Mergers, Acquisitions and Business Transfers

These Web pages provide general information about firms' regulatory and investor-protection obligations in mergers, acquisitions, business transfers and other organizational or operational changes. Such transactions and changes include:

  • mergers with or acquisitions of other broker-dealers;
  • customers changing firms as a self-initiated move;
  • registered representatives with an established customer base who change their association from one firm to another and bring customer assets; or
  • transfers of brokers and/or customers as part of an acquisition of a portion of a business (e.g., purchasing a trading desk from another firm).

Please note: The information contained here is not intended to speak generally to mergers, acquisitions and business transfers beyond a discussion of the commonplace regulatory requirements that may be applicable to such transactions. This information is not necessarily all-inclusive as to every regulatory requirement that may be germane or would otherwise arise as attendant to these transactions.

 

Firms are encouraged and, in some cases may be required, to notify FINRA when planning organizational or operational changes. Firms should discuss the planned transaction with their FINRA Coordinator. Discussing these proposals with FINRA well in advance of implementation may help firms address operational problems.

 

Please note that these Web pages highlight common regulatory concerns—not all of the potential issues that may arise during a merger, acquisition or business transfer are explored. Firms are once again encouraged to contact FINRA as early as possible in the transition process.

 

 

Continuing Membership Application and Membership Agreement Changes

Firms should assess the impact that merger- or transfer-related changes will have on their FINRA membership status. In doing so, firms are required to file an application whenever they seek to materially expand their operations or activities and for other business events, as indicated in NASD Rule 1017(a) (Continuance in Membership Application or CMA), and whenever they seek to modify or remove restrictions previously imposed in a membership agreement (Membership Agreement Change or MAC). Through early consultation with FINRA and adherence to the process outlined in FINRA's Continuing Membership Guide and related guidance, firms can learn about the core requirements for making organizational or operational changes.

Regulations and Rules
Firms planning a merger, acquisition or business expansion/transfer should be familiar with the following rules and regulations. This list is not comprehensive, as requirements may vary depending on each firm's business. It is the responsibility of each firm to research all laws, regulations and rules (in their most recent versions) that may be applicable to their particular business model.

NASD Rule 1017
Application for Approval of Change in Ownership, Control or Business Operations

NASD Rule 1011(k)
Definitions: Material Change in Business Operations

IM 1011-1
Safe Harbor for Business Expansions.

Incorporated NYSE Rule 312
Changes within Member Organizations

Incorporated NYSE Rule Interpretation 401/03
Conversions, Acquisitions and Changes in Business Activities and Early Warning of Developing Problems
 

 

Policies and Procedures

Firms planning organizational or operational changes should review each entity's policies and procedures. Merging firms should consider conducting a top-to-bottom review and comparison; a more limited review and revision may be appropriate in cases where a firm is acquiring a portion of a business from another firm. The combined and/or revised versions of the policies and procedures should fully reflect the new business model and should be comprehensive (i.e., there should not be any gaps in coverage). In comparing each firm's procedures, firms are encouraged to adopt best practice versions of policies and procedures, where possible, and ensure that necessary updates are made. In addition, firms should establish robust training and communication programs, which are essential to successfully implementing new policies and procedures or introducing existing policies and procedures to new personnel.

 

Governance

Firms should establish a governance structure that reflects the business composition and organization of the new or modified entity and provides a clear roadmap for review, assessment, approval and escalation of the new firm's business activities. As part of this process, firms are encouraged to review and modify the charters and/or mission statements for existing governance committees—such as commitment committees, new products committees and audit committees—to reflect the new management structure. Relevant charters should fully and clearly assign responsibility for review, oversight, reporting and approval of business activities of the newly merged entity. Where interim or ad hoc governance bodies are created during transition phases, firms are encouraged to develop a clear plan for establishing a permanent governance structure as soon as practicable.
 

 

Annual Compliance Certification

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.

Related Guidance
Notice to Members 04-79
Annual Compliance Certification and Designation of Chief Compliance Officer

Regulatory Notice 08-57
The SEC approves the adoption of NASD Rule 3010 and IM-3013 as FINRA Rule 3130 without material change, renumbering them to FINRA Rule 3130, effective December 15, 2008.

 

Supervision

Firms are responsible for ensuring that, post-transition, they have established clear lines of supervision and that supervisory principals have access to systems and information sufficient to perform their duties. In addition, firms should make sure that supervisory principals are properly licensed and/or should institute strict timelines for gaining proper licenses while delegating interim supervisory duties.

