December 29, 2015
This comment is submitted on behalf of Achates Capital Advisors LLC, an SEC-licensed broker-dealer firm and a FINRA member. Achates is a two-person "$5,000 broker-dealer" that conducts private placements and merger and acquisition advisories.
COMMENT
FINRA's proposed CAB rule-set continues unduly to prohibit sales of private placements to "accredited investors," as defined under Rule 501 of Regulation D. This limitation vitiates any usefulness or appeal of the CAB rules to our firm.
FINRA's reason for prohibiting such sales is ostensibly because, as stated in the SEC's Federal Register notice (the "Notice"), "FINRA's regulatory programs have uncovered serious concerns with the manner in which firms market and sell private placements to accredited investors."
What are these unidentified "serious concerns"? What firms and how many have caused them? Just what have these firms done improperly in marketing and selling Regulation D offerings to accredited investors? Is this an epidemic of abuse, and, if so, has FINRA sought the SEC to change the accredited-investor definition?
A blanket and unsupported statement such as FINRA's is no reason to deny CAB firms access to a critical segment of the investor marketplace -- a segment that the SEC plainly believes is sufficiently sophisticated and/or financially underpinned to make investment decisions about private placements. (See, e.g., Rule 506(c), permitting unrestricted advertising of private placements -- which may be sold only to accredited investors.)
The Notice also states, "Application of the CAB rules to firms that market and sell private placements to accredited investors would require FINRA to expand the applicable conduct rules and other provisions."
Exactly what would these expansions be? Requiring an annual compliance meeting? Requiring that a FINRA manual be made available to customers? Requiring office inspections? Requiring a principal's supervision of communications?
Frankly, there is virtually nothing in the marginally reduced administrative requirements of the proposed CAB rules, separately or collectively, that would offset the loss of the vast accredited-investor target market for our firm -- a market estimated to number 10 million households, holding approximately 70% of all private wealth in the United States. (See, e.g., http://dqydj.net/the-aspirational-class-how-many-accredited-investors-are-there-in-america/.)
Conversely, the significant and unnecessary burdens on small firms that carry no customer accounts and hold no customer securities or funds have been ignored by FINRA.
Thus, as to the annual audit requirement: "FINRA believes that it does not have the authority to reduce or eliminate the requirement to obtain audited financial statements."
Of course it doesn't, but has FINRA made any effort to have the SEC change Rule 17a-5 to exclude CABs from the annual audit requirement, or to require a review instead of an audit? And, separately, has FINRA made any effort to have the SEC eliminate the utterly unnecessary quarterly "Form Custody" FOCUS report for CABs (and for that matter, for all $5,000 broker-dealers)?
Likewise, as to SIPC dues, FINRA view is that, "Because SIPC membership is imposed by statute, FINRA has no authority to exempt any CAB from SIPC membership."
The issue clearly is dues, not membership. Has FINRA made any effort to have SIPC change its dues schedule for CABs? (I will credit FINRA for eliminating the requirement for a fidelity bond for CABs.)
In short, FINRA's proposed CAB rule-set hamstrings -- based on vague generalities -- small private-placement firms' ability to reach a critical investor segment, the accredited-investor marketplace. Almost no mitigation of FINRA rules, let alone the largely incidental ones FINRA has proposed, is worth this trade-off. Achates Capital Advisors, the paradigm of the broker-dealer for which the CAB rules are intended, will under no circumstances convert to a CAB given this restriction.
Roger W. Mehle
Chairman and CEO
Achates Capital Advisors LLC