Buying a Broker Dealer? The benefits, pitfalls and what to expect.

From venture capital funds to ICO advisers, many companies are staying ahead of the regulatory curve; the quickest route – buy an existing broker-dealer. Why buy a firm rather than start a new broker-dealer you might ask? Well, registering with the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (“FINRA”) as a new broker-dealer is a cumbersome process that usually takes at least six months. By purchasing an existing broker-dealer, firms can save this time and start doing business within five weeks.

This quick route to enter the market is not the only benefit that a firm derives from the purchase; there are several others. However, along with benefits, there are also a few problems one faces during and after the purchase. These drawbacks and benefits may differ, depending upon one’s requirements and the nature of the business, but the process of purchasing a broker-dealer remains more or less the same for everyone.

The Benefits of Buying A Broker Dealer

Existing broker-dealers are already registered with the SEC and FINRA; hence they have already been approved to buy and sell securities. However, one has to be choosy when selecting a broker-dealer to purchase because a BD can only conduct business within the “business line” it currently has registration for. There are many broker-dealers for sale that are approved for several business lines, so regardless of the nature of the security or the offering (public or private) an acquiring firm can easily find a broker-dealer that suits its need. There are several broker-dealers that are also approved for providing investment advisory services, and such services come in many shapes and sizes. But some regulatory hurdles may be complex, so be careful to fully understand the firm’s business line(s) before undertaking the purchase.

In most cases, by purchasing a broker-dealer, a firm not only becomes eligible to sell listed securities, but also securities that are traded over the counter (OTC) and those that are eligible only for private placements. For financial firms, individuals and startups that are entering a business in which they will be earning a fee or commission based on transactions or the amount of capital raised, registering as a broker-dealer is mandatory. If you are looking to conduct business quickly, then purchasing a BD may be the way to go.

The Process Of Buying A Broker Dealer

The process of purchasing a broker-dealer starts with a needs analysis. Although firms or individuals can do that on their own, hiring a professional advisor is recommended. The fee charged by a professional advisor is often minimal when compared to the costly pitfalls they can help circumvent. A professional advisor helps in assessing the needs of the organization and then offers alternatives that are tailor-made for it. The real process of purchasing begins only after one has found the broker-dealer that is the best fit for a firm’s requirements. Once that is done, then a firm should immediately proceed to complete due-diligence on the broker-dealer it has shortlisted.

Though broker-dealers that are in the market to be purchased generally maintain a clean record, it doesn’t mean that due-diligence should be ignored. Verifying a host of items is necessary for a smooth transaction, including Gateway forms, Form BD, FOCUS reports, membership agreement with regulatory bodies, past or pending litigations, and other important diligence items.

After the diligence has been completed, the broker-dealer that is being purchased must notify FINRA of the transaction that is taking place at least 30 days in advance of consummation; this is pursuant to membership rule 1017. This notification is sent to FINRA by filing a continuing membership application (CMA). An existing broker-dealer must file a CMA when it wants to:

  • make material changes to its business operations;
  • make asset transfers; and
  • change control or ownership, including mergers or acquisitions involving the firm.

Thirty days after FINRA receives the request, the transaction can close and you can begin to conduct business. However, it will still take approximately six months for the agency to fully approve the new firm. Using a professional advisor who is familiar with the process can shorten the length of time, but be careful – all advisors are not created equal.

The Pitfalls Of Buying A Broker Dealer

For those just entering the industry, the process of buying a broker-dealer is complex and without guidance from a seasoned professional or advisor, it can be burdensome and confusing. A few things to look out for:

  • Be sure to have proper Principals in place. FINRA rules require that each broker-dealer has two (2) Principals, each licensed with a Series 24. Moreover, each Principal holding a required executive role with the firm must have “at least one year direct, or two years of indirect experience supervising the requested business line”. This means if you are seeking approval to sell “private placements”, the firm’s Principal must have at least one year of direct experience overseeing that line at another firm. At CXG, this is a role that we regularly outsource.
  • Capital; be sure to be funded. At a bare minimum, the firm will require at least $100,000 in cash (excluding the purchase price) if they expect FINRA to approve the transaction.
  • Register for multiple business lines. A good rule of thumb – if a firm can be approved for 1 business line, then it can be approved for 10 business lines. Why should we be approved for multiple business lines you might ask? Simple: more opportunity post-approval to grow and conduct business. Besides, valuation in this arena is based largely on the number of business lines the firm is approved for. So if you ever decide to sell the firm, more business lines = higher valuation.

Final Thoughts

Regardless of the firm you choose, running a broker-dealer means taking care of regulatory compliances. While large firms can hire full-time professionals to do so, most small to mid-size firms just don’t have the resources or expertise to do it. For them, outsourcing compliance is unarguably the best alternative; hiring part-time Principals so owners can focus on the firm’s core initiatives and save money in the long run. Additionally, for those soon to be BD owners who have never worked in the regulated securities industry, full executive teams can be outsourced start-to-finish. Remember, one does not require a license to “own” a broker-dealer, just to manage it.

Compliance Exchange Group provides principal outsourcing and full-service compliance solutions for broker-dealers. Regardless of whether you are searching for a broker-dealer to buy or have already purchased one, we can help in each leg of your journey. Our offerings are well-suited for startups and small to medium-size firms, and come well within the budget. We also provide customizable compliance solutions, delivered according to your needs. For any compliance or broker-dealer related services, give us a call at (631) 595-5305 or visit our website

Leave a Reply