 

As part of their overall due diligence, firms should have a process to pre-screen incoming registered representatives, which may include provisions to place representatives on heightened supervision, if necessary. In addition, receiving firms must have a process reasonably designed to supervise newly acquired registered representatives and their accounts to ensure that recommendations regarding legacy holdings are not influenced by the fact that sale and replacement of securities will yield greater compensation. For example, when a transferring registered representative brings customer accounts that contain mutual funds and variable products, the firm should, for a reasonable period, review replacements recommended by the representative and identify recommendations to liquidate or surrender mutual funds or variable products that may be inconsistent with the customer's investment needs and objectives or that have not been preceded by appropriate disclosure to the customer. (See also "Customer Accounts, Portability," below)

 

Useful Links
Registration
Additional information for firms related to qualifications and exams, Central Registration Depository (CRD) and Investment Advisor Registration Depository.

Regulatory Notice 07-55
Personnel Background Investigations: FINRA Reminds Member Firms of Their Obligations
Regarding Background Investigations of Prospective Personnel

Regulatory Notice 07-06
Special Considerations When Supervising Recommendations of Newly Associated Registered Representatives to Replace Mutual Funds and Variable Products

Supervisory Control Web Pages

 

Customer Account Transfers

NASD Rule 11870 (Customer Account Transfer Contracts) 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.

 

Customer Notification Requirements
Firms must give customers notice and obtain their consent before transferring their account(s). In cases where a registered representative is transferring firms, the use of negative response letters to customers to effect the transfer of accounts to the new firm raises concerns under FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade). However, as discussed in Notice to Members 02-57 (September 2002) (Use of Negative Response Letters for the Bulk Transfer of Customer Accounts), in situations such as mergers and acquisitions it may be appropriate to use negative response letters for the bulk transfer of customer accounts, subject to certain conditions. Nonetheless, when the change relates to the "broker-dealer of record" on a mutual fund or variable insurance product account held directly with the issuer, firms must obtain the customer's affirmative consent. See Notice to Members 04-72 (October 2004) (Impermissible Use of Negative Response Letters for Transfer of Mutual Funds and Variable Annuities (Changes in B-D of Record).

Timeliness
Timeliness of account transfers has been an ongoing issue for the financial services industry. The 2006 "Report of the Customer Account Transfer Task Force" noted that a primary cause of delay in transfers was failure by firms to cooperate in the transfer process. Firms should refer to NASD Rule 11870 and Regulatory Notice 07-50 (October 2007) (SEC Approves Amendments to NASD Rule 11870 and NYSE Rule 412 to Conform with NSCC's ACATS Transfer Cycle Time Frames), which outline firm responsibilities in executing account transfers in a timely fashion.

Portability
Registered representatives with an established customer base who change their association from one firm to another may wish to bring with them customer assets that may not easily be transferred. In cases where investments are not portable, registered representatives may recommend that the investments be liquidated or continue to be held at the originating firm. For example, mutual funds or variable products may be held directly with the product issuer or they may be proprietary to the representative's prior firm and the sponsor may not permit them to be transferred into the customer's account at the new firm. Even nonproprietary products may not be portable if the sponsor does not have a dealer or servicing agreement with the new firm.

As FINRA stated in Regulatory Notice 07-06 (February 2007) (Special Considerations When Supervising Recommendations of Newly Associated Registered Representatives to Replace Mutual Funds and Variable Products), any recommendation by the firm or its associated persons to sell a mutual fund or variable product and to replace it with another one may be made only after fully assessing the suitability of the transaction for the customer and determining that the transaction is in the customer's best interests. Moreover, firms should review the transactions with a view to ensuring that full disclosure is made to customers regarding fees, expenses and surrender charges that may apply to the replacement product.

Safeguarding Customer Information
Whenever contemplating the transfer of customer accounts—whether because of a merger or when recruiting a registered representative—firms must be fully aware of limitations on sharing customers' personally identifiable, nonpublic information. The SEC's Regulation S-P (Privacy of Consumer Financial Information) requires firms to safeguard nonpublic personal information about customers. In most contexts, including the migration of an individual registered representative from one firm to another, firms must comply with all the requirements of Regulation S-P. Rule 15(a)(6) of Regulation S-P, however, provides limited exceptions from the notice and opt-out requirements when sharing customer information, such as a "sale, merger, transfer, or exchange of all or a portion of a business," subject to certain conditions.

Other Account Transfer Issues

The following are other issues that affect the customer during the transfer process:

    • account re-documentation ("re-papering"), such as requiring multiple new account forms;
    • transfer fees, particularly where the customer may be assessed for both termination of their account at the carrying firm and establishing a new account at the receiving firm; and
    • liquidating positions, particularly where the liquidation creates a taxable event allowing access to information not automatically transferred with the account, such as cost-basis information and archived account statements.

