The Issues and Implications of a 3PM / Broker Dealer Relationship

Transcription

1 and Present The Issues and Implications of a 3PM / Broker Dealer Relationship Sponsored by: January 29, 2009

2 Speakers Donna DiMaria 3PM President Tessera Capital Services, LLC Lisa Roth NAIBD Chairperson Keystone Capital Corp Stacy Havener Co-Chair of 3PM Events Committee Candlewood Advisory Partners Micah Taylor Kinetic Partners Page 2

3 Today s Agenda Participants Kinetic Partners About 3PM About NAIBD The 3PM/Independent BD Paradox Baseline BD Compliance and the Primary Issues Essential Choices for a 3PM Starting Your Own BD Affiliating with an Existing BD Issues for the 3PM To Address before Joining a BD Issues for the BD to Address before Sponsoring a 3PM Lessons Learned from a Peer the Candlewood Advisory Case Study Questions and Answers Page 3

4 Kinetic Partners Kinetic Partners is the only global professional services boutique focused exclusively on the asset management industry. Established as a viable alternative to the Big 4 and a one stop shop for clients wanting in-depth industry expertise, we provide a truly unique and bespoke solution to both alternative and traditional firms. Our services include audit and assurance, tax, consulting, forensic, corporate recovery and corporate finance High profile in the industry working with US and UK brokers/dealers, start up ventures, regulators and service providers Over 100 specialized staff servicing approximately 700 clients Our team of SEC and FINRA regulatory specialists, forensic accountants, investigators, industry and technology experts, work with US and international brokers/dealers, to help meet regulatory obligations and reduce compliance risk. In addition, we communicate between our clients with both the SEC and FINRA, as well as provide on-going daily compliance support. We understand the importance of the compliance function and devise unique ways to meet and exceed the requirements of the firm s regulator Page 4

5 3PM Third Party Marketers Association Formed in 1998 Goal: To maintain a standard of excellence in the industry and share information and ideas amongst the members of independent sales and marketing firms 3PM is the only Association in the world comprised solely of third party marketers Current membership: 75+ firms The Association represents 3PMs across the globe: US Canada UK France Luxemburg Switzerland Hong Kong Typically, 2-5 highly experienced investment management executives Average experience: 10+ years of sales and marketing experience Focus on either retail or institutional distribution channels Represent separate account managers, fund products or some combination thereof Varying regulatory requirements: Separate Accounts - State Registered Investment Adviser Fund products such as Hedge Funds, Mutual Funds, Private Equity Partnerships or Real Estate, FINRA Registration required 3PM - the Association 3PM - the Marketplace Page 5

6 NAIBD National Association of Independent Broker Dealers NAIBD attracts independent firms of all sizes, ranging from RRs Network of 350 Broker-dealers and more than 20 associated industry partners 28 year-old association Advocates of small and independent BDs on regulatory matters Small firms with one line of business related to private offerings, M&A, banking are thought to comprise 10% of FINRA membership Small firms (fewer than 150 RRs) comprise approximately 75% of FINRA membership Traditional and non-traditional Institutional vs. retail Employee vs. independent contractor Single-service specialty boutiques to fullservice Larger firms equally diverse Finding the right firm for you: Experience with private/unregistered offerings Comfortable with transaction flow and volume Meeting of the minds on oversight requirements NAIBD - the Association Independent BDs the Marketplace

7 The 3PM / Independent BD Paradox Page 7

8 Baseline BD Compliance Page 8

9 The Primary Issues Page 9

10 Starting your own Broker Dealer Pros: Firm remains independent Retain full control over products represented Commissions 100% of revenue is kept by the firm Cons: Time Membership process could take 3-6 months Up Front Costs - $15,000 - $20,000 using a compliance consultant On-going Costs - Annual renewals and audit Firm requires at least on Registered Principal who has passed the Series 24 Exam Compliance responsibility falls fully on the 3PM and its RRs Page 10

