How to Buy a Broker Dealer or file a New Broker Dealer Application

Buying an existing Broker Dealer:

Buying an existing Broker Dealer or filing a New Member Application is a question that I get asked on a regular basis and depends on many factors as follows:

1.  The lines of business that the existing Broker Dealer is approved for (This is very important as buyers think that they can simply put a new business line such as Digital Platforms or other specialty lines of business into the broker dealer and start operating. The business lines must match exactly what you wish to do otherwise you should start a new application).
2.  The current clearing agent
3.  The background of the Firm
4. The seller’s willingness to work with the purchaser
5. The purchaser’s expectations
6. The purchaser’s qualifications and resources
7. No restrictions from FINRA

The Process:

1. Find a Broker Dealer for sale. The Broker Dealer should have the lines of business that you use most. (You can add additional lines of business during the process).

 2. Conduct due diligence. At a minimum, collect the following:

•  Current membership agreement
• Corporate documents including formation and operating agreements
• Any loans/Liens of credit or other debt obligations
•  Clearing agreement (if any)
•  Copy of form BD
•  Last 4 Focus reports
• Current Annual Financial Audit
• Copies of the last FINRA and any other regulatory body review and the Firm’s response
• Copies of the Firm’s fidelity bond
• Copies of the Firm’s SIPC registration
• Corporate Formation Documents & Operating Agreement if applicable
• Vendor Agreements (Including Leases, email archive & personnel/consulting Agreements)

3. Enter into a purchase agreement

Be sure that the purchase agreement lists all the items that you expect as a purchaser and conforms to FINRA’s rules and regulations.

4. File the Continuing Membership Application (the 1017 application) with the applicable district. (This is a detailed application which has too many nuances to go into detail here).

5. Wait for a response from the district. (This response will have numerous questions regarding the structure, financing and supervision etc, of the proposed ownership).

6. Respond to the district. (Answer all of the districts questions with as much detail as possible).

7. Wait for next response then repeat 5, 6 and 7 until approved or denied.

You will typically need the following:

1. General Securities Principal: Licensed Series 24, with at least one year of direct supervisory experience, (or 2 years indirect) relating to all the lines of business that the Firm will engage in.

2. Financial Operations Principal: Licensed Series 27 this is the person that will file the Firms FOCUS reports either quarterly or monthly depending on the Firms net capital requirement.

3. Adequate resources in the bank (usually 12 months worth of expenses.)

4. Business Plan

5. Continuing Education Plan

6. Email compliance program

7. Anti Money Laundering Procedures

8. Written Supervisory Procedures

9. Business Continuity Plan

10. Pro-Forma Financials

11. LOTS of PATIENCE!

The above is designed to give a general overview of the process. Feel free to contact me to discuss your specific situation. Also, be aware that under FINRA Rule, while a Firm may effect the change before the final, written decision is issued, FINRA may place an interim restriction prohibiting the proposed purchaser from conducting any business which may remain in effect until the application is approved or denied.

Filing an application for a new Broker Dealer:

Filing for a new Broker Dealer is essentially the same process except for a) you will have to wait to get approval before conducting any transactions (4-6 months) b) All of the items have to be done from scratch (Fidelity bond, SIPC etc).

Buying an existing Broker Dealer:

Pros: Operating and transferring of ownership within 45 days

Cons: Cost around $65,000 (for a non producing shell with limited business lines) and requires a due diligence process.

Filing a new application:

Pros: Save $65,000 no due diligence, fresh Firm with no potential issues and custom tailored to your business.

Cons: Takes 4-6 months for approval

Resources:

Financial Regulatory Authority (FINRA)

Luxor Financial Group, Inc (LFG)