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.

“When a firm is acquired by or merges with another firm, the firm originating the accounts may seek the transfer of all of its accounts to the new firm using negative response letters,” said the notice.

Until LPL’s acquisition of NPH, Finra had not approved block transfers except in cases where a broker-dealer was going out of business or in significant distress, according to Jeff Nash, CEO and co-founder of Bridgemark Strategies, an independent merger and acquisition and advisor transitions firm for the financial advice industry.

“At the time, the policy was clear that when a broker-dealer goes out of business and accounts are abandoned, Finra will create protocols for a block transfer,” says Nash. “That process is now being governed by the broker-dealers, and the acquiring broker-dealer has said that we’ll do this for us, but not for anybody else.”

Jackson National’s request for the block transfers may be born of self-interest. The firm received $325 million up front as part of the sale of NPH, but may qualify for up to $123 million in additional payment from LPL if 72 percent or more of NPH’s business transfers over.

In some ways, LPL presents a special case for Finra. The broker-dealer prides itself on supporting the independence of its reps. At the same time, it is unique as a self-clearing firm.

Bill Morrissey, the LPL executive charged with onboarding the new representatives from NPH, said that the block transfer process is intended to ease the transition for advisors.

“The tape-to-tape transition process is one that will guarantee that the vast majority of an advisor’s business moves to LPL,” says Morrissey. “Typically, when an advisor goes through the transfer process, only 75 to 80 percent of their client accounts are moved successfully.”

Is LPL Becoming More Like A Wirehouse?

Some industry observers say that LPL has started to resemble a traditional wirehouse firm, but it does not offer the same cost-sharing benefits to its representatives. The use of block transfers to bring more representatives in appears to be part of a trend, says Nash.

“The industry is wondering if LPL is headed in the direction of the wirehouses by creating a virtual barbed-wire fence around their broker-dealer. This is a common practice with the wirehouses, but for years, LPL didn’t want that kind of fence. They just wanted to attract the best business by being the best firm out there,” says Nash.

Moving thousands of accounts from NPH, where they cleared with Pershing and Fidelity, to self-clearing LPL with affirmative consent would create difficulties and delays for representatives and OSJs, a huge level of disruption for thousands of accounts.

Accounts with at least two of NPH’s subsidiary broker-dealers, National Planning Corp. and Investment Centers of America, will be moved to LPL as of December 2, but representatives must announce their intent to transfer or to leave LPL by Nov. 15.

“A firm like LPL can operate like ‘The Godfather,’” says Ressler. “When they make you an offer you can’t refuse, you have to take it because the alternative is unacceptable. You can’t afford to shut your business down to fight this in a legal dispute for 12 to 18 months.”

As they prepare to move, NPH representatives are complaining that they do not have enough time to make key decisions about the transfer, or whether they want to transfer at all.

Ressler acknowledges that the block transfers will help LPL -- and the NPH subsidiaries and representatives caught up in the deal -- complete the transaction in a more reasonable amount of time.

“Remember that LPL is a huge, self-clearing firm with a tremendous number of accounts and representatives,” says Ressler. “Trying to get new paperwork on tens of thousands of accounts in a short period of time is problematic.”

Fear That Agreements Won't Be Honored

Several NPH advisors previously had agreements in their employment contracts that would allow them to transfer to firms of their choice, but Jackson, LPL and Finra do not appear poised to honor those agreements.

Any attempts to challenge the current plan for block transfers would have to play out in court. The deal’s tight time line would make it difficult for advisors to fight LPL and Finra.

“Obviously, these reps could pursue litigation, but before it’s settled they’ll have had to pick a broker-dealer and start moving the assets over,” says Nash. “If they choose LPL, it will be too late. If they choose someone else, it will still be too late. They’re faced with winning a battle in court, but losing the war for their business. The timing is not in their favor.”

Even if they won in court, advisors would then be faced with trying to appeal to their former clients on a case-by-case basis.

The management of OSJs caught up in the deal are facing nervous representatives and angry subsidiaries. In some cases, parties are caught up in Finra or LPL regulations that make changing companies difficult. In one case, an incoming OSJ supervisor’s spouse already works for LPL, running afoul of LPL’s anti-nepotism rules.

One of the OSJ’s bank affiliates had just joined from LPL and balked at the prospect of going back.

Other offices are scrambling to make copies of all of their digital and intellectual assets in hopes of retaining ownership after the deal.