11 Sponsorship by an Established BD Pros: Time - Relationship can be established quickly once the required exams are passed Compliance is primarily the responsibility of the BD But, the 3PM will still have some compliance responsibilities Cons: Traditional brokerage business is very different than 3PM BDs may not understand the complexities of 3PM resulting in a compliance risk for both firms Costs - 3PM must cover cost of Rep s registrations and other fees Commission Sharing - BD usually requires 5-20% of revenues generated by 3PM Manager Agreements must be between the BD and the Fund 3PM is merely a RR Loss of control 3PM may not be able to represent the Funds it wants to 3PM may have to work with other RRs on deals it sourced, impacting revenues Guilt by Association - If something adverse happens at the BD it could affect the 3PMs reputation Page 11

12 Issues to Address Before Joining a BD: Before affiliating with any broker dealer a 3PM should: Run a CRD (Central Registration Depository) check. Make sure the firm is properly registered with FINRA. Review the public Broker Check system available on the FINRA website. Conduct a search for information in states in which the firm is registered through the NASAA (North American Securities Administrators Association). Review the BD s Compliance manual to verify that it has the appropriate procedures, processes and controls in place to cover the activities to be conducted by the 3PM. Request the results of the BD s last FINRA exam. Review the latest FOCUS report to determine whether the BD is sufficiently capitalized. Unless you are working out of the BD s office, your 3PM office should be designated a branch office of the BD and will be subject to periodic surprise examination by the BD. Determine if the 3PM will require a Registered Principal who will be required to take a principal examination (Series 24). Page 12

13 Issues to Address Before Sponsoring a 3PM: Before sponsoring any 3PM for licensure a BD should: Verify the exam requirements of all proposed RRs Series 7 and 63 Run a CRD (Central Registration Depository) check, just in case. Check the RRs U5s to determine the reason for their termination Make sure the RR does not have any adverse history Review the public Broker Check system available on the FINRA website. Conduct a search for information in states in which the firm is registered through the NASAA (North American Securities Administrators Association) Perform a reference check of the 3PM s employees and any affiliates (Google, phone the past employers, if none then phone a few clients) Understand and evaluate contingent liabilities (past transactions of the 3PM) Assess the experience of the 3PM and its staff: this will pay dividends when it comes time to audit their office Openly discuss the BD s requirements for CE, ACM, Inspections, Communications review, signage, stationery Share relevant regulatory notices, such as NTM Page 13

14 Case Study Candlewood Advisory 3PM focused on the financial intermediary/ria channel founded in January 2007 Two partners who worked together at another 3PM firm that had its own broker-dealer Both partners hold FINRA licenses, one partner has a Series 24 Products primarily mutual funds Contemplated becoming a broker-dealer as well as affiliating Weighed costs, responsibilities, liabilities and hours we d need to dedicate Explored outsourcing some of the BD responsibilities Still opted to affiliate Affiliation requires: Finding the right BD partner Understanding the roles and responsibilities of each party Negotiating a compensation structure for the BD Page 14

15 Case Study: Finding the Right BD Qualitative/relationships very important Because of the liability the BD is assuming, trust and relationship are key Who do you know? Networking is the ideal first place to start. Who is a BD for other 3PMs? While they might not know you, they may understand the business. Know your client Applies to BD/3PM relationship as well What types of products will the 3PM be selling To whom? In which states? International? Page 15

16 Case Study: Roles and Responsibilities Role in general business Double check licenses, continuing education Branch, OSJ, etc. Role in client acquisition Contracts become tri-party agreements BD and client will have to be comfortable with each other 3PM compensation will be paid to BD and then to 3PM Role in on-going sales and marketing for clients How to determine if/when you need to register in a state? system through BD? Sales and marketing materials/communications approval process 3PM website, business cards, etc. Prospect/investor communication on behalf of clients Compliance meeting: in-person v conf call? Other requirements. Page 16

17 Case Study: Negotiating Compensation Costs of doing business Pass through of registration fees or mark-up? Will the BD pay for legal related to contracts, etc.? Flat fee v commission splits Monthly fee, usually dependent on number of reps Commission splits: range between 5 20% What qualifies for split? Retainer or just commission? Is there a cap on the amount paid to BD? How long does the commission last for BD? Trail? Page 17

18 Questions and Answers Special thanks to today s sponsor: Page 18