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Sep 7, 2009 3:00 pm

I’m considering bankruptcy to get some breathing room. What can happen to my practice? Does it jeapordize everything?

Sep 7, 2009 6:48 pm

Are you a RIA or using a b/d?

I was looking at hiring someone who had filed a BK so I have done a ton of research on it.

No, you will not lose your practice, BUT you will need to disclose it on your u4. It will show up on FINRA’s brokercheck. BIG TIME fines if you don’t disclose it. But you will be able to add your comments also. So if it was medical related or a bad biz deal, you can add it. This way a prospect may give you the benefit of the doubt.

Your E&O may go up. (ours would have gone up 5x) Mine would have if I had hired this person. Make sure you don’t get any judgments against you before you file. My E&O would not cover us if there were outstanding judgments. They felt that “fine you filed bk and wiped your debt out” was better than “you owe money due to a judgment, so we are not going to cover you. You may be high risk, since you may take more risks in clients accounts to generate more money for yourself.” Make sense?

If you are a state RIA, check your state rules. My state wanted it disclosed on the ADV also.

You may have an issue if you ever want to go back to a wirehouse. In this enviroment, they may not want the liability. This may happend if you try to switch b/ds.  I have had a few people tell me that they could not get hired by a b/d due to a recent BK, but their current b/d was ok with it.

I am not sure how to handle it with clients. If you book was built from networking, you may lose some clients. I have noticed more and more FINRA adds on TV recently. It would be safe to assume clients are looking you up on brokercheck. Last thing you want is a big refferal source telling all your clients you filled BK and have them leave at the same time, without hearing your side of the story. Plan to lose a few clients over this.

Lastly, talk to a lawyer who is familiar with the “stockbroker” rule. It states a stockbroker may not file chap 11, or 13 only a chap 7. I saw lots of message board postings were brokers had equity in their house, filed a chap 13 (where you pay back some of the debts) and were denied. Their only option was a 7 (where your assets over a certain value are liqidated). But your home probably doesn’t have much equity anyway

One of my clients is a BK lawyer and we spoke about this at lunch. He told me the issue is the definition of a stockbroker. A retail FA probably wouldn’t fall into this category. But a RIA who does blocktrading (and takes custody of the assets in their block trading account - even if it is just for a day or two) would fall into this category.

Since you may only be able to do a chap 7, you may run into one last problem - the BK court may look at your practice as having value  - a value that can be sold off to pay back your debts. If you are a solo practice, then you are the practice and there is no real value if it is sold off. However, if you have 30 reps working under you, you may have an issue.

Sorry for all the spelling errors, I am typing this on my blackberry and my train is here. So good luck!

Sep 8, 2009 1:08 am

From what my client told me it depends on who challenges it. He said many judges are not familiar with the rule and don’t press it. What he sees is the firms challenge it (your creditors can challenge it) so if you owe money to Mother Merrill they may press the issue. But 9 out of 10 times is goes unnoticd

Sep 8, 2009 3:02 am

I’m an independent using a BD. I really don’t wat to do a Chap 7.

Sep 8, 2009 6:38 pm

Call the compliance dept. at your B/D.  They will be able to guide you.

Yes, you will have to disclose it on your U4.  Like a PP mentioned, HUGE fines and more if you don't disclose it.
Sep 10, 2009 10:35 pm

It is my understanding that you can not be fired if you file bankrupcy.  However, if you are independant than you are a contractor.  Your bd may review your case and contract to determine if you are worth the risk.  They can terminate your contract.  Definately ask your bd what would happen.