It may be the ultimate example of the heavy price that a BD pays for being subject to FINRA regulation, and it happens all the time. Broker-dealer A decides to cease operations, for whatever reason, so it files a Form BDW (which, technically speaking, is a request by the BD to withdraw its FINRA membership and SEC and state registrations). In addition, in connection with that decision, broker-dealer B contracts to buy A’s assets (read “assets” to be “customer accounts”). As a result of that asset sale by A to B, FINRA requires A to file a CMA under Rule 1017.[1] A full-blown CMA. In other words, what this means, in essence, is that A has to ask FINRA’s permission simply to go out of business (for if the CMA is denied, then the asset purchase cannot happen.)
Is there another industry anywhere with such an absurd requirement? Can you imagine an unpopular restaurant that wants to shut down, but is forced to continue serving lousy food because the health department won’t allow it to close? Or an airline compelled to keep flying unprofitable routes because it first has to ask the FAA for permission to mothball its jets? No, even though those are both regulated entities, their business exigencies trump their respective regulators’ ability to dictate to them. But not a broker-dealer.
Even a cursory review of Form CMA reveals that it was not designed to address the situation where a BD is selling its all of its assets. The vast majority of the questions posed on the form do not contemplate the scenario where the BD does not survive the asset transfer. Yet, FINRA still requires that the entire form be completed, even if answer after answer is “not applicable”; in fact, if an applicant submits a form that FINRA deems to be “substantially incomplete,” the CMA will be summarily rejected…and the firm remains the owner of the assets it is seeking to sell.
Not surprisingly, when a broker-dealer files Form BDW and is trying to sell its customer accounts so it can close its doors, time is typically of the essence. The sooner the transition happens, the more accounts will transfer, and the more valuable the assets are to both the selling firm and the acquiring firm. Moreover, once Form BDW is filed, the firm’s registered reps will very quickly scatter to other broker-dealers (typically to the firm that is attempting to acquire the customer accounts, but not always), since they will be prohibited from conducting anything other than unsolicited liquidating trades activities at the firm that is closing. Until the CMA is approved, however, or, possibly, the use of a negative consent bulk transfer letter, in the absence of a written direction to transfer from the customer, the accounts must remain where they are, at BD A, orphaned and restricted.
One might think that under such circumstances, given its proclaimed interest in “investor protection,” FINRA would act swiftly to consider and approve the CMA, or at least the bulk transfer letter, to ensure that someone is watching the abandoned customer accounts. Sadly, that is not the case. It takes 60 days for the SEC to approve a Form BDW. Once that happens, a withdrawing firm loses any ability to service its clients, even on a limited, liquidating-only basis. In my experience, FINRA uses nearly all of that time period to deal with the CMA, ensuring that the firm going out of business has almost no time to deal with its customer accounts. That is in no one’s best interest, particularly the customers. Given that, FINRA would be wise to re-think the process by which customer accounts of withdrawing firms are handled.
[1] If the assets to be acquired exceed 25% of B’s existing assets, then B will also need to file its own CMA.