In a major brokerage firm move that appears to some to be coming out of left field, Cetera Financial Group recently alerted its roughly 8,000 financial advisors that selling their practices, often the most valuable asset an advisor owns and controls, requires the approval of the firm.
If advisors don't seek Cetera's OK, they risk running afoul of securities regulators, particularly the Financial Industry Regulatory Authority Inc., and could even be barred from the industry, according to Cetera.
Cetera's warning to advisors comes as the mergers and acquisition market for all types of advisory practices and firms remains active, even in the face of rising interest rates, last year's market downturn and the added anxiety fueled by this month's regional run on banks. In the internal note, Cetera makes clear that its financial advisors, who aren't employees but rather independent contractors, must consult with the firm when considering a deal.
Independent broker-dealers, in contrast to broker-dealers whose advisors are employees, for decades have pitched themselves as having little to no interest in controlling the practices of its financial advisors.
"In recent weeks, many advisors have been receiving solicitations from professional investors seeking to acquire a full or partial interest in the advisors practice," according to the November email, which is from Cetera Networks Compliance and has the subject line, "Reminder: Full or Partial Sale of Business May Result in PST and/or OBA."
"Please note, depending on the nature of the transaction, it will likely be deemed to be a Private Securities Transactions, PST, and/or an Outside Business Activity, OBA, which requires prior approval by your broker-dealer compliance department," the email said.
"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 firm and gaining approval."
The email does not cite any recent Finra enforcement cases brought against a financial advisor whose sale of his or her practice triggered private securities or outside business rules violations. Broker-dealers are required to track and oversee all sales of securities products by financial advisors.
The Cetera email was first reported earlier this week by industry website financial-planning.com
Joe Neary, Cetera’s chief risk officer, said in an email to InvestmentNews that the firm's note to advisors was not a warning but rather a standard reminder to comply with securities industry rules and regulations.
"The characterization of our reminder communication to our advisors as a warning is completely inaccurate," Neary wrote. "As most industry-leading firms do, we send regular reminders to our advisors to help them remain on the right side of Finra and others. The memo we sent to our advisors was one of those reminders — just like we remind our advisors of trainings, tax deadlines, and of course, regulatory rules and regs."
"It has been suggested that this is a Cetera policy, when in fact, Finra rules have always stated an advisor engaging in a PST needs firm approval, and since selling a practice may involve a PST, we simply want to make sure advisors are not running afoul of Finra rules," Neary wrote. "Cetera has no history of preventing an advisor from selling all or part of their business."
The sharp warning, coupled with the specter of Finra punishment for an advisor selling a practice without getting the broker-dealer's thumbs-up, struck some industry observers as an unusual — if not unprecedented — step by Cetera.
"This is the first I’ve heard of that," said Jonathan Henschen, an industry recruiter. "It sounds like the firm is trying to erode away the financial advisor's ability to have control over his own firm."
"The broker-dealer is there to supervise advisors, process transactions and pay the advisors," he said. "This looks like a firm that wants more control over the assets."
An executive at another broker-dealer said he had never heard of such a restriction on an advisor's sale of a practice before. "Does this mean the Cetera advisor must get recruited away to another firm that allows them to sell their business?" the executive asked.
One industry attorney disagreed and said the recent email was a smart move by Cetera.
“I think it’s a prudent move, even though the issue is more complicated and technical than the Cetera email read,” said Brian Hamburger, an industry attorney. “At its core, this is a notice that if you sell your practice and plan to continue working at Cetera, the advisor has to have prior written approval from the broker-dealer first. But if the advisor sells his practice and resigns prior to the consummation of the transaction, no approval is required.”
In January, Cetera Financial Group said that it had agreed to buy the wealth business of insurance company Securian Financial Group, which includes more than 1,000 advisors who manage $24.8 billion in assets under management and $47.4 billion in assets under administration.
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