The FINRA rule governing the sale (and purchase, by extension) of a broker-dealer firm is the most counter-intuitive rule in the history of rule-making. Maybe a little dramatic there but it’s my blog post, that’s my story, and I’m sticking to it.

I meet many of my clients at the beginning of the process of purchasing a FINRA member broker-dealer firm. A super majority of these potential clients are desirous of doing business during the application process, which is the primary reason for purchasing in the first place.

(Subscribe to receive a copy of my comprehensive PDF on the subject of buying vs. building. You’ll see the link at the top of the home page of my website)

The FINRA purchase and sale process is governed primarily by Rule 1017, is reviewed by FINRA through the eyes of Rule 1014 (the standards for review), and processed via the Form CMA.

 

What’s not clear…

The rules require that before closing on the transaction, by which I mean the seller hands over ownership via some form of written evidence and the purchaser hands over the purchase price, the target broker-dealer provides FINRA with thirty days’ written notice.

This notice does not take the form of a simple “Hey there FINRA, we’re going to close in thirty days” type letter. The notice takes the form of a substantially complete (in FINRA’s judgement) Continuing Membership Application. While not the subject of this blog post, the CMA, as it is often referred to, is a fairly substantial collection of information and documentation that must be provided to FINRA in order to kick off the review process.

What seems to get lost in the process, if you’re not guided well from the beginning, is that while you can close after the expiration of thirty days, FINRA has, in fact, 180 days within which to approve or deny the application.

You can technically have transferred ownership and then receive word from FINRA that you can’t.

These days, very rarely does one reach this point.  Unless certain important steps are taken (or should I say precautions, but that sounds ominous) and such are addressed clearly in the purchase documentation it is more probable than not that FINRA will impose what is referred to as an Interim Restriction on the purchaser’s ability to not only close (the lesser of two evils) but more importantly on the purchaser’s ability to conduct business during the application process – the most likely reason the purchaser had for purchasing in the first place.

 

What you do…

A purchaser should make certain to (a) structure the purchase in a manner whereby FINRA does not see fit to impose an interim restriction; (b) have appropriate “releases” drafted into the purchase agreement allowing the purchase the option, but not necessarily the obligation, to extricate itself from the purchase with little or no back end pain (there’s a joke there somewhere); and (c) read my Buying vs. Building article mentioned earlier. It’s free and it’s useful.

I hope I have provided you with a little clarity today.

 

Before you go…

My Clarity Concepts Blog posts are intentionally short and provided whenever I find a pattern of confusion or a simple lack of clarity among some of my own clients or that I see more generally occurring in the larger financial services world. They are not written as a treatise on the subject, but rather to clear the air or otherwise provide some clarity.

 

Disclaimer

The information in this article and/or blog is for informational purposes only and not for the purpose of providing legal advice.