Pace of B-D shutdowns slowed in first quarter

The number of broker-dealers closing each month still far outpaces the opening of new firms, but the shutdown rate is slowing, according to a new research report by the Compliance Department Inc., a consulting group. During the first quarter, 93 broker-dealers closed their doors, compared with 137 a year earlier, according to the report. Likewise, fewer new firms opened during this year's first quarter. All told, 44 new broker-dealers opened in the first quarter of the year, compared with 57 a year earlier. The number of broker-dealers has declined steadily as rising legal and regulatory costs — plus fallout from a number of failed investment programs tied to real estate and private placements — have knocked many firms out of the industry. According to the Financial Industry Regulatory Authority Inc., 4,428 broker-dealers were open in March, compared with 5,005 in 2007. That works out to an 11% decline in five years. “I don't see an end to the steady downtick” of broker-dealers' closing, said David Alsup, national director of business development with the Compliance Department. “And I don't see an uptick for a while.” Mr. Alsup noted that a stricter regulatory environment — particularly for mom-and-pop firms — will lead to further consolidation in the industry. “You just can't be a two-man shop and hire a $70,000-per-year compliance officer and stay in business,” he said, adding that smaller firms that control a large amount of assets will fare better.

IMPORTANT MEASURE

The average net loss of the number of broker-dealers is 10 firms a month, down from the recent figure of 12 per month, Mr. Alsup said. The first quarter is an important measure in the industry because firms that intend to close will do so during that time to avoid paying annual fees assessed by Finra. The slight abatement in the number of firms closing over the first quarter, when compared with a year earlier, was due to a couple of factors, Mr. Alsup said. The economy has improved slightly, and trading volume for retail-oriented broker-dealers improved marginally, he said. “That's across the board. Volume was better for equities, private placements and variable annuities,” Mr. Alsup said. And the independent broker-dealer industry is moving beyond the costly fallout of the “big three” of failed private placements: DBSI Inc., Medical Capital Holdings Inc. and Provident Royalties LLC. Crushed by the cost of arbitration judgments and litigation, about 50 broker-dealers that sold those products have shut their doors, Mr. Alsup noted. [email protected]