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.
The 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.
