When LPL Financial announced its acquisition of National Planning Holdings in August, the nation’s largest independent broker-dealer noted that it had received pre-approval from FINRA to initiate block transfers of advisors’ accounts from NPH to LPL. But some broker-dealers and advisors fear FINRA may be setting a dangerous precedent.

Sander Ressler, a compliance consultant with Your Securities Consultants, believes that FINRA’s decision to allow NPH reps to only “block transfer” their entire books to LPL may turn out to be anti-competitive action that hurts both advisors and their clients. Ressler is not involved in the NPH-LPL transaction.

Pre-approved block transfers have been around for a long time as a means of enabling rapid and high volume migrations of client accounts from one firm to another, he said. In most instances, it has been granted by FINRA in distressed transactions, when you need to rapidly move large numbers of advisors and their client relationships away from a failing firm, toward a healthy firm. Sometimes, block transfers have also been used when a bank switches broker-dealers.

The underlying goal with pre-approved block transfers is to protect retail investors from any potential firm-related financial or operational disruptions, according to Ressler.

There are a number of reasons why Ressler believes FINRA pre-approving block transfers for the LPL–Jackson transaction while not requiring the same arrangement for competing firms is troubling for the industry. When it comes to negative unintended consequences and establishing precedents, the effect could prove far-reaching.

Ressler said:

1. First and foremost, pre-approving block transfers between two healthy and extremely large firms that could make an M&A deal potentially more profitable to the transaction principals potentially sets a new precedent for our industry.  What makes this a highly dangerous precedent is the fact that NPH is not allowing block transfers for any of its advisors to any firms except for LPL, which potentially disadvantages the retail client and the advisor.

2. FINRA’s pre-approved block transfer capability for LPL and NPH, but not other competing firms, is being abused as an anti-competitive tool that hurts advisors and their ability to serve clients by being able to freely select among a range of firms that could help the advisor best support their clients.

3. If FINRA is going to allow pre-approved block transfers in connection with an M&A deal like this, the retail investor-friendly solution would be to do so on a level playing field basis.  This means allowing block transfers between NPH and any qualified firm that an NPH advisor selects as his or her next broker-dealer.

4. When you add to this picture the fact that -- rightly or wrongly -- FINRA has a reputation for favoring large firms over smaller firms, the optics around the block transfer pre-approval for the LPL-NPH deal are especially troubling for advisors, retail clients and small to mid-sized firms across the industry.

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