May 22, 2018
Merger and Acquisition Brokers: Overview and Proposals for
Relief
Introduction
On the other hand, being a registered M&A broker can be
Merger and acquisitions (M&A) brokers are also known as
relatively costly compared to an unregistered broker. There
Main Street brokers. In general terms, they are
are estimates that initial SEC registration costs for M&A
intermediaries who conduct privately negotiated sales of
brokers can exceed $150,000, with annual registration
privately held small- and mid-sized companies by
running as high as $75,000, costs that at least in part can be
facilitating securities transactions that transfer ownership
passed on to a broker’s client, potentially increasing the
and control of such firms to a buyer who intends to operate
expense of such corporate sales.
the firm.
The 2014 SEC No-Action Letter
The Exchange Act of 1934 (Exchange Act, P.L. 73-291) is
In January 2014, in what many observers described as a
a major federal securities law that authorized the creation of
major advance over earlier SEC guidance on unregistered
the Securities and Exchange Commission (SEC) and
M&A brokers and their intermediated transactions, the SEC
provides for a regulatory regime requiring most brokers and
staff issued a no-action letter on unregistered broker
dealers to register with the agency and also become
liability. (A no-action letter is a response to an individual or
members of the Financial Industry Regulatory Authority
entity who is uncertain if a certain product, service, or
(FINRA, the frontline regulator of securities brokerage
action would violate federal securities law. Such letters
firms and their brokers overseen by the SEC). The
express the view that the prospective activity or product
Exchange Act broadly defines a broker as a firm or
would not result in adverse agency action.)
individual who effects transactions in securities on behalf of
others. Dealers are defined as firms or individuals who
In the 2014 no-action letter to several attorneys who had
trade their own securities for profit, called “trading for its
raised the issue, entitled M&A Brokers, the SEC’s Division
own account.”
of Trading and Markets stated that it would not recommend
SEC enforcement action in the event that an intermediary
Historically, there has been some uncertainty over whether
were to facilitate a securities transaction connected to the
M&A brokers, many of whom self-identify as finders, meet
transfer of ownership of a privately held firm. The letter
the definition of a broker under the Exchange Act. For
contained a number of stipulations, including (1) the broker
example, some observers have argued that broker-dealer
cannot provide financing for the transaction; (2) the broker
regulations were originally conceived to prevent “high
cannot provide custody services for funds used in the
pressure selling tactics” and the “third party custody” of
transaction or for securities issued or exchanged in
securities trade-related funds. And they have noted that
connection with the transaction; (3) the transaction cannot
neither role appears to be associated with the firm
involve a public securities offering and is limited to
acquisitions that M&A brokers routinely manage.
offerings that are exempt from SEC registration under the
Securities Act of 1933 (P.L. 73-22); (4) the transaction’s
By contrast, in a 1985 U.S. Supreme Court case, Landreth
buyer “must control and actively operate the company or
Timber Co. v. Landreth, 471 U.S. 681 (1985), the court
the business conducted with the assets of the company”
ruled that the sale of all or a controlling interest in a firm
when the transaction is finalized; (5) the broker can
constitutes a securities transaction. It found that a person
facilitate an M&A transaction with a group of buyers only
involved in facilitating the sale of an operational business
if the group was initially formed without the broker’s
could fall within the definition of a broker under the
assistance; and (6) the broker cannot have been barred or
Exchange Act. According to some accounts, the ruling led
suspended by the SEC, a state, or by a self-regulatory
to greater numbers of unregistered M&A brokers
organization such as FINRA.
registering with the SEC under the Exchange Act. Still,
unregistered M&A brokers reportedly constitute a majority
Within the M&A broker community, a frequently
of brokers.
encountered reaction to the letter was that the letter was a
“welcome relief as private companies …[were] previously
Historically, among other things, an unregistered M&A
concerned about whether they had exposure for M&A
broker could face the risk of having a client’s corporate sale
transactions facilitated by unregistered broker-
rescinded if the acquired firm falters under the new owner.
dealers…[within the letter’s qualifying limits]”
Some acquirers have reportedly cited a broker’s
unregistered status to convince the courts to rescind a
Legislation
corporate sale.
