BUYING OR SELLING A BROKER-DEALER
Buying a Broker-Dealer firm, rather than building one, makes sense for the purchaser in a limited number of scenarios. While there are many variants, they are slight, and the two primary reasons a purchaser would wish to purchase a broker-dealer firm are:
(a) The purchaser needs to conduct business during the FINRA “Continuing Membership Application” or “CMA” period and, presumably, although not necessarily, believes the broker-dealer may earn during the application period, through commissions or other fees, an amount that may offset partially or completely the cost of the purchase; and/or
(b) The broker-dealer entity itself has certain assets (client accounts, excellent reputation, recognized name) that justify paying any purchase amount rather than saving that amount building a broker-dealer. For the complete story, please subscribe to receive my free PDF: “Buying vs. Building a Broker-Dealer: A Clear Perspective on What’s Right for You… and When”
Following naturally the “When Buying Beats Building” segment above, a potential purchaser of a broker-dealer must consider the following points in order to successfully navigate the purchase process and the FINRA Continuing Membership Application (“CMA”):
(1) Will the target broker-dealer’s current management team stay on (a) during the application process and/or (b) after hopeful FINRA approval of the purchase? This leads to the question of who has the real leverage in the purchase/sale of a broker-dealer. Purchaser? Seller?
(2) Does the broker-dealer purchase agreement provide the proper “outs” or release of the purchaser should FINRA impose a restriction on doing business (very important) or closing pursuant to FINRA rules (surprisingly, less important)?
(3) FINRA doesn’t necessarily allow the purchase/selling of a broker-dealer firm to effectively eliminate for the purchaser’s benefit the potential liabilities that may exist with regard to business conducted by the broker-dealer prior to the closing.
(4) Is the purchaser, whether a natural person or a legal entity, and his/her/its affiliates aware of the depth of the material requests they shall be subject to during the FINRA Continuing Membership Application, including, most importantly, financial condition?
(5) OK, here’s a bonus consideration: The FINRA rule allowing the purchaser and seller to close the contemplated purchase after providing FINRA with the prescribed 30-day notice, is very rarely allowed. For the complete story, please subscribe to receive my free PDF: “Buying vs. Building a Broker-Dealer: A Clear Perspective on What’s Right for You… and When”
The FINRA Continuing Membership Application, or “CMA” as to which it is commonly referred, is often (and often mistakenly) considered an “easier” application to survive, presumably because “the broker-dealer firm is up and running and all we have to do is pretty much jump right in with our people and get to work.” That could be an exact quote of many of my potential clients who come to me via the “buy scenario” - so much so that I feel tempted to acknowledge their authorship. Kidding.
The CMA is essentially no different in substance than a New Member Application or “NMA.” Let no one tell you differently. While the FINRA rules and website provide a substantial explanation of what is involved and what will be requested, and how long it all shall take, FINRA examiner subjectivity, variables within the application itself vis a vis the purchaser(s) background, experience, and future plans for the broker-dealer all infuse the application with enough uncertainty that “been there, done that” experience is hard to beat.
I can lead you through this process until FINRA approval is granted. The CMA process has a 180-day window for FINRA approval, although I will strive to shorten this period substantially to the best of my abilities.
(See below in “Growing or Modifying your Broker-Dealer” for application information regarding business modification. Here I discuss the application as it involves purchasing or selling a broker-dealer)
Many potential buyers (as well as builders) of broker-dealer firms are surprised to learn that individuals, as long as they do not place themselves in a position requiring securities brokerage licensing, can, indeed, become and remain passive owners, whether directly or indirectly. Like most other businesses, individuals can provide funding while others provide sweat and no how. That’s it.