated business sales,
mergers, and acquisitions.
At a recent hearing on capital formation conducted by the
House Capital Markets Subcommittee, Rep. Huizenga noted that an SEC working
group has been studying this issue for a number of ways, but the Commission has
not moved with recommendations. Thus, Rep. Huizenga concluded that a
legislative tool is needed.
H.R. 2274 would add a new subsection to Section 15 of the
Exchange Act, which governs broker-dealer registration, to reduce the
regulatory costs incurred by sellers and buyers of small and midsized privately
held companies for professional business brokerage services, while enhancing their
protection through well defined, appropriately scaled, and cost effective
federal securities regulation. The legislation would direct the SEC to create a
simplified system of registration through a public notice filing, publicly
available on the SEC’s website, and would require appropriate client
disclosures, pertaining to M&A brokers and their associates. The
legislation would also direct the SEC to tailor its rules governing M&A
brokers in light of the limited scope of their activities, the nature of privately
negotiated M&A transactions, and the active involvement of buyers and
sellers in those transactions.
In testimony at the hearing Shane Hansen, Warner, Norcross
& Judd, noted that H.R. 2274 would preserve important investor protections
by allowing federal law to continue to control the capital, custody, margin,
financial responsibility, recordkeeping, bonding, and financial or operational
reporting requirements applicable to M&A brokers, tailored by the SEC to
their circumstances. Statutory disqualifications would continue to apply. The
SEC, in coordination with state securities regulators, would establish the
content of the notice registration and disclosures, and could establish uniform
and consistent standards of training, experience, competence, and
qualifications for the associates of M&A brokers, presently prescribed by
FINRA.
M&A brokers would be exempt from membership in and
regulation by FINRA. Existing state securities laws would continue to apply.
Being SEC-registered, an M&A broker could exchange client referrals with
fully registered broker-dealers, noted Mr. Hansen thus better assuring that
small business clients could be cost effectively served by appropriately
regulated brokers. M&A brokers could not have custody of the funds or securities exchanged by the
parties. An M&A broker could not be involved in capital-raising beyond the
context of M&A transactions and could not be engaged by an issuer in a
public offering of its securities.
At the hearing, Mr. Hansen testified that the public policy
considerations supporting H.R. 2274 began in 2005 with the American Bar
Association, Business Law Section, Report and Recommendations of the Private
Placement Broker-Dealer Task Force. A similar recommendation was made the next
year in the Report of the Advisory Committee on Smaller Public Companies.
Following the issuance of these independent reports, working drafts of proposed
rules to accomplish these recommendations were developed by the Alliance of
Merger & Acquisition Advisors with the support of the International
Association of Business Brokers, and submitted to the SEC and NASAA in 2007 and
2008. A proposal to appropriately scale federal regulation of M&A
intermediaries and business brokers has been among the top recommendation at
the Government-Industry Forum on Small Business Capital Formation hosted by the
SEC.
The SEC has been studying these issues, as acknowledged by
former SEC Chairman Schapiro, but has not engaged in rulemaking. In December
2011, a bipartisan group of eight House members wrote to then SEC Chairman
Schapiro asking about the status of the recommendations from past
SEC-Government Small Business Capital Formation Forums. Chairman Schapiro’s
response of Jan 11, 2012 was that the Forum recommended that the SEC adopt a
rule providing an exemption from federal broker-dealer registration and FINRA membership
for M&A intermediaries and business brokers involved in the purchaser and
sale, exchange and transfer of ownership of privately-owned businesses, subject
to the states exercising primary regulatory supervision over these activities under
state law. Chairman Schapiro directed SEC staff to carefully analyze the Forum’s
recommendation and develop options for the Commission to consider in revising
regulations applicable to M&A intermediaries serving small businesses.