The Business Plan

NASD Rule 1013 requires a detailed business plan describing all material aspects of the business that will be, or are reasonably anticipated to be, performed at and after the initiation of business operations. The business plan will serve as one of the key documents in consideration of a newly initiated membership application, as well as a current member’s change of ownership, management, control, or operations.


Constructing a thorough business plan is likely to take considerable time. It is well worth the effort. The process of creating a business plan allows the Applicant to consider important aspects of the intended business to enhance the potential for success. The FINRA District Office staff, by having a complete understanding of the proposed business, will be in a position to point out areas of potential difficulty that could detract from the efficiency and effectiveness of the business.


The Applicant’s business plan should address the five general areas discussed below.


I.  Present and Projected Financial Condition


The Applicant’s present and projected financial statements will include: (1) a trial balance and balance sheet with supporting schedules and a computation of net capital to be prepared within 30 days before the date of the application, and updated within 30 days prior to the date of the Membership Interview; and (2) monthly projections of income and expenses for the first 12 months of operation.


The pro forma financial forecasts will be different for each Applicant. However, the more detailed the plan, the more the Applicant will be able to identify future challenges and opportunities in moving the business forward. Applicants typically find forecasting revenues to be the most difficult part of developing a business plan. Yet, like any business, there must be a reasonable basis upon which revenues can be forecasted.


Some, but certainly not all, of the sources an Applicant may consider as forecasted revenues include:


Corporate financing or other underwriting income
Interest income
Payment for order flow
Principal trade revenue
Public finance income
Research or evaluation fees
Service fees
Trading department income


Expenses are far more numerous in category and, in most cases, more predictable than revenues. The Applicant’s forecast should be as specific as possible to reduce the chance of overlooking a significant business cost.


Some areas for consideration of forecasted expenses include:


Accounting Fees
Advertising and Promotion
Assessments, Dues & Fees
Bank Charges
Clearing Costs
Commissions Payable
Computers & Technology
Consulting Fees
Continuing Education
Employee Benefits
Insurance, Fidelity Bond
Legal Fees
Marketing Costs
FINRA & State Registration Fees News Services
Office Equipment/Supplies
Payment for Order Flow
Payroll Taxes
Quotations Equip.
Research Costs
Service Bureaus
Transfer Fees
Workmen’s Compensation


The financial information should display the effect such revenues and expenses would have on the balance sheet and also describe any capital infusions or withdrawals expected during the year.


II.  Marketing Plan


The Applicant’s marketing plan should include a description of the general products to be offered and sold; a profile of the intended customer base with specific reference to the portions that would be retail and institutional; and marketing techniques to attract customers such as brochures, seminars, telemarketing efforts, mailings, technological media (e.g., the Internet), anticipated travel, or other initiatives. This part of the business plan should include a statement as to whether markets are to be made and, either by example of specific securities or other narrative description, the number to be made, the type and volatility of the securities, together with a statement of the anticipated maximum inventory positions to be created.


The plan should also discuss, in appropriate detail, any intentions to distribute or maintain securities products in proprietary positions, as well as a description adequate to identify the risks, volatility, degree of liquidity, and speculative nature of the products. Similarly, the plan should describe intentions to enter into contractual commitments such as underwritings or other securities-related activities.


Furthermore, where there is any other contemplated marketing activity or event that could have a material impact on the Applicant’s capital or overall business operation, whether such occurrence be of a negative or positive nature, this should be described as specifically as possible.


III.  Organizational Structure


The section of the business plan describing the organizational structure of the Applicant should include the following:


A.  Type of Organization and Organizational Chart

This includes the form of the business enterprise (e.g., sole proprietorship, partnership, limited partnership, corporation, S-corporation, limited liability company, etc.) and organizational charts (one reflecting the organization at the initiation of the business and others to indicate anticipated changes to occur during the first year of operation).


B.  Personnel and Recruitment


This part of the business plan also should identify how the sales force and support staff will be assembled over the firm’s first 12 months of business, including probable incentives used in any recruitment effort, a general recruitment profile indicating the types of educational qualifications and prior business experience sought, measures to verify such qualifications, and steps to be taken for the training of such persons together with the expected costs for all of these areas. Such information, again, will be useful in identifying the Applicant’s projected expenses and, therefore, the capital resources needed as well as the adequacy of supervisory methods.


C.  Branch Office Structure 


The business plan should describe the proposed branch office structure over the firm’s first 12 months of business, including the number of branch offices to be created, the location of the offices and whether an office would be required to be registered as an OSJ office under NASD Rule 3010. The business plan also should identify the names of the persons who will be in charge of each office, to the extent possible.


D.  Business Facilities


A description of the business facilities, including location, the number of persons that such facilities will support, and the general costs thereof should be incorporated into this section of the business plan. In addition, the business plan should disclose leases entered into, or that are expected to be entered into, including the terms and conditions together with the parties to the agreement. For an Applicant with branch offices, the business plan should indicate how expenses will be allocated. The business plan also needs to be specific as to the approximate number of staff within each branch office and whether there are significant differences between offices as to products to be offered or other significant ways that business will be conducted.


IV.  Present and Future Sources Of Capital


The business plan should describe the present and future sources of capital. All of the sources of Applicant funds, not only those directly flowing into the enterprise but also those obtained indirectly, such as through loans or arrangements with individuals or entities associated with the Applicant, should be disclosed. Applicants will be asked to provide documentation of sources of capital used to fund the firm including, but not limited to, bank statements, canceled checks, and corporate minutes. In addition, the Applicant should indicate whether such funding was in the form of cash, other assets, or capitalization arrangements whereby certain business obligations may be assumed by others. This portion of the business plan should include a description of any sources of future financing should the need arise, together with evidence of the certainty of such assets. This section also should describe any other external arrangements that may have an effect upon the control of the Applicant or persons within the management structure, including indemnification arrangements.


V.  Technology to be Employed

The Applicant’s business plan should describe the technology that will be employed to facilitate the securities activities of the broker/dealer. This, of course, is an emerging area but one with significant impact on operational costs, as well as on areas of proper supervision. This section should include a discussion of the technological support for the sales staff, a listing and a forecast of the cost of any communication devices, such as quotation devices and news services, and a discussion of any and all contemplated use of the Internet.


The application should provide a description of the communications and operational systems that the applicant intends to employ for the purpose of conducting business with customers and other members and the plans and procedures the applicant will employ to ensure business continuity, including: system capacity to handle the anticipated level of usage; contingency plans in the event of systems or other technological or communications problems or failures that may impede customer usage or firm order entry firm or execution; system redundancies; disaster recovery plans; system security; disclosures to be made to potential and existing customers who may use such systems and supervisory or customer protection measures that may apply to customer use of, or access to, such systems.