FINRA Proposes New “Limited Corporate Financing Broker”
FINRA has proposed a new category of “limited corporate financing broker” that would be subject to some, but not all, of the FINRA rules. To qualify, a LCFB would be required to limit its activities to advising issuers or private equity funds concerning securities offerings or other capital raising activities, advising on the purchase/sale of assets or mergers, advising on the hiring of an investment banker, assisting in the preparation of offering materials, providing fairness opinions, and identifying institutional investors. An LCFB could not provide investment advice under a grant of investment discretion, engage in proprietary trading, carry customer accounts, or accept orders. An LCFB would be subject to most of the basic FINRA rules (e.g. code of conduct, know-your-customer, supervision, licensing, AML) but the requirements would be streamlined to apply to the LCFB’s limited activities.
OUR TAKE: We are not really sure how this LCFB category reconciles with the SEC’s recent no-action relief exempting M&A brokers from BD registration (See http://blog.cipperman.com/2014/02/07/no-action-relief-from-bd-registration-for-ma-brokers.aspx). If an entity is exempt from registration in the first place, FINRA can’t require it to register even as some sort of limited purpose LCFB. Also, we believe that FINRA should go further in exempting an LCFB from more of the FINRA rules including exemptions from obtaining securities licensing for individuals.