Author Archives: Mitchell Atkins, CRCP

FINRA and SEC Corporate Conversion and Redomestication

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In the current legislative environment, it appears that significant tax changes are on the horizon. That said, the issue of corporate conversion of registered entities such as FINRA broker-dealers and registered investment advisors comes up quite frequently. For example, a broker-dealer may want to convert from a corporation to an LLC. In other circumstances a registered entity’s ownership may desire to relocate the entity to another state. When this occurs, the corporation literally becomes a “citizen” of another state. However, this can be a very complicated process in which failure to complete all required steps may result in the loss of the regulated entity’s license to operate as a broker-dealer or registered investment advisor. As such, it is critical that the process follow the exact set of steps required and that the approach occurs with surgical precision. Just because state law permits such a conversion doesn’t mean that your registered entity will maintain its license with its regulator. In fact, the SEC often considers a corporate conversion or redomestication to be a succession, and provides that new entity (successor) does not necessarily get to maintain the same license that it had before the change. Essentially, the SEC guidance has divided the successions into two types: a) a succession by amendment and b) a succession by application. In the latter, an entirely new application for registration is required, which in the FINRA world means a new member application and likely a six-month process. The former is the one you want if you are making the change – one that only requires an update to Form BD with the correct and timely disclosures in the various sections of Form BD. The SEC has provided guidance that,

“An adviser that fails to provide a substantially complete Form ADV that indicates the adviser is submitting a filing as a succession by application or succession by amendment within the statutory time would have to file a new application to register on Form ADV. Such an investment adviser would be conducting an investment advisory business without being registered.”

The same guidance would apply to the filing of an amended Form BD for a broker-dealer. To recap, we have several sets of considerations here. First, the issue of the conversion or redomestication and the applicable state law must be considered. For example, some states provide for statutory conversions of a corporation to an LLC. The law in the state essentially provides that the LLC shall be deemed to be the same entity as the converting other entity. In this case, under SEC guidance, this may be considered a succession by amendment, depending on the full set of facts which we cannot get into here. It is important to note, however, that some states (like New York) do not permit a corporate conversion – a statutory conversion of a corporation into an LLC – and instead would require the formation of a new LLC, and a merger of the old company into the new. It is critical to understand the legal implications of a corporate filing, and which states permit the various types of conversions. This is something I always encourage clients to discuss with legal counsel.

Next, FINRA will typically consider a conversion or redomestication to another state a material change under FINRA Rule 1011(k), and thus would typically require a CMA filing. However, FINRA may permit the filing to be handled through its Materiality Consultation Process.  In this case, it may approve the change without the actual filing of a CMA. FINRA will review the documents for the new entity, along with the legal aspects of the proposed activity. Assuming the FINRA approval is granted, the next step is to execute the change, and then to file the appropriate Form BD or ADV amendment within the SEC-required time period. It is critically important that the updated document include all required information for the SEC to consider the nature of the succession (see SEC guidance).

What seems like a simple change, if improperly planned and/or executed, can result in the loss of a broker-dealer’s or investment advisor’s registration to operate. For this reason, it is critically important that registered entities seek qualified legal and compliance advice in effecting a corporate conversion or redomistication. FirstMark Regulatory Solutions is a broker-dealer compliance consulting organization based in Boca Raton, Florida. If you are considering a CMA or other FINRA filing, contact Mitch Atkins at 561-948-6511.

FINRA Application Process – Buy or Apply?

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finra application processBuying a FINRA Broker-Dealer

Buying any business can prove to be complex. Buying a FINRA broker-dealer can be complex and then some. Over the years, Mitch Atkins, while an executive at FINRA and now as a consultant, has analyzed literally hundreds of purchase and sale transactions involving broker-dealers and their assets. For those who have little experience in this space, please take note of this article, as these words of wisdom may save you untold grief.

