FINRA Membership and Registration Rule 1017 requires that FINRA broker-dealers preparing to effect a “material change in business” must file for approval of that change by FINRA. A “material change” is defined in FINRA Rule 1011(k). FirstMark’s discussion on that appears here. In order to provide for some amount of expansion without requiring its members to come back for approval each time, FINRA permits members to expand pursuant to the provisions of FINRA IM-1011-1, also called the FINRA Safe Harbor Expansion provision. This rule creates what is called a “safe harbor” for expansions of business without having to seek FINRA approval through a Rule 1017 filing.
In order to qualify under the provisions of IM-1011-1, and take advantage of the FINRA Safe Harbor Expansion Rule, the member must not have a disciplinary history. And for purposes of this FINRA safe harbor expansion provision, the term disciplinary history is defined to mean that there has been, “a finding of a violation by the member or a principal of the member in the past five years by the Securities and Exchange Commission, a self-regulatory organization, or a foreign financial regulatory authority of one or more of the following provisions (or a comparable foreign provision) or rules or regulations thereunder: violations of the types enumerated in Section 15(b)(4)(E) of the Securities Exchange Act of 1934; Section 15(c) of the Securities Exchange Act of 1934; Section 17(a) of the Securities Act of 1933; SEC Rules 10b-5 and 15g-1 through 15g-9; NASD Rules 2110 [now FINRA Rule 2010] (only if the finding of a violation is for unauthorized trading, churning, conversion, material misrepresentations or omissions to a customer, front-running, trading ahead of research reports or excessive markups), 2120, 2310, 2330, 2440, 3010 (failure to supervise only), 3310, and 3330; and MSRB Rules G-19, G-30, and G-37(b) & (c).” See NASD IM-1011-1 for more on that. Note that this Interpretation has yet to be updated by FINRA with the current FINRA Rule citations. Finally, the FINRA member must not have a membership agreement that contains a specific restriction related to the number of personnel. If so – sorry, but no FINRA safe harbor expansion. However, FINRA Membership Agreement restrictions may often be removed through the FINRA Membership Agreement Change process. Contact FirstMark for assistance filing a FINRA Membership Agreement Change application.
FINRA Safe Harbor Expansion – Doing the Math
Simply stated, the Interpretation permits expansion of the “Number of Associated Persons Involved in Sales” as follows: if the broker-dealer has between 1 and 10 persons, 10 additional persons measured on a rolling 12 month basis, and if the broker-dealer has greater than 11 persons, 10 additional persons or a 30 percent increase, whichever is greater, again measured on a rolling 12 month basis. For branch offices, the process works similarly, with 1-5 offices allowed 3 more in 12 months, and 6 or more allowed 3 more or 30 percent, whichever is greater. There is also a provision for an increase in the number of markets made, but very few are actually doing that these days, so we won’t discuss it here.
Update: FINRA Notice 20-15 has changed the manner in which the Safe Harbor applies by introducing a limitation under its MAP rules. Specifically, a member may not expand its business using the FINRA safe harbor for business expansion if that expansion includes one or more associated persons involved in sales who have a “covered pending arbitration claim” an unpaid arbitration award or settlement. Instead, it must first file a materiality consultation.
If you are considering a material change to your business, and want to understand whether your change requires a FINRA CMA or if you can take advantage of the FINRA safe harbor expansion rule, contact an experienced FINRA CMA expert. Mitch Atkins, FINRA’s former Senior Vice President and Regional Director is now Principal at FirstMark Regulatory Solutions. Mitch Atkins has extensive experience with the FINRA CMA process. Contact FirstMark Regulatory Solutions at 561-948-6511.
