Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Amend the FINRA Capital Acquisition Broker (“CAB”) Rules

<NOTICE> SECURITIES AND EXCHANGE COMMISSION <DEPDOC>[Release No. 34-103945; File No. SR-FINRA-2025-005]</DEPDOC> <SUBJECT>Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Amend the FINRA Capital Acquisition Broker (“CAB”) Rules</SUBJECT> <DATE>September 11, 2025.</DATE> <HD SOURCE="HD1">I. Introduction</HD> On June 4, 2025, the Financial Industry Regulatory Authority, Inc. (“FINRA”) filed with the Securities and Exchange Commission (“SEC” or “Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act”)  <SU>1</SU> <FTREF/> and Rule 19b-4 thereunder, <SU>2</SU> <FTREF/> a proposed rule change to amend certain FINRA Capital Acquisition Broker Rules (“CAB Rules”). Specifically, the proposed rule change would amend the CAB Rules to: permit CABs to qualify, identify, solicit, or act as placement agents or finders on behalf of an issuer in connection with a sale of newly issued unregistered securities to an expanded scope of investors; allow CABs, in limited circumstances, to qualify, identify, solicit, or act as placement agents or finders on behalf of an institutional investor that seeks to sell unregistered securities that it owns; amend CAB Rule 328 to permit CAB associated persons to participate in private securities transactions, subject to the requirements of FINRA Rule 3280 (Private Securities Transactions of an Associated Person); codify existing FINRA guidance on CAB compensation; and replace a reference to a withdrawn SEC no-action letter with a reference to a corresponding Exchange Act provision. <SU>3</SU> <FTREF/> <FTNT> <SU>1</SU>  15 U.S.C. 78s(b)(1). </FTNT> <FTNT> <SU>2</SU>  17 CFR 240.19b-4. </FTNT> <FTNT> <SU>3</SU>   <E T="03">See</E> Exchange Act Release No. 103216 (June 10, 2025), 90 FR 25396 (June 16, 2025) (File No. SR-FINRA-2025-005) (“Notice”). </FTNT> The proposed rule change was published for comment in the <E T="04">Federal Register</E> on June 16, 2025. <SU>4</SU> <FTREF/> The public comment period closed on July 7, 2025. The Commission received comment letters related to this filing. <SU>5</SU> <FTREF/> On July 17, 2025, FINRA consented to extend until September 12, 2025, the time period in which the Commission must approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to approve or disapprove the proposed rule change. <SU>6</SU> <FTREF/> <FTNT> <SU>4</SU>   <E T="03">See id.</E> </FTNT> <FTNT> <SU>5</SU>  The comment letters are available at <E T="03">https://www.sec.gov/comments/sr-finra-2025-005/srfinra2025005.htm.</E> </FTNT> <FTNT> <SU>6</SU>   <E T="03">See</E> letter from Joseph Savage, Vice President and Associate General Counsel, FINRA (dated Jul. 17, 2025), <E T="03">https://www.finra.org/sites/default/files/2025-07/sr-finra-2025-005-extension1.pdf.</E> </FTNT> The Commission is publishing this order pursuant to Section 19(b)(2)(B) of the Exchange Act  <SU>7</SU> <FTREF/> to institute proceedings to determine whether to approve or disapprove the proposed rule change. <FTNT> <SU>7</SU>  15 U.S.C. 78s(b)(2)(B). </FTNT> <HD SOURCE="HD1">II. Description of the Proposed Rule Change</HD> <HD SOURCE="HD2">A. Background</HD> A capital acquisition broker (“CAB”) is a FINRA member firm that limits its activities to certain specified functions: “essentially acting as placement agents for sales of unregistered securities to institutional investors; acting as intermediaries in connection with the change of control of privately held companies; and advising companies and private equity funds on capital raising and corporate restructuring.”  <SU>8</SU> <FTREF/> CABs are not permitted to engage in broader broker-dealer activities, such as “accepting customers' trading orders, carrying customer accounts, handling customers' funds or securities, or engaging in proprietary trading or market-making.”  <SU>9</SU> <FTREF/> In light of the limited CAB business model, FINRA permits eligible member firms to elect CAB status and supervision under the CAB Rules. <SU>10</SU> <FTREF/> As compared to the FINRA rules applicable to non-CAB member firms, the CAB Rules impose “fewer restrictions” and “less extensive supervisory requirements” on CABs given their limited activities. <SU>11</SU> <FTREF/> <FTNT> <SU>8</SU>  Notice at 25396; <E T="03">see also</E> CAB Rule 016(c) (identifying the limited functions of a CAB). </FTNT> <FTNT> <SU>9</SU>  Notice at 25396 (citing CAB Rule 016(c)(2)). </FTNT> <FTNT> <SU>10</SU>   <E T="03">Id.; see</E> CAB Rules 112, 116(b). </FTNT> <FTNT> <SU>11</SU>  Notice at 25396. </FTNT> <HD SOURCE="HD2">B. The Proposed Rule Change</HD> The proposed rule change addresses multiple aspects of the CAB Rules, and this Order addresses each proposed rule change in turn. <HD SOURCE="HD3">1. Sales of Newly Issued Unregistered Securities</HD> The CAB Rules currently permit a CAB to, among other things, “qualify[ ], identify[ ], solicit[ ], or act[ ] as a placement agent or finder [ ] on behalf of an issuer in connection with a sale of [newly issued], unregistered securities to institutional investors.”  <SU>12</SU> <FTREF/> The proposed rule change would broaden this permissible activity by expanding the definition of institutional investor to include any “eligible employee,” as defined under proposed CAB Rules 016(i)(8) and 016(m). <SU>13</SU> <FTREF/> Under the proposed rule change, an “eligible employee” would mean, “with respect to an issuer for which the [CAB] has provided services to the issuer or a control person permitted under [CAB Rule 016(c)(1)(F) or (G)]: (1) any `Knowledgeable Employee' as defined in Investment Company Act Rule 3c-5 (`Rule 3c-5') with respect to services provided to an issuer that is a Covered Company as defined in Rule 3c-5 or services provided to an Affiliated Management Person of such Covered Company as defined in Rule 3c-5; and (2) the president, any vice president in charge of a principal business unit, division, or function (such as sales, administration, or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions, director, trustee, general partner, advisory board member, or person serving in a similar capacity, of an issuer that is not a Covered Company as defined in Rule 3c-5.”  <SU>14</SU> <FTREF/> <FTNT> <SU>12</SU>  CAB Rule 016(c)(1)(F). </FTNT> <FTNT> <SU>13</SU>  Notice at 25399; <E T="03">see</E> CAB Rules 016(i)(8), 016(m). </FTNT> <FTNT> <SU>14</SU>  Proposed CAB Rule 016(i)(8), 016(m). </FTNT> <HD SOURCE="HD3">2. Secondary Transactions</HD> The CAB Rules currently prohibit a CAB from acting as a placement agent or finder “in connection with secondary transactions involving unregistered securities, except when the transaction is in connection with the change of ownership or control of a [privately held] company.”  <SU>15</SU> <FTREF/> The proposed rule change would broaden the circumstances in which a CAB could participate in a secondary transaction. <SU>16</SU> <FTREF/> Specifically, the proposed rule change would permit CABs to “qualify[ ], identify[ ], solicit[ ], or act[ ] as a placement agent or finder on behalf of an institutional investor that seeks to sell unregistered securities that it owns, provided that: (i) the purchaser of such securities is an institutional investor; and (ii) the sale of such securities qualifies for an exemption from registration under the Securities Act.”  <SU>17</SU> <FTREF/> <FTNT> <SU>15</SU>  Notice at 25401. </FTNT> <FTNT> <SU>16</SU>   <E T="03">See id.</E> </FTNT> <FTNT> <SU>17</SU>  Proposed CAB Rule 016(c)(1)(H). </FTNT> <HD SOURCE="HD3">3. Private Securities Transactions</HD> CAB Rule 328 currently prohibits any person associated with a CAB from participating “in any manner in a private securities transaction.”  <SU>18</SU> <FTREF/> For purposes of this rule, a “private securities transaction” is “any securities transaction outside the regular course or scope of an associated person's employment with a member, including, though not limited to, new offerings of securities which are not registered with the Commission.”  <SU>19</SU> <FTREF/> In contrast, FINRA Rule 3280 permits associated persons of non-CAB member firms to participate in private securities transactions, so long as they comply with certain restrictions. <SU>20</SU> <FTREF/> The proposed rule change would eliminate the prohibition for CABs, and it would permit associated persons of CABs to participate in private securities transactions to the same extent as those of non-CAB FINRA member firms, subject to compliance with FINRA Rule 3280. <SU>21</SU> <FTREF/> <FTNT> <SU>18</SU>  CAB Rule 328. </FTNT> <FTNT> <SU>19</SU>   <E T="03">See id.</E> (cross-referencing FINRA Rule 3280(e) for the definition of a private securities transaction). The definition also excludes the following from the scope of a private securities transaction: “transactions subject to the notification requirements of Rule 3210, transactions among immediate family members (as defined in FINRA Rule 5130), for which no associated person receives any selling compensation, and personal transactions in investment company and variable annuity securities.” FINRA Rule 3280(e); CAB Rule 328. </FTNT> <FTNT> <SU>20</SU>  FINRA Rule 3280. FINRA Rule 3280 imposes certain notice, approval, and supervision requirements where an associated person of a FINRA member firm seeks to participate in a private securities transaction. </FTNT> <FTNT> <SU>21</SU>  Proposed CAB Rule 328. </FTNT> <H ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 20k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━