Mergers, Acquisitions & Business Transfers
Firms involved in mergers, acquisitions, asset transfers (which may include but is not limited to registered representatives and customer accounts) and other operational changes must attend to various regulatory and investor-protection obligations.
FINRA encourages firms, and in some cases requires them, to notify their FINRA coordinator when planning these changes. By discussing these proposals well in advance of implementing them, firms may find that it helps them address operational problems. Please see Rule 1017 (a)(3) for more information.
The following changes and transactions will prompt required firm actions, which are described below.
- Mergers and/or acquisitions of other broker-dealers.
- Customers changing firms on their own initiative.
- Registered representatives with an established customer base who bring customer assets along with them when they move from one firm to another.
- Transfers of brokers and/or customers as part of an acquisition of a portion of a business, such as the purchase of a trading desk from another firm.
Please note that this Web page highlights common regulatory concerns. It does not explore all the potential issues that may come up during a merger, acquisition or business transfer.
Firms should review the following areas when planning material business changes, among others.
- Continuing Membership Application (CMA) and Membership Agreement Changes (MAC)
You should assess how your firm’s merger- and transfer-related changes will affect its FINRA membership status. NASD Rule 1017a requires firms to file a CMA when they seek to materially expand their operations or activities, and a MAC when they seek to modify or remove restrictions imposed in a membership agreement.
Learn more about CMA requirements in FINRA’s Continuing Membership Guide.
- Policies and Procedures
When planning organizational or operational changes, firms should review each entity’s policies and procedures. Merging firms should consider a top-to-bottom comparison. A more limited review may be appropriate when a firm acquires a portion of a business from another firm. The revised and/or combined policies and procedures should be comprehensive and fully reflect the new business model.
Firms should establish a governance structure for the business composition and organization of the new or modified entity. This should provide a clear roadmap for the review, assessment, approval and escalation of the new firm’s business activities.
- Annual Compliance Certification
A firm’s compliance personnel should play an integral role in developing the overall structure of the post-transition business entity. (Learn more in FINRA Rule 3130.) Interaction with compliance should be sufficiently robust at all stages of the integration process.
Firms must ensure that they have established clear lines of supervision for the post-transition business entity. Properly licensed, supervisory principals must have access to systems and information sufficient to perform their duties.
- Customer Account Transfer
During business transitions, both the releasing (carrying) firm and the receiving firm must coordinate plans to expedite customer account transfers, as required in NASD Rule 11870. They also must treat customers fairly and protect their interests throughout the transition.
- Books and Records Retention
FINRA encourages firms to fully catalogue and review processes for retaining and retrieving required books and records. Be prepared to maintain legacy database systems to run in parallel with new or combined systems, if necessary, to ensure records remain accessible.
- Communications With the Public
FINRA urges merging firms to develop interim guidelines for referrals or other joint communications during the integration process. These guidelines may address such issues as sharing information with various business partners in the merging entities (e.g., research analysts, investment bankers, trading and sales people).
- Back Office and Operations
You should assess how merger- or transfer-related changes will affect your firm’s financial and operational status. This includes anticipating the effect of a merger or acquisition on net capital with the use of pro forma and reserve capital calculations.
- Systems and Technology
Firms should consider creating a detailed systems migration plan, which can help facilitate a seamless transition to the final infrastructure in a merger or acquisition. FINRA encourages firms to notify us when planning a significant electronic data processing system conversion, including conversions that are part of a business transfer. Find below more information on these issues, including related guidance, rules and regulatory notices.
|NASD Rule 2430||Link||02-20-2015|
|Notice to Members 92-11||Link||02-20-2015|
|Incorporated NYSE Rule 342||Link||02-19-2015|
|NASD Rule 1017||Link||02-05-2013|
NASD IM-2110-7 (FINRA Rule 2140 effective 6/16/09)
|NASD Rule 2210||Link||02-05-2009|
|NASD Rule 2211||Link||02-05-2009|
|Incorporated NYSE Rule Interpretation 401/03||Rule Interpretation||12-15-2008|
|FINRA Rule 3130|
FINRA expects compliance personnel to play an integral role in developing the overall structure of the post-transition entity (see FINRA Rule 3130 (Annual Certification of Compliance and Supervisory Processes)). As such, management should ensure that interaction with compliance is sufficiently robust at all stages of the integration process so that compliance staff not only can provide meaningful guidance as decisions are being made, but also can have a reasonable opportunity to develop an effective compliance infrastructure in advance of changes to the business platform.
|Regulatory Notice 08-57|
FINRA Announces SEC Approval and Effective Date for New Consolidated FINRA Rules
|NASD Rule 1011(k)||Link||06-26-2008|
|Letter from FINRA Office of General Counsel, May 15, 2008||Rule Letter||05-15-2008|
|Regulatory Notice 08-24|
Proposed Consolidated FINRA Rules Governing Supervision and Supervisory Controls
|NASD Rule 3520||Link||12-31-2007|
|Regulatory Notice 07-55|
FINRA Reminds Member Firms of Their Obligations Regarding Background Investigations of Prospective Personnel
|Regulatory Notice 07-50|
SEC Approves Amendments to NASD Rule 11870 and NYSE Rule 412 to Conform with NSCC's ACATS Transfer Cycle Time Frames
|NASD Rule 11870 (Customer Account Transfer Contracts)|
This rule requires that both the releasing (carrying) firm and the receiving firm coordinate to expedite customer account transfers, and that they treat customers fairly and protect their interests throughout the transition. Requirements regarding notice, timeliness, portability and safeguarding customer information should guide firms in customer account transfers. More generally, firms also should consider the ultimate effect the transfer process will have on the customer and work to reduce those burdens where possible.
|Regulatory Notice 07-36|
FINRA Clarifies Guidance Relating to SEC Regulation S-P under Notice to Members 07-06 (Special Considerations When Supervising Recommendations of Newly Associated Registered Representatives to Replace Mutual Funds and Variable Products)
|Notice to Members 07-06|
Special Considerations When Supervising Recommendations of Newly Associated Registered Representatives to Replace Mutual Funds and Variable Products
|Notice to Members 05-49|
NASD Reminds Members of Their Obligations Relating to the Protection of Customer Information
|Notice to Members 05-26|
NASD Recommends Best Practices for Reviewing New Products
|Interpretive Letter to Tamara K. Salmon, Investment Company Institute||Rule Letter||03-16-2005|
|Interpretive Letter to George T. Simon, Foley & Lardner, LLP||Rule Letter||01-26-2005|
|Notice to Members 04-79|
SEC Approves New Chief Executive Officer Compliance Certification and Chief Compliance Officer Designation Requirements