Buying an Existing Broker-Dealer
Purchasing an existing broker-dealer can be an attractive way to enter the securities business with minimal downtime. However, several factors influence the feasibility and success of this approach:
Key Considerations
Approved Lines of Business: Ensure the broker-dealer is authorized for the specific lines of business you intend to engage in.
Current Clearing Agent: Understand existing clearing arrangements and assess if they align with your operational needs.
Firm's Background: Investigate the firm's history, reputation, and any regulatory issues it may have faced.
Seller's Cooperation: Determine the seller's willingness to assist during the transition, which can be crucial for a smooth handover.
Buyer's Expectations and Resources: Align your business goals with your qualifications and available resources to ensure feasibility.
FINRA Restrictions: Verify that there are no restrictions or disciplinary actions from FINRA that could hinder your plans.
The Acquisition Process
Find a Suitable Broker-Dealer for Sale: Look for a firm that matches your business objectives. You can add additional lines of business during the acquisition process if necessary.
Conduct Thorough Due Diligence: Collect and review essential documents, such as:
Current membership agreement
Clearing agreement (if applicable)
Form BD (Uniform Application for Broker-Dealer Registration)
The last four FOCUS reports (Financial and Operational Combined Uniform Single Report)
Most recent annual financial audit
FINRA and other regulatory reviews and responses
Copies of fidelity bonds
SIPC (Securities Investor Protection Corporation) registration
Corporate formation documents and operating agreements
Vendor agreements, including leases and personnel contracts
Enter into a Purchase Agreement: Ensure the agreement satisfies your requirements and complies with FINRA regulations.
File the Continuing Membership Application (Form 1017): Submit your application through the Central Registration Depository (CRD) system, detailing proposed ownership, financing, and supervisory structures.
Respond to FINRA Inquiries: Be prepared to provide detailed answers to any questions regarding your firm's structure, financing, and supervision.
Finalize the Process: Continue engaging with FINRA until you receive approval or denial.
Filing Requirements
General Securities Principal: Must hold a Series 24 license with relevant supervisory experience.
Financial Operations Principal: Must hold a Series 27 license and will be responsible for filing FOCUS and financial reports.
Adequate Financial Resources: Typically, you should have enough capital to cover 12 months of operating expenses.
Essential Documentation
Ownership and organizational charts
Flow of funds chart
Comprehensive business plan
Resumes of supervisory personnel
Continuing education plan
Email compliance program
Anti-money laundering procedures
Written supervisory procedures
Business continuity plan
Note: The acquisition process can be lengthy and requires patience and persistence.
Filing an Application for a New Broker-Dealer
Starting a broker-dealer from scratch involves additional steps but allows for complete customization of your firm.
Key Points
Approval Wait Time: Anticipate a 4-6 month period before you can commence any business activities.
Establishing Foundations: You'll need to set up all documents and arrangements anew, including fidelity bonds and SIPC registration.
Comparison of Options
Buying an Existing Broker-DealerFiling a New ApplicationPros- Operational within ~45 days or immediately
- Existing infrastructure and agreements- Saves ~$65,000 in acquisition costs
- No need for due diligence on an existing firm
- Allows for a custom-tailored setup- Acquisition cost of around $65,000
- Requires extensive due diligence- Takes 4-6 months before operations can begin
Conclusion
Choosing between buying an existing broker-dealer and starting a new one depends on your resources, timeline, and business objectives. Acquiring an existing firm offers a quicker path to operation but comes with higher upfront costs and the need for due diligence. Starting anew is cost-effective and customizable but involves a longer wait before you can begin operations.