Category: Broker-Dealer

Broker-Dealer: A Broker is defined in Section 3(a)(4)(A) of the Exchange Act as any person engaged in the business of effecting transactions in securities for the account of others and, as such, is required to register pursuant to Section 15(a) of the Exchange Act…

Nov222016

SEC Has Approved FINRA’s New Category Of Broker-Dealer For “Capital Acquisition Brokers”

ABA Journal’s 10th Annual Blawg 100

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On August 18, 2016, the SEC approved FINRA’s rules implementing a new category of broker-dealer called “Capital Acquisition Brokers” (“CABs”), which limit their business to corporate financing transactions.  FINRA first published proposed rules on CABs in December 2015. My blog on the proposed rules can be read HERE. In March and again in June 2016, FINRA published amendments to the proposed rules.  The final rules enact the December proposed rules as modified by the subsequent amendments.

A CAB will generally be a broker-dealer that engages in M&A transactions, raising funds through private placements and evaluating strategic alternatives and that collects transaction-based compensation for such activities. A CAB will not handle customer funds or securities, manage customer accounts or engage in market making or proprietary trading.

Description of Capital Acquisition Broker (“CAB”)

There are currently FINRA-registered firms which limit their activities to advising on mergers and acquisitions, advising on raising debt and equity

Oct252016

Florida Broker-Dealer Registration Exemption For M&A Brokers

ABA Journal’s 10th Annual Blawg 100

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Following the SEC’s lead, effective July 1, 2016, Florida has passed a statutory exemption from the broker-dealer registration requirements for entities effecting securities transactions in connection with the sale of equity control in private operating businesses (“M&A Broker”). As discussed further below, the new Florida statute, together with the SEC M&A Broker exemption, may have paved the way for Florida residents to act as an M&A broker in reverse or forward merger transactions involving OTCQX-traded public companies without broker-dealer registration.

Florida has historically had stringent broker-dealer registration requirements in connection with the offer and sale of securities. Moreover, Florida does not always mirror the federal registration requirements or exemptions. For example, see my blog HERE detailing some state blue sky concerns when dealing with Florida, including the lack of an issuer exemption from the broker-dealer registration requirements for public offerings.

However, in a move helpful to merger and acquisition (M&A) transactions in the

Jan262016

FINRA Proposes New Category Of Broker-Dealer For “Capital Acquisition Brokers”

ABA Journal’s 10th Annual Blawg 100

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In December, 2015, FINRA proposed rules for a whole new category of broker-dealer, called “Capital Acquisition Brokers” (“CABs”), which limit their business to corporate financing transactions. In February 2014 FINRA sought comment on the proposal, which at the time referred to a CAB as a limited corporate financing broker (LCFB). Following many comments that the LCFB rules did not have a significant impact on the regulatory burden for full member firms, the new rules modify the original LCFB proposal in more than just name. The new rules will take effect upon approval by the SEC and are currently open to public comments.

A CAB will generally be a broker-dealer that engages in M&A transactions, raising funds through private placements and evaluating strategic alternatives and that collects transaction based compensation for such activities. A CAB will not handle customer funds or securities, manage customer accounts or engage in market making or proprietary trading.

As

Aug252015

Finders- The Facts Related To Broker-Dealer Registration Requirements

ABA Journal’s 10th Annual Blawg 100

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Introduction

As a recurring topic, I discuss exemptions to the broker-dealer registration requirements for entities and individuals that assist companies in fundraising and related services.  I have previously discussed the no-action-letter-based exemption for M&A brokers, the exemptions for websites restricted to accredited investors and for crowdfunding portals as part of the JOBS Act and the statutory exemption from the broker-dealer registration requirements found in Securities Exchange Act Rule 3a4-1, including for officers, directors and key employees of an issuer.  I have also previously published a blog on the American Bar Association’s recommendations for the codification of an exemption from the broker-dealer registration requirements for private placement finders.   I’ve included links to each of these prior articles in the conclusion to this blog. 

A related topic with a parallel analysis is the use of finders for investors and investor groups, an activity which has become prevalent in today’s marketplace.  In that case the investor

May122015

SEC Proposes Broadening Of Broker-Dealer Registration Rules To Include Proprietary And High-Frequency Traders

ABA Journal’s 10th Annual Blawg 100

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On March 25, 2015, the SEC proposed rule amendments to require high-frequency and off-exchange traders to become members of FINRA.  The amendments would increase regulatory oversight over these traders.

Over the years many active cross-market proprietary trading firms have emerged, many of which engage in high-frequency trading.  These firms generally rely on the broad proprietary trading exemption in rule 15b9-1 to forgo membership with, and therefore regulatory oversight by, FINRA.  The rule change is specifically designed to require these high-frequency traders to become members of FINRA and submit to its review and oversight. 