A FINRA broker-dealer is unlike almost any other business. It is subject to the regulations of FINRA, SEC, MSRB, SIPC, 50 state securities regulators, and the Bank Secrecy Act – just to name a few. What may be considered a logical, reasonable approach in any other business may not directly apply to running a broker-dealer. Broker-dealers (and associated persons of broker-dealers) are subject to FINRA arbitration requirements – and to the jurisdiction of the FINRA arbitration panels. When you buy a broker-dealer, you buy all of its prior problems and history – known and unknown. For better or worse, once the Form BD and U4 are signed, one enters the world of broker-dealer regulation. And the tough regulation comes for a good reason. The members of the public may now entrust their life savings to you. The industry can be very financially rewarding if approached with a good understanding of what it takes to survive long-term in the business.

Start New or Buy Existing?

One of the most important steps in entering the brokerage industry as an owner is determining whether to buy an existing broker-dealer or to start a new one. The FINRA application process can be complex whether forming a new broker-dealer or acquiring one. Either direction can be appropriate. The key in an acquisition is whether one fully understands the history of the target. For example, a broker-dealer that has already been in operation may have obligations that remain hidden to the purchaser until months or even years after the purchase is closed. It is not unusual for a broker-dealer to receive notice of an arbitration filed against it for conduct that occurred years before. When the new owners receive this notice, the initial owners are often long gone. So to be sure that this doesn’t come up, some simply file a FINRA new member application with FINRA, creating a clean broker-dealer. Going through the FINRA application process with a new firm is a clean start for the entity. After FINRA approves this entity, it may grow by purchasing the assets of other FINRA broker-dealers. The assets to be acquired generally consist of the rights to some or all of the customer accounts of that firm. There are potential pitfalls to this approach as well. The FINRA application process in this scenario can be even more complex than a new member application.

But, in the humble opinion of this author, the best and cleanest approach is to form an entirely new broker-dealer. Some might say that this is not the case – especially since an existing broker-dealer has already cleared many of the startup hurtles. And logically this makes sense. For one thing, an existing broker-dealer already has customers, brokers, systems and the most important thing – a FINRA membership. But the reality has been (at least in this author’s experience) that this seemingly logical approach can be like walking a mine field. This is because unforeseen problems often arise after the sale closes. A careful analysis of the history of an acquisition target is critically important to making a determination of whether a purchase makes sense. Nothing less than full, expert due diligence is required. However, a more protective approach is to create a new broker-dealer that then purchase the assets of existing broker-dealers. Either way, one must follow the FINRA application process. We’ll call this FINRA broker-dealer merger and acquisition 101.

Is the FINRA Application Process Different for an Asset Purchase?

An asset purchase, under most circumstances, requires an application under FINRA Rule 1017(a)(3). FINRA must review and approve the sale. And for this reason, both the acquiring firm and the target firm may have to go through the FINRA application process. FINRA requires that a Continuation of Membership Application, or CMA, be filed when, “direct or indirect acquisitions or transfers of 25% or more in the aggregate of the member’s assets or any asset, business or line of operations that generates revenues comprising 25% or more in the aggregate of the member’s earnings measured on a rolling 36-month basis, unless both the seller and acquirer are members of the New York Stock Exchange, Inc.”

In this scenario, before approving the transaction, FINRA will consider the business of the seller, and whether it has made adequate provisions for its outstanding liabilities. Under its rules, FINRA will not approve such a transaction if the owners of the selling broker-dealer receive compensation for an asset sale but fail to make sufficient provisions for its outstanding liabilities. This is particularly the case if the selling broker-dealer has outstanding customer claims – such as arbitration claims or unpaid awards. In some cases, as part of the FINRA application process, applicants are required to place a reasonable sum in an escrow account for the satisfaction of current and future customer claims. This can get somewhat tricky. Reasonable minds can disagree as to how one adequately provides for future claims. See my article about FINRA CMA Arbitration Plans for more information on that.

