Most of the time when you acquire or buy a business, you place your bets and take your chances (caveat emptor, as they say). But that's not the way it works on Wall Street. If you're not careful about what you buy, you could wind up with the regulatory equivalent of the Ebola virus, which quickly infects your entire organization, and brings industry regulators around to nail a “quarantine” notice to your door. Trust me, many of the broker/dealers and branches available for sale are not as healthy as they would appear. Before you acquire another firm or branch, consider some of the factors that regulators are likely to scrutinize when reviewing your new business.
Supervision
Member firms must establish and maintain a system (reasonably designed to ensure compliance) for supervising each registered or associated person, as well as the firm's business. Failure to do so for a new member firm (or an expanded one) is among the factors most likely to delay regulatory approval, and could result in future fines and/or suspensions.
Tips:
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Incorporate all new offices, personnel and lines of business into your written supervisory procedures (WSP).
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Do NOT cut and paste another firm's WSPs into your document without fully considering the applicability of all lines of business.
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Transmit a copy of your compliance manual/WSP to all new staff. Send out a memo contrasting old and new policies, and clearly note the surviving ones.
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Prepare a flowchart with all current supervisors' names on it, then contact each designated supervisor. Ask him or her to identify the individuals they are supervising, identify any supervisor whom they themselves report to and confirm their understanding of their supervisory routine. Immediately address any holes in coverage.
Delegation
The president of a b/d is personally responsible (and liable) for the firm's regulatory compliance until he or she reasonably delegates a particular function to another person competent enough to take it on. Although the president may well have been indemnified from personal liability prior to an expansion, such protection may be lost if policies and procedures are not timely and updated, and if competent additional supervisors are not appointed to oversee the expanded business.
Tips:
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Ensure that existing supervisors are qualified to handle new business lines, products and assigned personnel.
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Consider hiring additional qualified supervisors if they are not.
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Confirm that all supervisors understand your different policies and procedures.
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Scrutinize the U4 forms of all new staff to determine whether any compliance issues exist. Be on the lookout for pedigrees from firms with regulatory histories. That's a sure fire red flag for regulators, and you will likely be held accountable for failing to anticipate trouble.
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Determine whether any newly hired reps are now subject to heightened supervision, and verify that they are compliant with their continuing education status.
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Distribute compliance manuals to all new staff, and confirm that all new supervisors are familiar with the WSPs (and are appropriately designated therein).
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On an interim basis (at the least), designate a veteran supervisor at the main office to monitor the implementation of all proposed supervisory changes during the merging of the new and old business.
Risk
The allowances you now make for losses, reneges and trade errors may underestimate the challenges of incorporating new product lines and staff. A failure to properly anticipate increased risk could have a devastating impact upon your net capital.
Tips:
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Make sure you understand the risk profile for all new lines of business, and delegate the oversight of this task to someone competent to do so.
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Ensure that all offices and desks are aware of the limits on their positions, and confirm that all computer models are followed as previously submitted and approved.
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Monitor the levels of cancellations and re-bills for all new offices and staff, and demand satisfactory explanations for any unsatisfactory performance.
By doing all of this you should be able to build a healthy business without too many hiccups, and keep the regulators at bay.
Writer's BIO: Bill Singer practices law at Stark &Stark, and is the publisher of RRBDLAW.com
