Podcast Transcript IV

Dealing with an Unexpected Course of Business due to an Illness of a Principal Owner

Announcer: Hello and welcome to the Regulatory Compliance podcast series. This time we will be joined by Stephen Sussman, President, and Beverly Fetcko, Manager of Compliance Partners, as they describe working with the unexpected illness of a principal owner, resulting in an unexpected course of business.

Beverly: The client is a general securities broker-dealer firm. It’s independent, has approximately 50 registered representatives with 15 to 20 branch offices located throughout the United States. The situation was they had been in business for a number of years and were operating with the principal being the owner of the firm, and he had taken to some ill health and had had a stroke.

It was always his intent that his family would be able to take over the broker-dealer and his responsibilities within the broker-dealer. Quickly it became very apparent to them that they simply did not know what they did not know, and that it was not going to be any type of a possibility for them to transact business on a day-to-day basis. So they contacted us to see if we could come in and assist them and help guide them down the right path of what they were supposed to do.

Stephen: One of the problems, the principal of the firm did not leave any type of business continuity plan for transition for someone to take over. Because his illness was so fast, it was a stroke, no one understood the records. It was like putting together a puzzle. We had to put the pieces together.

Beverly: It was not only a puzzle, but a bit of a scavenger hunt as well. We needed to go in and find everything and then figure out how it all pieced together.

Stephen: In addition, this was a very personal situation and it had to be handled very sensitive, because of the father taking ill. That, besides we had to handle it professionally, we also had to have the understanding it was a family-owned business. It’s almost like we had to have a compassionate side also to deal with the whole relationship, and we couldn’t just treat it black and white.

When I went down to the firm, we realized the situation was a lot worse than we had imagined. The main thing was to keep the regulators at bay. We had to be concerned about their clients and making sure the clients were taken care of. We had to make sure their salespeople, registered representatives, didn’t have a run on the bank, knowing that if the firm was in trouble that they’d lose all their representatives, and then the cost concern for the family, that there was no value left in the firm if it all fell apart.

So we had to put a plan of action together to figure out what were the priorities and how to take care of this situation.

Beverly: Steve realized when he arrived that there was not just one fire to be put out, but that there were a lot of small forest fires that needed a lot of attention and guidance.

Stephen: I would ask questions like, “Can you show me your audit tickets?” and I would get a response, “What is an audit ticket?”

They showed me these reports that they were throwing out every day and they said, “What are these?” And they were margin calls. So I had to explain to them that you just can’t throw these things out. So immediately it appeared that the lack of knowledge was just way beyond what we ever imagined.

Beverly: One isolated problem would not have been abnormal to have seen throughout the industry, or maybe three or four of them. What was a little more abnormal in this situation was that everything seemed to be out of balance. We just had to take every aspect in of itself, by itself, and walk the family through what they were to do, how they were to do it. We offered guidance on various processes that they needed to take. For instance, it’s a requirement that any representative that transacts business in a state other than their home state, and things that need to be registered within that state. And the firm wasn’t registered in some of these states these representatives were transacting business in, and the family just didn’t know what that process was. So we, we just dissected it with a toothpick. We just took every part and looked over every aspect and every angle and just started fixing things.

Stephen: One of the hardest things I had to tell them was that they had to sell the firm. It was obvious the father’s health was getting worse and worse. The lack of experience of the children, what’s needed to run a broker-dealer. A broker-dealer is not an easy thing to run. The best advice was to just sell the firm for the most that they could get at the time. And the hard thing to them was that it’s a family business and it was like a child, but that was without a doubt the best advice. If they tried to continue to run the firm they would have lost all their representatives. There was no doubt.

Beverly: When we realized that it was in the client’s best interest for them to actively pursue selling the firm, we changed the thrust of what we were doing to make certain that everything was compliant and sellable, rather than trying to fix all of the prior things, as it would have been for a regulator coming in or anything like that. We made everything as clean as possible so that it was attractive to a buyer.

Stephen: Well, we handled basically the back office. The client sold the firm.

Beverly: The client was very happy. They knew in their hearts that this was what needed to take place, and over the time that we worked with the client I believe that they had a little bit of a shift in their thinking in wanting to hang on to this business that was their father’s into making it something that was going to be able to take care of their father. That became their primary concern then, that he was going to be comfortable and happy.

Stephen: The children during this whole time period, the stress level was tremendous, trying to run this broker-dealer that they didn’t really have any experience in, and to deal with problems that they’ve never dealt with before. So there was tremendous relief. The regulators were happy, the client was happy, the buyer was happy and the representatives were happy.

Announcer: This concludes today’s segment from the Regulatory Compliance podcast series. We invite you to listen to other topics available here on our website, and if there is a question that you would like