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Implications of starting your own broker-dealer firm

March 20, 2015

MICHAEL HOMEIER, ROBERT CORNISH, JACKIE PRESTER, JOHN LEO

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Jackie Prester
w/ Baker Donelson

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Robert Cornish
w/ Phillips Lytle

 

 

 

 

Jackie Prester: After analyzing the broker dealer rules I know that a lot of regional centers start becoming concerned that their traditional activities as a regional center could potentially result in them being deemed a broker-dealer. And so, the quick answer is, "Okay then, we'll just get licensed as a broker-dealer”, easy enough.

Well the problem is that it's not particularly easy or cost effective to get licensed as a broker dealer firm in the U.S.. It tends to take a good deal of time and money and more importantly in order to be licensed as a broker dealer firm it has to be managed by folks who have taken the requisite broker-dealer licensing tests and have the principal licenses before actually even opening the doors.

To be able to pass those tests, the people who take them have to have a general understanding of what I ‘d call the ‘traditional broker-dealer’ model. How to buy stocks and bonds and everything else under the sun. If you think about it, regional centers and the people who work at them have a lot of expertise from an immigration standpoint and in project development, but by and large folks don't have the background of investment bankers. Trying to get the necessary people licensed to be able to even think about getting licensed as a broker dealer firm is really challenging and really expensive.

What's even worst is just the challenge of trying to maintain a broker-dealer firm even if you're able to get licensed, which requires ongoing compliance in a variety of activities that really are not geared toward just EB-5. You have to basically maintain your supervisory procedures that run the gamut from A to Z and really aren't necessarily even halfway related to the EB-5 program.

For most regional centers and people in this space, getting licensed as a broker dealer firm really does not make a lot of sense. Perhaps for those who just happen to have principals who have an investment banking background, it's a possibility. Although even with an investment banking background it's still a very expensive proposition to get licensed as a broker-dealer firm.

Robert Cornish: One consideration, if you're looking to be a broker-dealer, is where you're located. The rule-of-thumb is that you'll have to get licensed in the state where you're sitting. In addition to the FINRA test that you may have to take, you may also have to take the series 63 or series 66 exam, which is your state securities examination. That enables you to get licensed in certain states.

We talked about the expense of staying licensed. Each state requires that if you're doing business in a state, or you have an agent who's working out of a certain state, they will probably need to be licensed in those states as well.

So if you're planning to get licensed in all 50 states, the last time I checked you're probably looking at about $14,000 to $15,000 a year per person. That doesn’t mean you have to get licensed in every state but obviously you have to drill down into the business planning to actually see if this is going to be beneficial for you.

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