Related Rules and Notices

Following are some of the rules, regulations and publications that firms planning an acquisition or transfer of customer accounts should be familiar with. This list is not comprehensive, and it is the responsibility of each firm to research all applicable laws and rules (in their most recent versions) and consider their applicability to the particular firm.

NASD Rule 11870
Customer Account Transfer Contracts

NASD Rule 2430
Charges for Services Performed

NASD IM-2110-7 (FINRA Rule 2140 effective 6/16/09)
Interfering With the Transfer of Customer Accounts in the Context of Employment Disputes

Notice to Members 07-50
SEC Approves Amendments to NASD Rule 11870 and NYSE Rule 412 to Conform with NSCC's ACATS Transfer Cycle Time Frames

Regulatory Notice 07-06
Special Considerations When Supervising Recommendations of Newly Associated Registered Representatives to Replace Mutual Funds and Variable Products

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 05-49
Safeguarding Confidential Customer Information: NASD Reminds Members of Their Obligations Relating to the Protection of Customer Information.

Notice to Members 04-72
Transfers of Mutual Funds and Variable Annuities: Impermissible Use of Negative Response Letters for the Transfer of Mutual Funds and Variable Annuities (Changes in Broker-Dealer of Record)

Notice to Members 02-57
Bulk Transfer of Customer Accounts: Use of Negative Response Letters for the Bulk Transfer of Customer Accounts

Notice to Members 01-66
SEC Approves NASD Rule Proposal Relating to Operations

Notice to Members 92-11
Fees and Charges for Services

Interpretive Letters on the Use of Negative Response Letters to Customers
Letter to Barry Harris, Esq., Chief Counsel, Banc of America Investment Services, Inc. October 20, 2004

Letter to Michael D. Wolk, Esq.,Foley and Lardner, May 1, 2003

Letter to Marion A. Kashan, Compliance Officer, London Pacific Securities, Inc., February 3, 2003

Letter to Doug Wright, Chief Compliance Officer, The Investment Center, Inc., February 3, 2003

Letter from FINRA Office of General Counsel, May 15, 2008

Letter to Tamara K. Salmon, Investment Company Institute, March 17, 2005

Letter to George T. Simon, Foley & Lardner, LLP, January 26, 2005

Letter to Marc. A. Cohn, Metropolitan Life Insurance Company, February 3, 2003

Other Guidance
FINRA's Customer Information Protection Web Resource

Additional information about firms' obligations to protect customer account information and resources to help firms meet those obligations, including rules, guidance and external links.
 

 

Training and Communication

Firms should allow registered representatives to sell only products for which they have been adequately trained and that they understand. Thus, training plans for newly merged businesses and newly acquired personnel should reflect the "size, organizational structure, and scope of business activities" of the firm (NASD Rule 1120 – Continuing Education Requirements). Where a new product mix is novel or complex, firms should provide ample time and training for registered representatives before qualifying them to sell products acquired via a merger.

 

Product Review

Firms should scrutinize the portfolios of registered representative transferring from other firms to ensure that any products that are new to the receiving firm are properly vetted before authorizing continued sales of those products. In the context of mergers and acquisitions, where legacy products from either firm will be marketed and sold by a newly created entity, firms should consider whether some or all of the products in the merged portfolio also should be subjected to reassessment. Moreover, and as a matter of best practice, firms should consider implementing a post-merger/transition review for products they will continue to sell (similar to the Post-Approval Review outlined in Notice to Members 05-26 (April 2005) (NASD Recommends Best Practices for Reviewing New Products). These reviews allow firms to assess product performance, determine whether compliance requirements are being met and evaluate whether risks associated with the product have changed. Firms should adopt procedures to vet new products and may choose to:

  • track and monitor customer complaints and grievances relating to the products;
  • reassess the firm's training needs regarding the products; and
  • establish procedures to monitor, on an ongoing basis, firm-wide compliance with any terms or conditions that have been placed on the sale of the products.

 

Useful Link

Disclosure and Compliant Filings
 

 

Books and Records/Record Retention

Firms are encouraged to fully catalog and review processes for retaining and retrieving required books and records. Firms should ensure that no retention database or process is retired until a replacement system/process is identified and confirmed to be operational. In doing so, firms should be prepared to maintain legacy systems to run in parallel with new or combined systems, if necessary, to ensure records remain accessible.

Firms also are reminded that, in cases where a Form BDW (Uniform Request for Broker-Dealer Withdrawal) will be filed on behalf of a firm that is merging or being acquired, Form BDW requires the legacy firm to appoint a custodian of its required books and records, provide contact information for the custodian after the firm has discontinued its business operations and provide the address where the books and records will be located, if different than the custodian's address. NASD Rule 3121 (Custodian of the Record) also requires that the custodian be a person who is associated with the withdrawing firm at the time the Form BDW is filed.