These questions and the FINRA application process are best addressed by a FINRA CMA expert. FINRA broker-dealer acquisitions can be rewarding if handled properly. If you are considering starting a new FINRA broker-dealer or if you are thinking of purchasing an existing FINRA broker-dealer, contact Mitch Atkins, FINRA’s former Senior Vice President and Regional Director. Mitch Atkins has extensive experience with the FINRA CMA process and particularly with broker-dealer acquisitions. Contact Mitch Atkins, Principal, FirstMark Regulatory Solutions at 561-948-6511.

FINRA Membership Application Rule Retrospective

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finra membership application rule retrospective

FINRA Membership Application Rule retrospective – Interested in a summary of the comments received by FINRA? See Mitch Atkins’ LinkedIn article about it.

FINRA sometimes seeks comments on rule proposals and other matters.  This time, comments were solicited on the FINRA Membership Application Rules as part of its rule retrospective program.  Last year, FINRA announced that it would engage in retrospective reviews of its rules in certain areas.  This presented an unusual opportunity to provide formal comments on the existing FINRA Membership Application Rules and to provide suggestions about the process. Over the years, the FINRA Membership Application Rules have been the subject of a good deal of discussion.  So a retrospective rule review in this area seemed like it made a lot of sense when FINRA announced it in Regulatory Notice 15-10.  It is reasonable to expect that FINRA may make changes to its rules or processes in this area to address industry comments that it receives.  Mitch Atkins, Principal and Founder of FirstMark Regulatory Solutions, a broker-dealer consulting firm that specializes in FINRA membership applications (NMA and CMA filings) reviewed and summarized the comments.  The results were a bit surprising.  Check Mitch Atkins’ LinkedIn article for more details on exactly what was suggested, and what he expects that FINRA might do going forward.

Update:  FINRA completed its retrospective rule review in the MAP space and commenters supported the core MAP function while suggesting changes to streamline the administrative process. Suggested changes included restructuring and streamlining the MAP rules, reducing the overall time period for application review from 180 days to 150 days, and clarifying certain areas including, events that will require a CMA, ability of the MAP Group to lapse and reject applications, and elimination of the ability to impose interim restrictions. While these changes have not been implemented as of yet, FINRA has published changes designed to incentivize payment of arbitration awards. See Regulatory Notice 20-15 for additional information.

FirstMark assists clients with all types of FINRA membership applications.  If you need help with an issue involving a FINRA CMA, Membership Agreement Change or Materiality Consultation, or to form a new FINRA broker-dealer, contact Mitch Atkins at FirstMark by calling 561-948-6511.

FINRA CMA Material Change in Business Operations (Rules 1011 and 1017)

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FINRA’s continuation of membership rules require that broker-dealers file a FINRA CMA material change in business application (also called a CMA, or continuation of membership application). As a FINRA CMA expert, FirstMark often receives inquiries about exactly when and how to file a FINRA CMA material change application.

finra cma for material changeThe answer to this question can be a little unclear. FirstMark recently heard from a client that FINRA advised them that adding mutual funds as a business line may not be considered material.   However, the opposite has been true in other cases.  It isn’t always black and white.

So going to the basics, FINRA states in Rule 1017 that a material change in business requires the filing of a FINRA CMA material change application. It is important to note that this is just one of the five categories of events requiring an application pursuant to Rule 1017. FINRA defines a material change in business operations in FINRA Rule 1011(k). That Rule states that the term “material change in business operations” includes, but is not limited to: 1) removing or modifying a membership agreement restriction, 2) market making, underwriting, or acting as a dealer for the first time, and 3) adding business activities that require a higher minimum net capital under SEC Rule 15c3-1.

Although the definition above seems quite limited, there are numerous instances in which activities other than those listed have been considered to be material under FINRA’s rules. This is why many instances of changes in business operations are considered on a facts and circumstances basis.

So Should I File a FINRA CMA Material Change in Business Application?

Because the consequences of not filing an application when one is required can be severe, FINRA has developed a process called a “Materiality Consultation.” A FINRA Materiality Consultation is a channel for broker-dealers to describe the proposed change in business operations in writing to FINRA. Typically, FINRA takes about 30 days to process these requests. Upon completion of its review, FINRA will issue a written response to the broker-dealer indicating whether it views the proposed change as material under Rule 1011(k).

