What’s a Shell Broker-Dealer?
It is publicly understood that the securities industry and its transactions are highly regulated and monitored. Whether you plan to deal with public or private securities, becoming a registered Broker-Dealer is the only way to do so legally. However, if you plan to start a new Broker-Dealer, you will discover the registration process via FINRA, related to starting a Broker-Dealer, is a time-consuming process. Regardless of your experience, the registration process for a brand new Broker-Dealer will take time. Typically, it takes about six months or more for a new Broker-Dealer to receive approval from regulators. As a result, this usually means wasting time and missing out on valuable business opportunities. For this reason, most people choose to buy a shell Broker-Dealer instead of going through the timely process of New Member registration. But, what is a ‘shell’ Broker-Dealer exactly?
Shell Broker-Dealers Decoded
Essentially, a shell Broker-Dealer is one that has little to no past accounts or production. But, why would a Broker-Dealer even exist if it’s not going to conduct any business? Truthfully, the reasons are endless. However, generally speaking, business opportunities or plans simply change for owners of these firms. In such a case, the newly established firm never conducts any business, even though its Broker-Dealer registration has been completed and approved. As a result, the Broker-Dealer exists as a shell.
Why Buy A Shell Broker-Dealer?
Simple, buying a shell Broker-Dealer will save you time. When done correctly, the new owner(s) can be up and running in roughly 45 days. Whereas registering a new Broker-Dealer can take several months for FINRA to complete its review process. During this review process owners will not be able to conduct any business. Unlike starting a new BD, when acquiring a shell, the new owners can begin to conduct business under the existing Broker-Dealer’s previously approved license(s).
Concerns of Liability
When considering to buy a Broker-Dealer, many have liability concerns and rightfully so. The last thing anyone wants is to purchase a firm, only to find out later that previous transactions done by that Broker-Dealer may cause liability concerns for the new owner. Because of this, there are a few things to consider:
Understand The Firm That You Are Buying
While this may seem oversimplified, coming to know the owners and principles of the current business can go a long way. When you fully understand the firm you want to buy, you’ll see how effective any indemnity clause may be.
Have A Solid Purchase Agreement
Various issues and concerns can be evaded by addressing them in the purchasing documents. Things like indemnity, capital structure, and clawback provisions can go a long way when it comes to protecting yourself, the purchaser.
Conduct Due Diligence
No matter the purchase price, thorough and comprehensive diligence should never be neglected.
A True Shell Has No Business
As a shell Broker-Dealer, it should have little to no previous production. Meaning, it has never made a transaction. Or, the few past transactions can easily be cross-checked through due-diligence for liabilities.
Buying A Shell Broker-Dealer
If you have a professional advisor on your side, the process of buying a shell Broker-Dealer can be rather simple. An expert advisor is always highly recommended considering the complexities of regulatory matters related to Broker-Dealers. Not only can they advise on compliance matters, but also find solutions to suit your specific needs.
Find a Shell BD to Purchase
After hiring a professional advisor, they will analyze your specific needs. Then, they will search for a shell Broker-Dealer that is approved for the ‘business lines’ that meet those needs. It is important to remember, apart from registering with FINRA, a Broker-Dealer also needs to be approved for specific ‘business lines’. Therefore, purchasing any random shell Broker-Dealer may not have the approved business lines to achieve the desired results. As a result, it is vital to do your homework and to create a plan.
Thorough Due Diligence
Once you find a suitable shell Broker-Dealer, the vital process of due diligence begins. Due diligence is unarguably the most crucial step, which is why it is strongly advised you seek the guidance of an experienced professional advisor. An advisor will be an enormous help when it comes to verifying relevant documentation, such as:
– Form BD
– FOCUS reports
– Gateway forms
– Past or pending litigation
– Membership agreement with regulatory bodies
– and other important items
File Change of Ownership – FINRA Rule 1017
Now, once due diligence is complete, and the shell seems flawless, you will inform FINRA of the change in ownership. Under FINRA’s membership rule 1017, you must inform FINRA at least 30 days in advance of completing the change in ownership; this is done by filing a notice letter. Once FINRA has been notified, 30 days have passed, and FINRA has not provided a notice rejecting the transaction, the deal can close. When the transaction is complete you can begin to conduct business using the shell Broker-Dealer. Keep in mind, FINRA can take a few months to approve the transaction entirely.
Obstacles When Buying a Shell Broker-Dealer
When buying a shell Broker-Dealer there are several pitfalls to avoid during the purchasing process. Our partner, Compliance Exchange Group, has written extensively on these pitfalls and how to avoid them, including the article, “What is a Shell Broker-Dealer? And What is the Process of Buying One?”
Managing Compliance When Buying a Broker-Dealer
It might not be a big leap to run to your own Broker-Dealer if you’re currently licensed and operate as an OSJ. But for most unfamiliar with the regulated industry, compliance can be difficult. While larger firms can afford to hire in-house, full-time licensed principles to handle compliance, most small to mid-size firms don’t have the resources. For firms that lack the resources of their larger competitors, outsourcing compliance is unarguably the best option. Outsourcing a firm’s compliance responsibilities allows the owners to focus on the firm’s core initiatives and save money. Furthermore, full executive teams can be outsourced for those soon to be Broker-Dealer owners with no experience related to regulations within the securities industry. Remember, you don’t need a license to own a Broker-Dealer, but you need a license to manage it.
Our Team has years of experience registering shell Broker-Dealers via FINRA. And thanks to our partnership with Compliance Exchange Group, we can provide your newly acquired firm with licensed principals along with full-service, turnkey compliance solutions for all types of Broker-Dealers. Whether you are in search of a Broker-Dealer to buy or have just purchased one, we can help. Our services for startups or small to medium-size firms come well within budget. Register Now to search through our list of available shell Broker-Dealers. Also, if you have any compliance or Broker-Dealer related service questions, contact us online or give us a call at (631) 595-5305.