Form BDW also requires that the person signing the Form on behalf of the firm certify that the firm's books and records will be preserved and made available for inspection. See also Rule 17a-4(g) under the Securities Exchange Act of 1934 (a firm that stops doing business as a registered broker-dealer has a continuing obligation to retain its required books and records for the retention period specified).

Useful Links
CRD Filing & Guidance

NASD Rule 3110
Books and Records

Incorporated NYSE Rule 440
Books and Records
 

 

Communications with the Public

Joint Marketing for Merging Firms

Firms are encouraged to develop interim guidelines for referrals or other joint communication with clients and customers during the integration process. These guidelines may address issues such as sharing information with various business partners across the merging entities (e.g., research analysts, investment bankers, trading and sales personnel). Ideally, the guidelines will include a process for evaluating potential conflicts, obtaining management and/or legal department approval for joint activities and, if necessary, obtaining customer consent to share customer/client information. These interim guidelines also may address distribution of advertising and sales literature, including whether legacy marketing tools (marketing letters, routine trade commentary, etc.) will continue after the merger date or will be replaced with new versions.

Research

If one or both firms produce research and/or disseminate third-party research to its clients, integration teams should ensure that a robust process for identifying potential conflicts is developed early in the transition. Programs for publishing and disseminating research should include appropriate changes to disclosures that accurately reflect the evolving relationship between the two firms as the merger progresses.

Useful Links
NASD Rule 2210
Communications With the Public

NASD Rule 2211
Institutional Sales Material and Correspondence

Incorporated NYSE Rule 472
Communications With the Public

FINRA's Advertising Information Center
Information on preparing compliant sales communications and complying with filing requirements.
 

 

Branch Office Review Programs

In addition to the various requirements to register additional branch offices and associated persons, firms should be mindful of the need to reconsider and revise their branch office review program(s) to ensure they comply with all requirements of the SROs of which the surviving firm will be a member.

Useful Links

NASD Rule 3010
Supervision

Incorporated NYSE Rule 342
Offices: Approval, Supervision and Control

Notice to Members 08-24
Proposed Consolidated FINRA Rules Governing Supervision and Supervisory Controls

Supervisory Control Web Page
 

 

Back Office and Operations

Firms should assess the impact that merger- or transfer-related changes will have on their financial and operational status. Firms should anticipate the impact of a merger or acquisition on net capital through the use of pro forma and reserve formula capital computations. In addition, firms should create a management reporting process to monitor the effect of conversion on suspense and difference accounts, stock record breaks and unreconciled differences in accounts. Through early consultation with FINRA and adherence to the process outlined in FINRA's Continuing Membership Guide and related guidance, firms can understand the core requirements for bringing about necessary changes.
 

 

Systems and Technology

Firms are encouraged and, in some cases may be required, to notify FINRA when planning a significant electronic data processing system conversion, including when such conversions are part of a business transfer. Firm should consider creating a detailed systems migration plan, which can help facilitate a seamless transition to the final infrastructure. Problems often arise when firms fail to fully consider systems integration concerns in developing merger schedules and then attempt to force resolution of systems issues in too narrow a timeframe. Firms should allow adequate time and resources for testing—not only of the systems undergoing change, but also of downstream systems (such as trade reporting and surveillance) that may be affected by such changes.

Firms also should be sensitive to concerns regarding the compatibility and capacity of technology platforms, particularly when legacy technology structures are significantly different and where the initial or planned volumes of the combined platform may stretch systems architecture beyond their capabilities.

Finally, firms also should ensure that systems changes are fully considered in Business Continuity Planning (BCP). Firms are encouraged to include BCP issues when developing plans for "sunsetting" legacy systems and to bear in mind that, in some cases, the systems redundancy that often occurs during migration may enhance BCP preparedness.

Useful Links
The following are some of the rules and regulations that firms planning a systems migration should be familiar with. This list is not comprehensive, and it is the responsibility of each firm to research all applicable laws and rules, review their most recent versions and consider their applicability to the particular firm.

NASD Rule 3510
Business Continuity Plans

NASD Rule 3520
Emergency Contact Information

Incorporated NYSE Rule Interpretation 401/03
Conversions, Acquisitions and Changes in Business Activities and Early Warning of Developing Problems

Notice to Members 04-37
Business Continuity Plans: Members to Create Business Continuity Plans and Provide Emergency Contact Information

Other Guidance
Business Continuity Planning
Information on FINRA Rules and business continuity plans for securities firms.