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Congressional Research Service
Informing the legislative debate since 1914
May 22, 2018
Merger and Acquisition Brokers: Overview and Proposals for
Relief
Introduction
Merger and acquisitions (M&A) brokers are also known as
Main Street brokers. In general terms, they are
intermediaries who conduct privately negotiated sales of
privately held small- and mid-sized companies by
facilitating securities transactions that transfer ownership
and control of such firms to a buyer who intends to operate
the firm.
The Exchange Act of 1934 (Exchange Act, P.L. 73-291) is
a major federal securities law that authorized the creation of
the Securities and Exchange Commission (SEC) and
provides for a regulatory regime requiring most brokers and
dealers to register with the agency and also become
members of the Financial Industry Regulatory Authority
(FINRA, the frontline regulator of securities brokerage
firms and their brokers overseen by the SEC). The
Exchange Act broadly defines a broker as a firm or
individual who effects transactions in securities on behalf of
others. Dealers are defined as firms or individuals who
trade their own securities for profit, called trading for its
own account.
Historically, there has been some uncertainty over whether
M&A brokers, many of whom self-identify as finders, meet
the definition of a broker under the Exchange Act. For
example, some observers have argued that broker-dealer
regulations were originally conceived to prevent high
pressure selling tactics and the third party custody of
securities trade-related funds. And they have noted that
neither role appears to be associated with the firm
acquisitions that M&A brokers routinely manage.
By contrast, in a 1985 U.S. Supreme Court case, Landreth
Timber Co. v. Landreth, 471 U.S. 681 (1985), the court
ruled that the sale of all or a controlling interest in a firm
constitutes a securities transaction. It found that a person
involved in facilitating the sale of an operational business
could fall within the definition of a broker under the
Exchange Act. According to some accounts, the ruling led
to greater numbers of unregistered M&A brokers
registering with the SEC under the Exchange Act. Still,
unregistered M&A brokers reportedly constitute a majority
of brokers.
Historically, among other things, an unregistered M&A
broker could face the risk of having a client's corporate sale
rescinded if the acquired firm falters under the new owner.
Some acquirers have reportedly cited a broker's
unregistered status to convince the courts to rescind a
corporate sale.
On the other hand, being a registered M&A broker can be
relatively costly compared to an unregistered broker. There
are estimates that initial SEC registration costs for M&A
brokers can exceed $150,000, with annual registration
running as high as $75,000, costs that at least in part can be
passed on to a broker's client, potentially increasing the
expense of such corporate sales.
The 2014 SEC No-Action Letter
In January 2014, in what many observers described as a
major advance over earlier SEC guidance on unregistered
M&A brokers and their intermediated transactions, the SEC
staff issued a no-action letter on unregistered broker
liability. (A no-action letter is a response to an individual or
entity who is uncertain if a certain product, service, or
action would violate federal securities law. Such letters
express the view that the prospective activity or product
would not result in adverse agency action.)
In the 2014 no-action letter to several attorneys who had
raised the issue, entitled M&A Brokers, the SEC's Division
of Trading and Markets stated that it would not recommend
SEC enforcement action in the event that an intermediary
were to facilitate a securities transaction connected to the
transfer of ownership of a privately held firm. The letter
contained a number of stipulations, including (1) the broker
cannot provide financing for the transaction; (2) the broker
cannot provide custody services for funds used in the
transaction or for securities issued or exchanged in
connection with the transaction; (3) the transaction cannot
involve a public securities offering and is limited to
offerings that are exempt from SEC registration under the
Securities Act of 1933 (P.L. 73-22); (4) the transaction's
buyer must control and actively operate the company or
the business conducted with the assets of the company
when the transaction is finalized; (5) the broker can
facilitate an M&A transaction with a group of buyers only
if the group was initially formed without the broker's
assistance; and (6) the broker cannot have been barred or
suspended by the SEC, a state, or by a self-regulatory
organization such as FINRA.
Within the M&A broker community, a frequently
encountered reaction to the letter was that the letter was a
welcome relief as private companies ... [were] previously
concerned about whether they had exposure for M&A
transactions facilitated by unregistered broker-
dealers... [within the letter's qualifying limits]
Legislation
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
https://crsreports.congress go
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