I'm preparing to merge my small brokerage firm with a registered investment adviser. Do we have to wait for FINRA approval before we can close the transaction?

F.A., Florida

If there's going to be a change in ownership of the broker-dealer (for example, by adding additional owners of the firm), then you need to file a Continuance in Membership Application (CMA). Take a look at NASD Rule 1017(c). It requires that you provide FINRA with 30-day advance notice of the transaction in order to give the staff prior notice that the change will occur and to allow FINRA to analyze the change of ownership and render a decision. You may effect the change before FINRA makes a final decision, but FINRA may impose interim restrictions on the firm that would remain in effect until a decision is made. In the event that FINRA denies the application, then the new owners would have to cease doing business and unwind the transaction. Keep in mind that FINRA can request additional documentation in conjunction with the CMA such as: 12-month income and expense projections; documentation reflecting the source of funding for the new owners and their financial situation; copies of bank statements from prior months from all parties; and updated written supervisory procedures and business plan, among other things. See Notice to Members 04-10 for more information.


I've been trying to create strategic relationships with complementary businesses, (CPAs, attorneys, etc.), and am continually running into revenue sharing arrangements that preclude someone from referring me business because they receive compensation for referring it somewhere else. Some of these are RIA only while others are at least dually registered. I did not think there was any circumstance where a FINRA representative could share revenues/fees with a non-member. Are there more options available using advisor fees as an investment advisor?

R.D., Via E-mail

This question comes up quite frequently and the answer depends on several factors. For individuals who are registered representatives of brokerage firms only, the answer is simple. Registered representatives are prohibited from sharing commissions with non-licensed individuals. Period. This does not mean, however, that you can't hire someone as a consultant and pay him a flat fee for his work. But, you need to make sure that the fee is reasonable when considered against the work performed and that it is not related to a percentage of the transaction. For example, if you were a registered rep and then, a CPA (who was not licensed as a stockbroker) sent you a client, you could hire the CPA to do a forensic analysis of the client's account and pay the CPA his usual fee for doing so. However, you could not give the CPA a percentage of the commissions you received for transactions in the client's account. For registered investment advisers, however, the rules are different. You can, in some cases, share advisory fees with non-licensed individuals in some states. But, some states require these "solicitors" to be registered as investment adviser representatives. While other states do not require solicitors to be registered, I believe just about every state requires that the adviser have a written agreement with the solicitor and that the adviser disclose the arrangement in their disclosure brochure. There are other requirements as well, such as the solicitor agreeing to provide a disclosure statement of their own and a copy of the adviser's disclosure brochure to the referred client. In situations where an individual is dually registered as an investment adviser and a registered representative, the person can share their advisory fees with the referring party (assuming compliance with the particular state's requirements regarding solicitors) but not their commissions.


Alan J.Foxman is an attorney in private practice in Boca Raton
and also an independent contractor for National Compliance Services, Inc.
in Delray Beach, Florida. He worked as a staff attorney in the office of dispute resolution
at the NASD (now known as FINRA), where he handled more than 1,500 arbitrations.
He can be reached at this email address.

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