There are plusses and minuses to following this process. Once you propose the change and FINRA opines on it, you are on notice that the change is viewed as material, so taking the “asking for forgiveness rather than permission” approach is not an option. If however, you receive a written opinion from FINRA that the change is not material, you have documentation should there ever be a question in the future.

FINRA’s membership application process should be navigated carefully, by FINRA CMA specialist who is familiar with the process. Mitch Atkins, FINRA’s former Senior Vice President and Regional Director has extensive experience preparing applications like a FINRA materiality consultation, a FINRA membership application, and a FINRA CMA material change in business application. Contact Mitch Atkins, Principal of FirstMark Regulatory Solutions at 561-948-6511 with questions about the FINRA membership application process.

FINRA Safe Harbor Expansion Rule

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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.

finra safe harbor expansionIn 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

finra safe harbor expansionSimply 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.

What is a FINRA CMA Arbitration Plan and why does FINRA want it?

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FINRA CMA Arbitration PlanIf you have filed a CMA with FINRA and are being asked for an “Arbitration Plan,” it is important that you develop a comprehensive document that will stand up to scrutiny by regulators. Requests for a FINRA CMA Arbitration Plan usually happen when a broker-dealer is selling its assets. An asset transfer may include the transfer of customer accounts and representatives. More specifically, under FINRA Rule 1017(a)(3), FINRA requires that its members file a CMA when engaging in, “direct or indirect acquisitions or transfers of 25% or more in the aggregate of the member’s assets or any asset, business or line of operations that generates revenues comprising 25% or more in the aggregate of the member’s earnings measured on a rolling 36-month basis, unless both the seller and acquirer are members of the New York Stock Exchange, Inc.”

The reason behind this is that FINRA wants to ensure that broker-dealers are not attempting to avoid liabilities by selling assets and directing the proceeds to owners or officers. One of the reports FINRA requires in these applications is called a FINRA CMA Arbitration Plan. This plan must contain information that FINRA specifies about current arbitration claims outstanding against a broker-dealer. FINRA will require that the broker-dealer proposing the sale provide legal and financial information on the Arbitration Plan which are sufficient to show how the member will satisfy current and future claims, and particularly customer-related claims. This is especially true if the broker-dealer is receiving a sum of money in exchange for the assets or business lines. In some cases, there is no sum of money being exchanged, but FINRA will still want to understand how the firm will satisfy outstanding claims.

A well-prepared FINRA CMA Arbitration Plan can help gain quick approval of your FINRA asset-transfer CMA. If you require assistance with any CMA or NMA related issue, contact a FINRA CMA expert.

Update:  While FINRA typically requires a CMA filing to expand business beyond certain thresholds, FINRA has amended its membership application rules to require that if a member is contemplating any acquisition (even under the 25% outlined in Rule 1017(a)(3)) and the transferring member or an associated person of the transferring member has a “covered pending arbitration claim” an unpaid arbitration award or settlement, the member must file a materiality consultation prior to proceeding, even if under the 25% threshold that exists in Rule 1017(a)(3). The arbitration plan is likely something FINRA will want to review as part of this process. See FINRA Notice 20-15 for details.

Contact Mitch Atkins, FINRA’s former Senior Vice President and Regional Director and now Principal at FirstMark Regulatory Solutions. Mitch Atkins has extensive experience with the FINRA CMA process and broker-dealer asset transfers. Contact FirstMark Regulatory Solutions at 561-948-6511.

The FINRA CMA Fee – Can it be Waived?

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FINRA CMA FeeIn 2012, FINRA announced that it would begin charging a fee for continuing membership applications (or CMAs). Also, at that time, FINRA announced increases in the new member application (or NMA) fees. The FINRA CMA fee structure for both is based on a grid that appears in Section 4(i)(3) of Schedule A of the FINRA By-Laws. The problem here for FINRA is that for years it processed CMA applications (and spent considerable resources on some) without actually collecting any fees for this specific service. Wanting to recover some of the resources it was expending on CMAs, FINRA instituted these user fees in 2012.