Two legislative proposals in the 115th Congress, Section
401 of H.R. 10 (the Financial CHOICE Act, which passed
the House on June 7, 2017); and H.R. 477 (which
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Merger and Acquisition Brokers: Overview and Proposals for Relief
unanimously passed the House on December 7, 2017), are
Responses to the Legislation
aimed at “clarifying and simplifying the registration regime
In March 2017, the International Business Brokers
for M&A brokers [thus reducing] … the burdens on the
Association (IBBA), a group of brokers and transaction
M&A brokers, which in turn will reduce the costs borne by
intermediaries, wrote to the House Financial Services
their small business clients that need the services of the
Committee In support of the current legislation. They
M&A broker to assist them in with merger or acquisition
argued that the current “one-size-fits all” broker-dealer
opportunities.”
regulatory regime unfairly conflates M&A brokers involved
in the sale of privately held firms with “Wall Street”
The current legislation attempts to do so by amending the
investment bankers who intermediate between public
Exchange Act so that certain M&A brokers would be
company issuers and buyers of their shares. The letter also
exempted from registration as broker-dealers with the SEC.
argued that the current regulatory regime imposes
Under the legislation, a registration-exempt M&A broker
regulatory burdens and costs on M&A brokers that are
would be defined as an entity who is involved in facilitating
passed on to the buyers and sellers of the private businesses
the transfer of ownership of a privately held company with
whose acquisitions are managed by the brokers.
annual earnings of less than $25 million or annual revenues
of less than $250 million.
The North American Securities Administrators Association
(NASAA) is an association of state and provincial securities
Under the legislation, the exemption from registration
regulators that tends to take an investor protection stance
would not be granted to M&A brokers who do any of
on many policy issues. In an October 2017 letter to the
several things, including the following:
House Financial Services Committee, the group lent its
support to the legislation. In addition, it argued that the
They provide custody services for funds used in the
legislation’s federal regulatory exemption is very similar to
transaction or for securities issued or exchanged in
the NASAA’s own model state regulation for M&A
connection with the transaction.
brokers, which generally exempts M&A brokers from state
securities registration.
They are engaged in a public securities offering on
behalf of a securities issuer.
The Americans for Financial Reform (AFR) is a coalition
that includes consumer advocacy; civil rights, investor, and
They cannot provide financing for the transaction.
retiree advocacy; and labor and faith-based groups. In an
October 2017 letter to the House Financial Services
They are engaged in a transaction involving the transfer
Committee, the group, which also tends to take a pro-
of ownership of an eligible privately held company to
investor stance on financial policy issues, argued that the
passive buyers. (These are defined as buyers who do not
legislation improved on similar bills in the 114th Congress
who have an active involvement in the managing of the
by including the aforementioned disqualifications for “bad
acquired firm.)
actors.” The group, however, pointed to the 2014 SEC no-
action letter and argued that the letter effectively made the
They are engaged on behalf of any party to a transaction
legislation unnecessary.
involving a shell company. (A shell company is defined
as a company with (1) either no or a nominal level of
Supporters of the current legislation counter that the no-
operations; (2) either no or a nominal amount of assets;
action letter, which they say the current legislation is
(3) assets that consist entirely of cash and cash
consistent with, merely serves as interpretive guidance that
equivalents; or (4) assets that consist of any amount of
the SEC can always rescind. As such, they argue that there
cash and cash equivalents and nominal amounts of other
is a need for a more permanent statutory fix via the current
assets.)
legislation. Historically, however, very few SEC no-action
letters appear to have been rescinded.
They can facilitate a transaction with a group of buyers
only if the group was initially formed without the
In 2015, criticizing legislation in the 114th Congress similar
broker’s assistance.
to the current legislation, Theresa A. Gabaldon of the
George Washington University Law School invoked the
The current legislation also contains several “bad actor”
question of M&A broker fairness. She argued that the
disqualifications, which would disqualify a broker from the
legislation would allow unregistered brokers to compete
registration exemptions. One key “bad actor” disqualifier
with brokers who have put “in the time and effort [and
would apply if a broker has had their SEC registration
expense] to register and who are willing to submit to
suspended or revoked.
inspection and other controls.” The law professor also
commented that lost in much of the discussion on the
The legislation appears to be broadly similar to the SEC’s
legislation was the notion that registered M&A brokers
January 2014 no-action letter on M&A brokers, which is
might actually do a better job of serving the needs of
discussed above.
smaller companies than unregistered brokers.
Gary Shorter, Specialist in Financial Economics
IF10893
https://crsreports.congress.gov
Merger and Acquisition Brokers: Overview and Proposals for Relief
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https://crsreports.congress.gov | IF10893 · VERSION 2 · NEW