Scores of broker-dealers were bruised and battered last year, with dozens of small and midsize firms closing their doors amid desperate — and mostly futile — searches for much-needed capital.
Through November, the number of broker-dealers registered with the Financial Industry Regulatory Authority Inc. was 101 below the total at the end of 2009. Since 2005, the broker-dealer community has shrunk by 9% to 4,619.
(Click here for a list of B-Ds that bit the dust in 2010.)
While the steady decline in the net number of broker-dealers is evident in statistics on Finra's website. the regulator does not detail how many new broker-dealers are registered each year, making it impossible to determine with accuracy how many firms open or close their doors in a given year.
By the end of 2009, however, there were 175 fewer broker-dealers registered with Finra than a year earlier, the self-regulatory agency's records show. And by the end of 2008, there were 110 fewer than a year earlier.
Owners and executives of small broker-dealers contend that a decline in the number of firms is damaging to the economy and to small investors. Many of these broker-dealers act as engines for local investment banking deals. Small firms also are willing to work with retail investors with small amounts of money — $100,000 for example.
Giant firms have no interest in serving small businesses or small retail investors, some executives said.
“I've been in the business for 45 years and nothing has ever come close to the carnage that's occurred in our industry,” said Ron Kovack, chairman of Kovack Securities Inc.
He pointed to two types of firms that have recently run aground and been forced to shut down. Some simply cut corners during tough times, leading to bad business practices. Others were shuttered due to minor rule violations that led to staggering legal costs arising from lawsuits and arbitration claims.
“From the number of calls I'm getting from other small-broker-dealer owners, people are getting out,” said Alan Davidson, chief executive of Zeus Securities Inc. and president of the Independent Broker-Dealer Association Inc., an industry group with 250 broker-dealer members.
BAD CLIMATE
He said regulatory pressures and business conditions — including rising fees and assessments — are pushing broker-dealers to the brink. “The membership is under attack and small firms are taking the brunt,” he said.
Mr. Davidson added that according to his research, the number of firms that closed in the past few years totaled 20% of the Finra membership.
When asked if the declining number of firms was a concern to Finra, Nancy Condon, a spokeswoman for the regulator, declined to comment.
In 2010, net-capital requirements tripped up a number of firms.
The Securities and Exchange Commission requires broker-dealers to maintain a certain amount of net capital at all times. The levels, however, vary widely from firm to firm, with many small firms required to have as little as $5,000. Once a firm fails to meet its required net-capital level, it's at death's door.
Two high-profile firms were closed this year due to such violations.
GunnAllen Financial Inc., which had been one of the fastest-growing independent broker-dealers of the last decade and at one time boasted 1,000 affiliated registered representatives, was closed in March. Then in June, Jesup & Lamont Securities Corp., a Wall Street mainstay whose corporate lineage dates back to the 19th century, closed due to net-capital violations.
At the time the firms closed, GunnAllen had about 500 reps and Jesup & Lamont 300.
Expect more failures and closings this year, industry observers said. “It's been a horrible market and firms are thinly capitalized,” said Larry Papike, president of Cross-Search, a recruiting firm specializing in independent reps and executives at such firms.
“And then there's the limited-partnership debacle,” he said, referring to the cascade of lawsuits and arbitration complaints that numerous independent broker-dealers face in the wake of SEC fraud charges against Medical Capital Holdings Inc. and Provident Royalties LLC.
Dozens of independent broker-dealers sold allegedly bogus private-placement offerings from those firms and now face potential class actions, arbitration complaints from investors, and even lawsuits from receivers in bankruptcy proceedings looking to claw back commissions from broker-dealers.
Liabilities from Medical Capital and Provident sales contributed to the demise of some of the broker-dealers that closed this year.
That group includes Okoboji Financial Services Inc., a leading seller of Provident Royalties private placements, which closed last May.
Cullum & Burks Securities Inc., which was heavily involved in the sale of Medical Capital private placements, also shut its doors in 2010.
E-mail Bruce Kelly at bkelly@investmentnews.com.