The amount of the required FINRA CMA fee depends upon a tiered structure within each firm category (small, medium and large). And the tiers, for example, of a small firm are Tier 1, 2 and 3 where the first is 1-10 registered persons, the second is 11 – 100 and the third is 101 – 150. The fees within each tier for a small firm seeking to gain approval for a material change in business range from $5,000 to $15,000. For a large firm these fees range from $35,000 to $75,000. Some fees are simply a flat fee (no tiers) – for example there is a flat fee for an asset transfer of $5,000 for a small firm. Essentially, FINRA has aligned the fees with what it anticipates the amount of work required by its staff will be.

Then Comes the Clarification on FINRA CMA Fee Waivers

In 2013, acknowledging that there are certain circumstances in which CMAs should qualify for a fee waiver, FINRA issued guidance about what these circumstances are and how to apply for the waiver. Specifically, an applicant may be granted a FINRA CMA fee waiver where FINRA, “determines that the CMA is proposing less significant changes that do not require substantial staff review.” And FINRA went on to provide guidance suggesting that the applicant may qualify for a FINRA CMA fee wavier in the following instances:

  • The proposed change does not make any, “day-to-day changes in the applicants business activities, management, supervision, assets or liabilities, and the applicant is only proposing a change in the:” applicant’s FINRA CMA Feelegal structure (corporation to LLC), ownership structure (adding a holding company), and change of percentage ownership of existing owners with no disclosure or disciplinary issues within the last 5 years.
  • An asset transfer application in which there are no pending or unpaid settled customer related claims, or there are claims but an escrow has been established.

Obviously, the FINRA CMA fee-waiver eligibility circumstances are very limited. But in FINRA’s Regulatory Notice 13-11, it states that other changes may qualify based on the individual facts and circumstances of such a waiver request. And FINRA has granted waivers in other circumstances.

A FINRA CMA fee wavier request should be uploaded into the FINRA Gateway with the Form CMA, and specifically in the section covering Standard 1 of the application. There have been instances in which the waiver request was completed after the application was filed, however.

If you are considering filing a CMA, or if you would like to request a waiver of any FINRA CMA fee, contact Mitch Atkins, FINRA’s former Senior Vice President and Regional Director, a FINRA CMA expert who has extensive experience with the FINRA CMA process.

Contact Mitch Atkins, Principal, FirstMark Regulatory Solutions at 561-948-6511.

FINRA BD Asset Acquisition

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FINRA bd asset acquisitionAs has been pointed out in the trade press in recent years, there have been numerous instances of broker-dealers going out of business for a number of reasons, not the least of which is being on the wrong end of an arbitration award. For small broker-dealers, an adverse arbitration award can be a devastating event. If not fully covered by insurance, it can mean the end of the broker-dealer. Since the SEC’s Net Capital Rule requires that broker-dealers book the entire amount of an adverse arbitration award upon receipt, an award in excess of that firm’s net capital requires the FINOP to direct the cessation of securities business except for liquidating transactions, and even those may only be effected by customers directly with the clearing firm. In a circumstance like this, the broker-dealer will likely want to wind down the business and transfer the brokers and accounts to another firm as quickly as possible. Sometimes a broker-dealer in this circumstance will attempt to sell its assets (and in terms of customer accounts and brokers, while not technically assets, they certainly represent valuable relationships).  This is called a FINRA BD asset acquisition.

