Advisors, Industry Watchdogs Say Finra Is Playing Favorites In NPH/LPL Deal

When the Financial Industry Regulatory Authority pre-approved the block transfer of accounts from National Planning Holdings to LPL but not to any other firm earlier this summer, the self-regulatory organization for broker-dealers stirred a tempest in a teapot.

Some of the 3,500 representatives and managers caught up in the deal, as well as many industry observers, have cried foul over Finra’s decision, claiming that the regulator has favored LPL, the nation’s largest broker-dealer, over the balance of its membership, many of which are small- to mid-sized firms.

“It was a shock, from my group’s standpoint. We felt like we were being packaged up and herded like cattle,” says a leader of one NPH-affiliated OSJ supporting more than 30 advisors across the country and nearly $400 million in AUM.

Block transfers allow broker-dealers to move customer accounts from one firm to another without affirmative consent from their clients. In lieu of affirming the account transfer, clients have the ability to opt out if they choose in a process of negative consent. In LPL’s case, it allows thousands of accounts from advisors, representatives and offices of supervisory jurisdiction (OSJ) to move from NPH without waiting for customer signatures.

Sander Ressler, a compliance consultant with Your Securities Consultants, argues that Finra’s decision is harmful to the broker-dealer industry.

“This situation reinforces the optics that Finra gives preferential treatment to large members at the expense of small members,” says Ressler. “I’m not sure they can afford the attrition they’re going to cause; membership is already declining by double-digit percentages. Finra is the parasite that kills its host, driving down the number of firms and representatives while increasing the cost of doing business. That’s a recipe for disaster.”

While Ressler acknowledges that there’s nothing new about pre-approved block transfers, he believes that Finra has set a new precedent by approving them in LPL’s case.

When asked why the transfers were approved, Finra did not comment on the issue, but referred to a 2002 notice to members outlining when it may approve the block transfer of accounts.

The 2002 notice was published after Finra revised its rules to require that broker-dealers receive affirmative consent from clients before their accounts are transferred. The block transfers could be permitted as exceptions to the general rule requiring affirmative consent in cases where broker-dealers were experiencing financial or operational difficulties, when a broker-dealer changed clearing firms, when a member firm was going out of business or even when a broker-dealer was acquired by or merged with another.

When asked, a Finra spokesperson noted that the 2002 notice allowed the approval block transfers in any case of a merger or acquisition of a member firm.