Broker Dealer Myths Revealed

Broker Dealer Myths Revealed

Greetings from all of us at BD Exchange! The first quarter of 2011 is off to a flying and we have seen not only the typical shells flying off the shelf but producing firms are back in play as well as Self clearing firms. Each day we receive dozens of phone calls from potential buyers and thought now might be a good time to educate both buyers and sellers on some common misconceptions that are floating around out there and address some of the most common questions we get on a daily basis from buyers and sellers.

“ I need a firm with a two principal waiver”
The two principal waiver was and is designed for firms with limited personnel and resources. It is no intended however to allow a buyer to have less supervision. This waiver also is not grandfathered in so during the Continuing Membership Interview (CMI) FINRA can revoke this waiver if they deem that more supervision is needed. In addition, just on sheer numbers, the waiver is designed for a one man shop not a group of ten brokers who want to buy a firm.

“ I need a shell broker dealer approved for at least 50 brokers”
This is one of the most common requests we receive yet it’s the hardest to understand. Over the years we have come across some firms that were approved for dozens of reps but they are few and far between for the simple fact that as most firms wind down their operations they are forced to reduce the number of reps to reflect the amount of Supervision needed. A firm that once had 100 reps is not going to keep a full staff of supervisors on board if there is no revenue being generated so often times they will amend their Membership Agreement to reflect fewer offices and fewer reps.

“ My firm has No Restrictions on it’s membership agreement so its worth a lot”
This is one of the biggest myths that sellers have concerning their brokerage firm and its membership agreement. I have viewed hundreds of membership agreements and can tell you first hand that 99% of them had that little line that says ‘RESTRICTIONS: NONE’. This can be very confusing but the reality is that there are no current restrictions on the approved lines of business. This does not mean that a firm approved for Mutual Funds only can just send notice and start trading stocks and bonds the next day. All it means is that there are no restrictions on the type or size of your mutual fund trades. Have had some owners claim they can make markets or even go self clearing all because they read the no restriction part of their membership agreement. Nothing could be farther from the truth and I would urge all owners to contact your local examiner before you decide to “make markets” bases on this one sentence.

We would recommend that all owners have their membership agreement reviewed yearly and weigh the cost of keeping certain permissions open. Fewer permissions does make your firm les valuable however if you are looking toward the future and do not plan on selling your firm then consider the elimination of unwanted or unused business lines.