FINRA has addressed scenarios such as this in NASD Notice to Members 04-10. In the Notice, FINRA (NASD at the time) points out that firms in this circumstance must file an application under Rule 1017 and must gain approval prior to effecting this type of transaction – one it calls an “Asset Transfer” or a FINRA BD asset acquisition.  FINRA expressed concern about this practice because –  remember FINRA’s mission is investor protection – it wants to ensure that customers who have arbitration awards against a broker-dealer are given priority in any sale or liquidation transaction. In the Notice, NASD said, “NASD has encountered several instances where the effect of a member attempting to restructure by transferring assets is to insulate the member and its owners from responsibility for payment of pending or unpaid arbitrations. In some cases, the member will transfer its assets without a corresponding transfer of its liabilities.”

In circumstances in which a broker-dealer is closing, it is possible to gain approval from FINRA, whether or not there is a payment for the assets being transferred. However, FINRA’s Rule 1017 process must be followed and FINRA satisfied that customer claims will be dealt with in as fair a manner as is possible under the circumstances.  This is a critical aspect of the FINRA BD asset acquisition and is discussed more in this article about FINRA Arbitration Plans. FINRA BD asset acquisition

Generally, this type of application is filed under Rule 1017(a)(3). The provision states that a Continuation of Membership Application, or CMA, must be filed in any instance in which there are, “direct or indirect acquisitions or transfers of 25% or more in the aggregate of the member’s assets or any asset, business or line of operations that generates revenues comprising 25% or more in the aggregate of the member’s earnings measured on a rolling 36-month basis, unless both the seller and acquirer are members of the New York Stock Exchange, Inc.”

UPDATE: See discussion of FINRA Notice 20-15 below. Note that while Rule 1017(a)(3) is still in effect, FINRA has amended its rules to require that if a member is contemplating any acquisition (even under the 25% threshold above) and the transferring member or an associated person of the transferring member has a “covered pending arbitration claim” an unpaid arbitration award or settlement, the member must file a materiality consultation prior to proceeding, again, even if under the 25% threshold that existed previously. Similarly, 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.

Don’t Have 180 Days for a FINRA BD Asset Acquisition CMA?

A FINRA BD asset acquisition application often is filed in urgent circumstances. Because the firm has ceased operations, the client services are limited. Firms often want to effect a mass transfer of representatives of the closed firm to a new firm. The new firm may also need to file a Rule 1017 application. Also, as is often the case in these scenarios, the broker-dealers involved will want to effect a block transfer of customer accounts using a negative consent letter. All of these scenarios require precise compliance with the numerous rules that are triggered. Further, there can be significant operational considerations.   In some instances, FINRA BD asset acquisition applications can be processed in an expedited manner.  There is the possibility of using the FINRA fast track membership application process.

UPDATE: On September 14, 2020, as outlined in FINRA Notice 20-15, FINRA has amended its Membership Application Program rules to create further incentives for the timely payment of arbitration awards. The existing MAP rules (FINRA Rule 1014) already required that FINRA consider whether the applicant and its associated persons have any material disciplinary actions taken against them by industry authorities, customer complaints, arbitrations, civil actions, etc. The amended rules include the following key changes:

  • FINRA now requires firms to seek Materiality Consultations when engaging in certain changes involving ownership, control, or business operations, including business expansions when an unpaid arbitration award or settlement exists;
  • There is a rebuttable presumption to deny a new member application that involves a pending arbitration claim against that applicant or its associated persons;
  • To overcome a presumption of denial due to unpaid arbitration claims or settlements, an applicant must demonstrate its ability to satisfy the awards settlements or claims and guarantee that any funds used to evidence ability to pay will used for that purpose; and
  • An applicant must notify FINRA of any arbitration claim involving the applicant or its associated persons that is filed, settled, awarded, or becomes unpaid before FINRA renders the decision on the application.

If your firm is experiencing circumstances like these, or if you desire to effect a FINRA BD asset acquisition contact a FINRA CMA expert who knows how to navigate these complex requirements in an expedited manner. Mitch Atkins, FINRA’s former Senior Vice President and Regional Director has extensive experience with the FINRA CMA process and particularly with asset transfers and broker-dealer acquisitions under Rule 1017(a)(3).

Contact Mitch Atkins, Principal, FirstMark Regulatory Solutions at 561-948-6511.

