On January 30, 2020, the Financial Industry Regulatory Authority (“FINRA”) issued its Regulatory Notice 20-04, requesting comments on proposed amendments to the CAB rules. Its goal is to make the rules more useful to CABs without reducing investor protection. Presently CABs enjoy less burdensome supervisory requirements, but are also not permitted to engage in a number of broker-dealer activities.
These proposed changes offer an opportunity to expand a CAB’s business activities and are summarized below:
CABs would be permitted to register as investment advisers, as long as the advisory services are provided to institutional investors, as defined. FINRA also proposes to include “knowledgeable employees” in the definition of institutional investors.
FINRA proposes to expand the ability of a CAB to act as placement agent for secondary trades of unregistered securities. A CAB would be permitted to act as a placement agent in a secondary transaction involving unregistered securities of an issuer for which the CAB had previously acted as placement agent for such securities, provided that the purchaser of such securities is an institutional investor, and the new sale falls within a Securities Act of 1933 exemption from registration.
With these changes come new proposed regulatory responsibilities:
FINRA proposes to require that any CAB whose business activities create potential insider trading risks shall establish, maintain and enforce written policies and procedures that are reasonably designed to mitigate and prevent those risks.
Also, CABs meeting this description would be required to adopt supervisory procedures for the review of securities transactions that are reasonably designed to identify trades that may violate provisions of the Securities Exchange Act of 1934 and related rules that prohibit insider trading in accounts of the firm’s associated persons and their immediate family members.
FINRA requests comments by March 30, 2020, on all aspects of the proposal. In addition, FINRA has provided several questions in the regulatory notice designed to give commenters the opportunity to offer suggestions and data that will help FINRA make this proposal more meaningful.