Series LLCs and 1934 Act Broker-Dealers

In a  letter dated Sept. 1, 2009, the SEC staff responded to a Financial Industry Regulatory Authority (FINRA) request for guidance on the application of the financial responsibility rules to broker-dealer using LLC series.  In the view of the staff, the structure posed by FINRA would not be permitted.

The broker-dealer would be organized as an LLC with two series.  The Master LLC would have no business operations.  The LLC would have two Series:  (i) a series for retail broker-dealer operations; and a series for institutional activities.  Only the Master LLC would register as a broker-dealer.  The specific question was the treatment of series assets and liabilities for purposes of (i) the net capital rule, (ii) the consumer protection rule, and (iii) financial reporting purposes.  FINRA suggested a consolidated financial statements that included the assets and liabilities of the two operating series.

The SEC suggested the worst of all possible worlds when computing net capital:

…assets that are not available to all creditors would not be subject to the risks of the broker-dealer’s business and would be treated as non-allowable….

… liabilities, whether the liability of a Master LLC or a series, would be deducted from allowable assets….

Id.at 2.  Moreover, consolidated financial statement would not be permitted because

a user of the financial statements would be unable to determine which of the series controlled specific assets or was obligated to satisfy specific liabilities.

Id.  As to the consumer protection rules, a seireis LLC would also fall short:

… if the amount calculated for the special reserve account for customers included credits from one series and debits from another series the account could be underfunded. Therefore, a Series LLC that receives customer cash or securities would not be able to comply with the requirements of Rule 15c3-3.

Id.at 3.  For similar reasons, the use of series LLCs would be

problematic for purposes of a liquidation proceeding under the Securities Investor Protection Act….

Id.

Gary Rosin

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