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.