By John M. Jascob, J.D., LL.M.
NASAA has expressed concern that regulatory gaps created by FINRA’s proposed rules for merger and acquisition (M&A) brokers could negatively impact firms doing business in that space. In a letter commenting on FINRA’s proposed Capital Acquisition Broker Rules, NASAA called for cooperation between the SEC, FINRA, and NASAA in order to better harmonize FINRA’s proposal with NASAA’s own model rule and state registration requirements.
In January 2014, the staff of the SEC’s Division of Trading and Markets granted no-action relief from the broker-dealer registration requirements of the Exchange Act to certain brokers who facilitate mergers, acquisitions, business sales, and business combinations. In September 2015, NASAA adopted a model rule that would exempt M&A brokers from state registration. In order to aid uniformity, the provisions of NASAA’s model rule were designed to parallel language contained in the Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2015 (S. 1010) pending before Congress.
CAB proposal. NASAA observed that under FINRA’s proposal, firms that qualify for the SEC’s no-action relief would be permitted to register with FINRA as a capital acquisition broker (CAB) or, if already a FINRA member, switch their registration status to CAB registration. Once qualified as a CAB, firms would be subject to a particular set of FINRA rules aimed at regulating these firms’ business models. FINRA's approach may be problematic, however, because the no-action letter underpinning FINRA’s proposal differs from both the proposed federal legislation in S. 1010 and the NASAA model rule. As a result, there could be regulatory gaps in light of differences between the definitions of M&A brokers and the application of other provisions.
For example, NASAA explained, there are differences related to the scope and breadth of the statutory disqualification provisions contained in the SEC’s no-action letter and the NASAA model rule. Consequently, a firm may qualify in certain instances for both the no-action relief with the SEC and CAB registration with FINRA, but may still require full registration as a broker-dealer at the state level. Moreover, FINRA membership in any capacity, CAB or otherwise, could trigger state registration requirements. In NASAA’s view, these issues need further examination and analysis in order to achieve the goal of reducing the regulatory burdens on M&A brokers.