February 28, 2014

FINRA Proposes New Regulatory Regime for M&A Brokers

A few days ago, FINRA proposed a new regulatory regime – through Regulatory Notice 14-09 – for firms that limit their activities to advising companies and private equity funds on M&A, capital raising and corporate restructuring. This proposal fits with the SEC’s new position that private M&A brokers are not required to register as brokers (see the memos posted on this).

As noted in this memo by DLA Piper’s Ed Johnsen:

Many firms limit their business to corporate advisory services, but this nevertheless can fall within the broad definition of broker-dealer activity. Such firms advise companies on mergers and acquisitions, assist them in raising capital in private placements to institutional investors and/or help them assess strategic and financial options.

The SEC and FINRA (and, from time to time, the courts) have taken the position that such firms must register as broker-dealers because they are involved in key points in the distribution of securities. This is especially true when such firms receive transaction-based compensation for their services.

Realizing that such firms do not engage in most of the activities typically associated with broker-dealers, FINRA is proposing a bespoke set of rules for what they now refer to as “limited corporate financing brokers.”