FINRA (the Financial Industry Regulatory Authority) is soliciting public comment on a proposed rule set (LCFB Rule 14-09) for firms that meet the definition of “limited corporate financing broker” (LCFB). An LCFB is a firm that engages solely in any one or more of the following activities:

  • Advising an issuer, including a private fund, concerning its securities offering or other capital raising activities
  • Advising a company regarding its purchase or sale of a business or assets or regarding its corporate restructuring, including a going-private transaction, divestiture or merger;
  • Advising a company regarding its selection of an investment banker
  • Assisting in the preparation of offering materials on behalf of an issuer
  • Providing fairness opinions
  • Qualifying, identifying or soliciting potential institutional investors

The rationale behind LCFB Rule 14-09 is that while LCFB firms may receive transaction-based compensation as part of their services, they do not engage in many of the types of activities typically associated with traditional broker-dealers. An LCFB firm would be prohibited from maintaining customer accounts, handling customer funds or securities, exercising investment discretion on behalf of a customer, or engaging in proprietary trading of securities or market-making activities.

LCFB Rule 14-09 would continue to subject an LCFB firm to the FINRA bylaws as well as core FINRA rules that FINRA believes should apply to all firms. However, the rule set would include other FINRA rules tailored specifically for an LCFB’s business activities, including a streamlined set of conduct rules. In addition, LCFB Rule 14-09 would govern the registration and qualification examinations of principals and representatives associated with an LCFB firm. These principals and representatives would remain subject to the same registration and qualification examinations of principals and representatives of other FINRA firms. However, LCFB principals and representatives would be eligible for fewer registration categories.

If a firm wishes to register as an LCFB, the firm would need to submit an application to FINRA, indicating its intention to operate as an LCFB with proposed limited activities consistent with LCFB Rule 14-09. An existing FINRA firm that wishes to operate only as an LCFB firm would need to file a request to amend its membership agreement or obtain a membership agreement that limits the firm’s activities to those permitted under LCFB Rule 14-09.

The comment period closes April 28, 2014. Among the comments FINRA seeks are those regarding whether the recent SEC M&A broker no-action letter impacts the analysis of whether a firm would become an LCFB. There seems to be some overlap or inconsistency in the proposed FINRA rule set and the no-action letter as well as potential conflicts that may arise from the pending federal legislation dealing with M&A brokers.

Nevertheless, the federal regulatory environment for brokers is evolving; proposed LCFB Rule 14-09 is the most recent of three efforts to change the federal regulation of certain businesses that previously would be required to register as a broker-dealer.