On June 4, 2025, the Financial Industry Regulatory Authority (FINRA) filed a proposed rule change with the Securities and Exchange Commission (SEC) under SR-FINRA-2025-005, seeking to modernize the Capital Acquisition Broker (CAB) Rules governing the scope of their permissible activities. The proposal is intended to promote greater market efficiency and improve access to private capital, while upholding existing investor protection standards. The proposed amendments address several substantive areas designed to broaden CABs’ operational capabilities and better align the CAB rules with current industry practices and regulatory expectations.
Highlights of the Proposed Rule Changes
The proposed amendments to FINRA’s CAB rules would broaden the definition of institutional investors, permit CABs to facilitate secondary private securities transactions between institutional investors, allow associated persons to engage in private securities transactions under supervisory conditions, clarify the permissibility of equity, and reaffirm CABs’ ability to engage in exempt M&A broker activities.
- Broadened Definition of Institutional Investors. The proposed amendment would broaden the definition of “institutional investor” to include certain “eligible employees,” such as knowledgeable employees as defined under the Investment Company Act of 1940, as well as specified officers, directors, or employees of issuers who possess sufficient financial expertise to evaluate investment opportunities and risks. FINRA has explained that the inclusion of these individuals reflects a recognition that they often have access to material, nonpublic information and possess the professional experience and acumen necessary to make informed investment decisions without the need for the full array of regulatory protections typically afforded to retail investors. Additionally, by aligning the definition of “institutional investor” with similar standards applied under other regulatory regimes, the amendment seeks to harmonize the CAB framework with broader industry practice and facilitate consistent treatment of sophisticated participants across various private capital market activities. This expansion is intended to provide greater transactional flexibility for CABs when structuring offerings and engaging in capital raising activities, while ensuring that only investors capable of bearing the risks associated with private placements are included within this category.
- Secondary Market Participation. The proposed amendments would permit CABs to facilitate secondary transactions involving private, unregistered securities, provided that (i) both the buyer and the seller are institutional investors and (ii) the transaction qualifies for an applicable exemption, such as those available under Rule 144 or Rule 144A. This proposed revision is intended to mitigate longstanding challenges related to the limited liquidity of privately placed securities, which can restrict the ability of institutional investors to rebalance portfolios or monetize holdings in a timely and efficient manner. By expressly permitting CABs to serve as intermediaries in these secondary transactions, the rule change would expand the tools available to CABs to address client needs for liquidity and portfolio diversification, thereby aligning the CAB framework more closely with market realities.
- Private Securities Transactions (PSTs). The proposed amendments would harmonize the CAB rules with the broader provisions of FINRA Rule 3280, which governs the participation of registered persons in PSTs. Specifically, the proposal would permit associated persons of CABs to engage in PSTs, provided they comply with the well-established conditions of prior written notice to the firm, firm review and approval (where compensation is involved), and ongoing supervision to ensure compliance with applicable regulatory requirements.
Under the current CAB rules, such activities are effectively prohibited, placing CABs at a competitive disadvantage compared to traditional broker-dealers whose registered representatives routinely rely on Rule 3280 to facilitate legitimate private placements and other off-book transactions under appropriate oversight. This prohibition has been viewed as overly restrictive, particularly given that CABs are often engaged in similar capital-raising activities within the private markets.
- Clarification of Equity Compensation. The proposed amendments would explicitly permit CABs to receive or dispose of unregistered equity securities of issuers as a form of compensation for services rendered, provided that such arrangements comply with applicable federal and state securities laws and adhere to all relevant disclosure and recordkeeping requirements. This codification is intended to formalize and clarify a practice that is already prevalent among firms operating in the private capital markets, where equity-based compensation is a customary means of aligning the interests of placement agents and issuers.
- Merger and Acquisition Broker Activities. Lastly, the proposed amendments reaffirm that CABs may continue to engage in merger and acquisition transactions in a manner consistent with the SEC exemptive guidance for M&A Brokers. This clarification is particularly significant in light of the SEC’s withdrawal in 2023 of certain longstanding staff no-action letters that had provided interpretive relief for M&A Broker activities. By explicitly confirming that such transactions remain within the scope of permitted CAB activities, FINRA seeks to remove any regulatory uncertainty and to ensure that CABs may continue to facilitate corporate acquisitions, business sales, and similar transactions that do not involve public offerings of securities. This provision supports continuity of practice and aligns the CAB framework with evolving federal guidance on M&A Broker exemptions.
Rationale and Industry Reaction
FINRA has emphasized that the proposed amendments are intended to strike an appropriate balance between modernizing the regulatory framework governing CABs and preserving the robust investor protections that underpin the existing CAB rules. By broadening the range of permissible activities, the proposed rule change is expected to facilitate capital formation, promote greater market efficiency, and afford firms and their clients increased flexibility in structuring private transactions.
Industry stakeholders, including the Securities Industry and Financial Markets Association (SIFMA), have generally expressed strong support for the proposed revisions, particularly the provisions that would permit CABs to participate in secondary market transactions involving private securities. Stakeholders have noted that this enhancement has the potential to materially improve liquidity within the private markets while maintaining the supervisory controls and regulatory safeguards necessary to protect institutional investors and preserve market integrity.
Review and Approval Process
The proposed rule change was filed with the SEC on June 4, 2025, and published in the Federal Register on June 10, 2025, as SEC Release No. 34‑103216. A public comment period is now open, with comments due within 21 days of publication, no later than July 7, 2025. Following the conclusion of the comment period, the SEC will evaluate the proposal, and any public feedback received, before determining whether to approve the amendments, with or without modifications. Firms are encouraged to review the proposed changes in detail and consider submitting comments if they wish to provide input on the potential impact of the revision.