The proposed rule change amends Rule 15b9-1 of the Securities Exchange Act of 1934, as amended (“Exchange Act”) to narrow a current exemption from FINRA membership if the broker is a member of a national securities exchange, carries no customer accounts and has annual gross income of no more than $1,000 derived from sources other than the exchange to

Mar242015

The New FINRA Broker Background Check Rule

ABA Journal’s 10th Annual Blawg 100

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On December 30, 2014, the SEC approved FINRA Rule 3110(e), which requires FINRA member firms to verify the information provided by or contained in a broker’s Form U-4 within 30 days of filing the form with FINRA.  The Rule becomes effective on July 31, 2015.  The Rule is intended to help verify background information on a broker, including publicly available information through the FINRA Broker-Check system and to prevent high-risk, recidivist brokers from moving from firm to firm and continuing questionable or outright improper conduct. 

Background

One of FINRA’s 2015 Regulatory and Examination Priorities is addressing concerns about high-risk brokers and improving background checks and due diligence by member firms on prospective hires.  The new Rule is part of FINRA’s initiative in this regard.  FINRA is taking additional steps in this area as well, including a one-time background and financial check of all registered representatives, which checks will be completed by August 2015.

Jan202015

SEC Announces Examination Priorities For 2015; Focus On Transfer Agents, Investment Advisers and Broker Dealers

ABA Journal’s 10th Annual Blawg 100

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On January 13, 2015, the SEC published its Office of Compliance Inspections and Examinations (OCIE) priorities for 2015.  The OCIE examines and reviews a wide variety of financial institutions, including investment advisers, investment companies, broker-dealers, transfer agents, clearing agencies and national securities exchanges. 

The priorities this year have a primary focus on (i) protecting retail investors, especially those saving for retirement; (ii) assessing market-wide risks; and (iii) using data analytics to identify signs of potential illegal activity.  In addition, the SEC will examine municipal advisers, proxy services, never-before-examined investment companies, fees and expenses in private equity and transfer agents. 

Transfer agents and broker-dealers will be scrutinized for potential claims of engaging in or aiding and abetting pump-and-dump or market manipulation schemes.

The SEC shares its annual examination priorities as a heads-up and to encourage industry participants to conduct independent reviews and make efforts for increased compliance, prior to an SEC examination, investigation or

Dec162014

SEC Sanctions BITCOIN Exchange Operator-A Case Study In Basic Registration And Exemption Requirements

ABA Journal’s 10th Annual Blawg 100

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On December 8, 2014, the SEC settled charges against a creative, but ill informed, entrepreneur for acting as an unlicensed broker-dealer and for violations of Section 5 of the Securities Act of 1933, as amended.  Ethan Burnside and his company, BTC Trading Corp., operated two online enterprises, BTC Virtual Stock Exchange and LTC-Global Virtual Stock Exchange, that traded securities using virtual currencies, bitcoin or litecoin.  Neither of these exchanges were registered as broker-dealers or stock exchanges.  In addition, Burnside and his company conducted separate transactions in which he offered investors the opportunity to use virtual currencies to buy or sell shares in the LTC-Global exchange itself and a separate litecoin mining venture he owned and operated.  These offerings were not registered with the SEC as required under the federal securities laws.

According to the SEC release on the matter, “the exchanges provided account holders the ability to use bitcoin or litecoin to buy,

Nov042014

Penny Stock Rules And Broker Dealers

ABA Journal’s 10th Annual Blawg 100

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In last week’s blog regarding FINRA’s request to eliminate the OTC Bulletin Board quotation service (OTCBB) and to adopt rules relating to the quotation requirements for OTC equity services by inter-dealer quotation services, I touched upon the significance of penny stock rules related to the OTC marketplace.  As further described herein, penny stocks are low-priced securities (under $5.00 per share) and are considered speculative and risky investments.

Penny stock rules focus on the activity of broker-dealers in effectuating trades in penny stocks. As a result of the risk associated with penny stock trading, Congress enacted the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (the “Penny Stock Act”) requiring the SEC to enact rules requiring brokers or dealers to provide disclosures to customers effecting trades in penny stocks.   The rules prohibit broker-dealers from effecting transactions in penny stocks unless they comply with the requirements of Section 15(h) of the Securities Exchange

Jul072014

Case Study of Online Funding as Related to Broker-Dealer Exemptions

Introduction

As a recurring topic, I am discussing exemptions to the broker-dealer registration requirements for entities and individuals that assist companies in fundraising and related services.  On February 18th I published a blog about the new no-action-letter-based exemption for M&A brokers, the exemptions for websites restricted to accredited investors and for crowdfunding portals as part of the JOBS Act.  Further on, I wrote on the statutory exemption from the broker-dealer registration requirements found in Securities Exchange Act Rule 3a4-1, including for officers, directors and key employees of an issuer.

This blog addresses the statutory and related exemptions that affect, and would permit, the operation of a funding website, including the statutory exemption from broker-dealer registration enacted into law as part of the JOBS Act on April 5, 2012.  This blog also includes an analysis of a fictional funding website.

Summary of Exemption from Broker-Dealer Registration Found in Title II of the JOBS Act

Title II of the JOBS Act created