Smaller B-Ds hit hiring limits

A bumper recruiting environment is causing many smaller brokerage firms to brush up against strict hiring limits enforced by the Financial Industry Regulatory Authority Inc.

A Finra rule limits the number of brokers a firm can hire, and the number of branches it may open, during any 12-month period. The rule is intended to make sure that broker-dealers are able to support and supervise their growth properly.

Firms with 10 representatives or fewer are allowed to bring on 10 new brokers without approval from New York-and Washington-based Finra. Firms with 11 or more reps may add 10 producers or increase their number of brokers by 30%, whichever is greater.

The rule also allows broker- dealers with one to five offices to open three additional branches without getting a green light from Finra. Those with at least six offices may open three more or increase their number of branches by 30%, whichever is greater.

With smaller firms enjoying a record level of recruiting, many are running into those limits.

“We’re going through the paperwork right now” of getting a new branch office approved, said Joel Blumenschein, president of Freedom Investors Corp., a broker-dealer based in Hartland, Wis.

Freedom Investors brought on the 13-rep Milwaukee branch late last year, putting his 30-broker firm over the limit. The reps in that office formerly were associated with an insurance-company-owned broker-dealer and were unhappy by the limited number of products they were able to offer clients, he said.

“So far, we’ve been able to keep” the new reps, Mr. Blumenschein said..

APPROVAL PROCESS

As part of the approval process, a broker-dealer must show that it meets each of the 14 qualifications for a Finra membership.

Those qualifications include having up-to-date licenses, registrations and training requirements. They also include maintaining adequate net capital and having systems for the firm’s financial controls, record keeping, compliance and operations.

Mr. Blumenschein said the Finra staff was helpful in guiding his application, “but going back and proving you meet all 14 standards of admission after being in the business for 20 years and with no marks on our record [is] make-work,” he said.

Lisa Roth, chief executive of Keystone Capital Corp. of San Diego, Calif., agrees.

“It definitely is a hassle” to get approval, said Ms. Roth, who is also chairwoman of the National Association of Independent Broker/Dealers Inc., which is based in Princeton Junction, N.J.

Part of the problem is that the expansion approval process is not administered evenly across all Finra districts, she said.

“In some, you have to provide a full set of procedures, financials [and] biographies of supervisors,” Ms. Roth said. “In others, you just give information on the principals, and you’re done.”

On its website, Finra says delays in gaining approval are usually caused by supplying insufficient information and failure to meet the qualifications requirements.

Firms need to plan ahead and prepare for expansion, observers said.

Morrie Reiff, chief executive of AFA Financial Group LLC in Calabasas, Calif., recently got approval to expand to 250 brokers, from 50.

Getting approval wasn’t a problem, said Mr. Reiff, who is planning to hire some displaced wirehouse brokers this year.

“We didn’t need [expansion approval] at the time but felt it was something we needed to do,” he said.

PAY CUTS

Cuts in pay for less productive brokers at wirehouses are expected to force out many reps, specifically those who produce less than $300,000 annually.

This year, such firms as Merrill Lynch & Co. Inc., Morgan Stanley and Smith Barney, the brokerage unit of Citigroup Inc., cut payouts for lower-producing reps.

Brokers doing less than $300,000 are getting 20% or 25% of what they produce, down from about 30%.

In addition, the reputations of many wirehouses have been hurt by their role in the financial crisis. As a result, they are less able to hold on to their brokers.

E-mail Dan Jamieson at [email protected].