In the current legislative environment, it appears that significant tax changes are on the horizon. That said, the issue of corporate conversion of registered entities such as FINRA broker-dealers and registered investment advisors comes up quite frequently. For example, a broker-dealer may want to convert from a corporation to an LLC. In other circumstances a registered entity’s ownership may desire to relocate the entity to another state. When this occurs, the corporation literally becomes a “citizen” of another state. However, this can be a very complicated process in which failure to complete all required steps may result in the loss of the regulated entity’s license to operate as a broker-dealer or registered investment advisor. As such, it is critical that the process follow the exact set of steps required and that the approach occurs with surgical precision. Just because state law permits such a conversion doesn’t mean that your registered entity will maintain its license with its regulator. In fact, the SEC often considers a corporate conversion or redomestication to be a succession, and provides that new entity (successor) does not necessarily get to maintain the same license that it had before the change. Essentially, the SEC guidance has divided the successions into two types: a) a succession by amendment and b) a succession by application. In the latter, an entirely new application for registration is required, which in the FINRA world means a new member application and likely a six-month process. The former is the one you want if you are making the change – one that only requires an update to Form BD with the correct and timely disclosures in the various sections of Form BD. The SEC has provided guidance that,
“An adviser that fails to provide a substantially complete Form ADV that indicates the adviser is submitting a filing as a succession by application or succession by amendment within the statutory time would have to file a new application to register on Form ADV. Such an investment adviser would be conducting an investment advisory business without being registered.”
The same guidance would apply to the filing of an amended Form BD for a broker-dealer. To recap, we have several sets of considerations here. First, the issue of the conversion or redomestication and the applicable state law must be considered. For example, some states provide for statutory conversions of a corporation to an LLC. The law in the state essentially provides that the LLC shall be deemed to be the same entity as the converting other entity. In this case, under SEC guidance, this may be considered a succession by amendment, depending on the full set of facts which we cannot get into here. It is important to note, however, that some states (like New York) do not permit a corporate conversion – a statutory conversion of a corporation into an LLC – and instead would require the formation of a new LLC, and a merger of the old company into the new. It is critical to understand the legal implications of a corporate filing, and which states permit the various types of conversions. This is something I always encourage clients to discuss with legal counsel.
Next, FINRA will typically consider a conversion or redomestication to another state a material change under FINRA Rule 1011(k), and thus would typically require a CMA filing. However, FINRA may permit the filing to be handled through its Materiality Consultation Process. In this case, it may approve the change without the actual filing of a CMA. FINRA will review the documents for the new entity, along with the legal aspects of the proposed activity. Assuming the FINRA approval is granted, the next step is to execute the change, and then to file the appropriate Form BD or ADV amendment within the SEC-required time period. It is critically important that the updated document include all required information for the SEC to consider the nature of the succession (see SEC guidance).
What seems like a simple change, if improperly planned and/or executed, can result in the loss of a broker-dealer’s or investment advisor’s registration to operate. For this reason, it is critically important that registered entities seek qualified legal and compliance advice in effecting a corporate conversion or redomistication. FirstMark Regulatory Solutions is a broker-dealer compliance consulting organization based in Boca Raton, Florida. If you are considering a CMA or other FINRA filing, contact Mitch Atkins at 561-948-6511.