FINRA Interim Restrictions

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The FINRA Continuation of Membership Application (“CMA”) is covered under FINRA Rule 1017 (among others), and is often referred to as a “1017” application. The rule provides that any of the events enumerated in Rule 1017(a) require the filing of an application. Generally, these include: a merger, an acquisition, an asset acquisition, a change in ownership or control or a material change in business operations. For purposes of this discussion, we will focus on a change of ownership or control.FINRA Interim Restrictions

Generally speaking, the change of ownership or control provision of the rule is designed to allow the member to effect the transaction 30 days after filing the application unless FINRA objects (and an objection comes in the form of FINRA interim restrictions). In that case, FINRA must notify the applicant that it is imposing interim restrictions, which may include a prohibition on the member effecting the transaction until the completion of the processing of the application. This process is described in FINRA Rule 1017(c)(1).

The Basis for FINRA Interim Restrictions

When FINRA interim restrictions are involved, it is usually because FINRA has made a preliminary assessment that the applicant may not meet one or more of the standards in FINRA Rule 1014. Absent that view, FINRA interim restrictions generally won’t be imposed. This is not to say that if FINRA does not object that it has approved the transaction. However, based on a review of the details of the proposed transaction, FINRA may leave it to the applicant to determine whether it wants to proceed with the change.

The real risk to the applicant if it proceeds with the transaction prior to receiving FINRA’s approval is that FINRA may, after reviewing all of the material provided with the application, determine not to grant the applicant an approval. If this is the case and the applicant has already effected the transaction, it has limited choices: file a new application, unwind the transaction or file Form BDW and withdraw from FINRA membership. Clearly, this is not a scenario one wants to face.

When filing an application under Rule 1017, it is critical that the applicant consult with a FINRA CMA expert who is experienced in the process. Mitch Atkins, FINRA’s former Senior Vice President and Regional Director has extensive experience with the FINRA CMA process and particularly with FINRA interim restrictions under Rule 1017(c). Contact Mitch Atkins, Principal, FirstMark Regulatory Solutions at 561-948-6511 with your questions about FINRA’s CMA process.

FINRA CMA Application Rejected – Substantially Incomplete

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substantially incomplete rejected FINRAGaining approval of a material change in business or other type of membership application is dependent upon whether the standards for admission are satisfied. These standards are spelled out in FINRA Rule 1014(a). However, prior to evaluating whether the standards have been satisfied, FINRA will evaluate whether an application for membership (a “MAP” application) is “substantially complete” and if not, it may reject that application. FINRA Rule 1017(d) provides that FINRA must determine, within 30 days of receiving an application for change in ownership, control or business operations, whether that application is considered by FINRA to be substantially complete.  If not, FINRA will send a letter to the applicant notifying them of the substantially incomplete status.

A similar provision applies to new member applications and is spelled out in FINRA Rule 1013(a)(3). While the term “substantially complete” is not defined specifically in the rule, experience has shown that FINRA is generally quite generous when it comes to making that determination. The rules provide a period of 30 days from the date of filing for FINRA to make its determination. Should it decide to reject an application, the application is deemed not to have been filed at all. And, FINRA returns the application fee less $500. FINRA will also provide an outline of the reasons it viewed the application as substantially incomplete. An applicant will then be required to re-file the application once it has been further developed (along with the full application fee).

Even an application that is not rejected by FINRA as substantially incomplete can have serious issues if it requires substantial revision.  Submitting a complete application can significantly reduce its duration. Because the application process is complex and requires a major investment of time and resources, it often makes sense to involve a professional FINRA CMA expert to assist.

Mitch Atkins, FINRA’s former Senior Vice President and Regional Director has extensive experience with the FINRA membership application process and particularly with ensuring that applications meet the standards specified in FINRA’s Membership Rules. Contact Mitch Atkins, Principal of FirstMark Regulatory Solutions at 561-948-6511 with your questions about FINRA’s MAP process.