FINRA Publishes Regulatory Notice Clarifying its Capital Acquisition Broker Rules and Sets Effective Date for Implementation

On October 17, 2016, FINRA published Regulatory Notice 16-37 setting an effective date for implementation of its new Capital Acquisition Broker (“CAB”) rules (“CAB Rules”).  The CAB Rules, which codify the creation and regulation of a new FINRA Membership category designed for broker/dealers that restrict their activities to certain designated corporate finance transactions, are discussed in greater detail in a recent Parker MacIntyre blog post (see “SEC Approves FINRA’s Capital Acquisition Broker Rules (“CAB Rules”)”). 

Regulatory Notice 16-37 also clarifies an aspect of CAB regulation, especially relevant to CABs engaging in private fund placement agent activity, that we identified in our last blog post on CABs.  Specifically, we noted that by choosing to include “qualified purchasers” (as defined in the Investment Company Act) but not “accredited investors” (as defined in Reg D under the 1933 Act) in its definition of “institutional investor,” the CAB Rules appeared to restrict private fund placement agent activity by CABs to 3(c)(7) private funds as opposed to 3(c)(1) private funds.  Recall that private funds relying on section 3(c)(7) of the Investment Company Act must, among other things, only admit qualified purchasers as investors; while, on the other hand, private funds relying on section 3(c)(1) may also admit accredited investors.

In Regulatory Notice 16-37, FINRA points out that under the CAB Rules, a CAB would still be permitted to solicit institutional investors to invest in a 3(c)(1) private fund, despite that fund having issued shares to persons who do not meet the definition of “institutional investor” under CAB Rule 016(i), so long as the CAB does not solicit, offer, act as a placement agent or receive compensation in connection with the sale of shares to any person who is not an institutional investor.  Similarly, in the process of qualifying investors to determine whether they meet the definition of “institutional investor,” a CAB may contact and receive information from persons who do not meet this definition.

As stated in Regulatory Notice 16-37, the CAB rules become effective on April 14, 2017.  However, in order to provide new CAB applicants with lead time to apply for FINRA membership and obtain the necessary qualifications and registrations, CAB Rules 101-125 will become effective on January 3, 2017.  Accordingly, pursuant to that subset of the CAB Rules, FINRA will begin accepting applications for firms that are not broker-dealers but wish to become CABs, for existing member firms requesting to elect CAB status, and for CAB associated person registration and qualification, on January 3, 2017.


Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others.  Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including compliance with federal and state laws and rules.  Please visit our website for more information.