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It is common knowledge in the financial industry that brokers who work for independent broker-dealers (IBDs) are independent contractors, meaning that they are not employees of the firm. Rather, they operate their own businesses within the broker-dealer’s framework. The independent contractor model has been a fundamental feature of the financial industry, allowing brokers to have autonomy when it comes to controlling their business operations and even when selling their practices. However, recent developments at Cetera Financial Group, which serves affiliates comprising the second-largest family of independent BDs in the United States, are challenging this notion by requiring their independent financial advisors to obtain firm approval before selling their practices.
Cetera Sends Firm-Wide Warning
In a message to its approximately 8,000 financial advisors, Cetera warns that independent advisors who do not seek firm approval risk violating securities regulations and facing penalties from securities regulators, particularly the Financial Industry Regulatory Authority (FINRA). The move has raised concerns in the industry, with some suggesting that Cetera is attempting to gain greater control over its financial advisors’ assets.
In the message, Cetera Networks Compliance instructs financial advisors to consult with the firm when considering a deal to sell their practice, whether internally or externally, or the sale will likely be considered an unapproved private securities transaction (PST) or outside business activity (OBA). Unapproved PSTs and OBAs both constitute direct violations of securities regulations that can lead to fines, suspensions, and even a ban from the industry entirely.
“Unapproved PSTs are often deemed a ‘selling away’ violation by regulators and can lead to material challenges going forward,” according to Cetera. “FINRA has suspended, fined, and even barred registered representatives for entering into PSTs or having OBAs without first notifying their BD and gaining approval.”
What’s an OBA?
An OBA is any business or activity that is conducted outside of a registered individual’s employment with their broker-dealer. These activities can include anything from starting a side business to serving on a board of directors. While OBAs are not necessarily prohibited, they must be disclosed to the individual’s broker-dealer and approved by the BD. The purpose of this rule is to ensure that the individual’s outside activities do not create conflicts of interest with their work at the broker-dealer.
Nearly every year, FINRA includes OBAs as a key area of focus for enforcement. Recently, FINRA has increased its focus on OBAs, in response to the growing trend of financial advisors engaging in outside activities, such as using trading apps or participating in the gig economy. Several enforcement actions have been brought against financial advisors for engaging in OBAs, and FINRA shows no intention of stopping.
How should independent advisors proceed?
While the M&A market for advisory practices and firms remains active, Cetera’s recent warning should be of great concern to financial advisors. Independent broker-dealers like Cetera have long represented themselves as having little to no interest in controlling their financial advisors’ practices. Some in the industry are now arguing that the broker-dealer’s newly-adopted stance is an attempt to gain greater control over the financial advisors’ assets and pressure internal sales and acquisitions. Others suggest that this warning could lead many Cetera advisors to seek opportunities with other firms that will permit them to sell their businesses.
The role of broker-dealers in advisor M&A deals will likely continue to be a topic of debate, with firms and advisors seeking to maintain control over their businesses. Consequently, financial advisors face tough decisions when it comes to choosing a broker-dealer with which to register and deciding when to leave a firm. Advisors who choose to go independent are often met with resistance and even punishment from their former firms. With internal compliance teams and securities regulators like the FINRA closely monitoring transactions, it is crucial for financial advisors to consult with their broker-dealers and comply with securities industry rules and regulations — or risk serious consequences.
Interested in selling your firm and planning your succession?
If an advisor is interested in selling their firm externally and is working with Cetera, they should seek representation from a qualified securities attorney who can advise them on how to proceed. AdvisorLaw specializes in providing securities-related counsel to financial advisors and other industry professionals. We have extensive experience in securities law and can help advisors navigate the complex regulatory landscape that surrounds advisor M&A deals.
AdvisorLaw can help advisors prepare the necessary documentation. We also consult advisors on how to comply with Cetera’s recent warning and keep the sale of their practice in full compliance with securities regulations.
AdvisorLaw also offers advisors help with negotiating the terms of the sale of their practice. This may include drafting and reviewing purchase agreements, conducting due diligence on potential buyers, and providing representation in the event of any disputes or legal challenges. We help advisors find the right match through our Practice Purchase Network (PPN) — a comprehensive network of buyers and sellers of advisory practices. We can also provide complimentary business valuations to advisors to determine the current fair market value of their practice.
In the event that any disputes or legal challenges should arise during the M&A process, AdvisorLaw can provide representation for advisors. This may include representing advisors in arbitration proceedings, negotiating settlements with other parties, or defending against any regulatory enforcement actions or TROs. Our team has extensive experience in securities litigation and can provide aggressive representation to protect advisors’ interests.
Overall, AdvisorLaw can provide independent advisors at Cetera with the expert guidance and support they need to successfully plan their succession and make sure that their clients are well taken care of. With our comprehensive services and significant expertise in securities law and regulation, we can help you navigate the complex and often challenging process of selling your practice and transitioning your clients to a new firm.