Observers claim that Finra has set a troubling precedent that favors large firms that pay a large share of the organization’s dues. For one thing, pre-approving block transfers between two immense broker-dealers enables more inexpensive, and thus more profitable, mergers and acquisitions for larger firms than for smaller firms.

“LPL is a 900-pound gorilla in the room, they can put a lot of pressure on everybody in lots of directions, and they will,” says one NPH OSJ manager. “Their job is to make the deal happen and put it together. The people at Jackson and what’s left of NPH are looking to get a payday. The rest of us in between are incidental or collateral damage in the deal.”

Smaller broker-dealers will not be able to compete for the ex-NPH representatives fairly due to the block transfers, thus distorting the marketplace.

Ressler argues that Finra has often favored larger broker-dealers over smaller firms, and that the organization should allow block transfers to any member firm to preserve a state of fair play.

“They should be creating an environment where broker-dealers have to continue to service and honor those relationships and take care of them,” says Nash. “Having block transfers available for advisors, all advisors industry-wide, would be really beneficial. It keeps the broker-dealers honest to the extent of providing extra services that attract and retain advisors, not creating barriers and walls to keep advisors in.”

Finra also appears to be favoring large member firms over the individual representatives and clients that it is also charged with protecting.

“When you have firms buying and selling and merging, they’re always doing it for the firm,” says Nash. “They really aren’t considering the advisors and they’re not entirely considering the clients.”

Smaller representatives might also feel lost after the deal, says Ressler. While reps bringing in $100,000 to $400,000 in revenue were among the best producers for NPH, at LPL these same representatives would find themselves in the middle of the pack.

Not all of the NPH advisors are upset about the deal, says Morrissey.

“We’ve been receiving some very positive feedback from advisors,” says Morrissey. “Jackson National made a strategic decision to exit the broker-dealer space, they did a significant amount of due diligence to find the right partner or the right broker-dealer to steward their advisors and their clients, and I think the vast majority of the feedback we’ve gotten has been very positive.”

Yet others have also been concerned that Finra’s process for approving the block transfers was opaque and lacked proper accountability. One National Planning Corp. advisor producing more than $700,000 in annual revenue, who asked to remain anonymous, said that the sale’s accelerated time lines enable the participants to obscure details of the transaction from reps and shareholders.

Some onlookers argued that Finra might be having funding issues as broker-dealers go to lower fee structures or become advisory firms. As it receives less money, Finra has more to gain from creating barriers to moving client assets to other industry segments.

OSJ Autonomy Threatened?

The NPC advisor also feared that the sale to LPL would destroy the autonomy of her OSJ.

“The short time line that has been provided to all NPC reps was done with the sole intent to maximize retention -- put another way, to not allow independent business owners the time to make their own decision,” she said. “When that OSJ makes the decision to not transition to LPL, LPL is taking an aggressive position in competing against OSJs.”

Anecdotally, sources close to the deal say that their representatives are already being targeted by LPL.

“They’re coming to my biggest representatives first,” says a manager at one former NPH OSJ. “They’re talking to them at various national conventions, saying things like ‘You want to go to LPL in a direct relationship, don’t you?’ so they don’t violate the anti-recruiting rules, but still have an opportunity to lure a rep away and take them on a direct basis.”

The NPC advisor said that she was offered triple retention money to affiliate with LPL directly instead of remaining with her OSJ.

Morrissey denied that LPL was attempting to poach representatives affiliated with former NPH OSJs.

“We want to make sure that the OSJs and the advisors that are part of NPH are making an informed decision about their options,” says Morrissey. “We are not going around the OSJs and direct to their advisors. If an OSJ wants to go in a different direction and decides to join a different broker-dealer, that’s their choice and we respect their decision -- we also want to make sure that their advisors are making an informed choice.”

Still, several onlookers argued that the decision to grant block transfers to LPL could backfire on LPL and Jackson National as many advisors and OSJs are trying to avoid the transfer to LPL.

At least one source, who asked to be unnamed, told Financial Advisor that LPL might transfer as few as 50 percent of the NPH customer accounts.

“I think they’re going to lose half the reps,” he said. “I would say that about half of the representatives caught in this deal make between $100,000 and $200,000 annually and don’t fit LPL’s profile. They make a nice living, but they’re not going to fit in at LPL. The other ones are being targeted by major players like Cetera and Cambridge, who have already announced that they have picked up substantial groups from this deal.”

Ressler says that it may be at least two years before attrition from LPL begins to slow down.