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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 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.

FINRA CMA Filing – Getting Faster Approval

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FINRA cma filing

FINRA’s Continuation of Membership process (also known as a FINRA CMA filing) has earned the reputation with some as an onerous process. One of the criticisms of the FINRA CMA program was that the process for reviewing a FINRA CMA filing took too long. However, FINRA’s rules specify the maximum duration of a FINRA CMA filing – 180 days. And there are other time limits specified by the rules, such as the time that FINRA has to request additional information once it receives an application or a response to a subsequent question – usually 30 days. But let’s remember that there are often three sides to any story – their story, my story and the truth which lies somewhere in the middle.

The public criticism of the FINRA CMA program involved extended time frames (applications taking the full six months – or longer – to complete) and an overly complex process. But one frequent reason for delays in its processing of a FINRA CMA filing is that applicants do not provide the minimum required information, or that applicants do not pass the required qualification examinations in time. The truth is that both sides have a significant role in determining the duration of a FINRA CMA filing. In fact, applicants who used experienced professionals to guide them through the FINRA CMA filing process can avoid unnecessary delays.

finra CMA filingFINRA has made significant changes to its program in recent years, streamlining the process and even creating an expedited review program for certain applications. It has created an online application program and made significant staffing commitments to help process CMA applications in a timely manner. FirstMark’s experience with the FINRA process is that when applications are thorough and complete, that FINRA staff is responsive and move very quickly.

When a broker-dealer is considering a FINRA CMA filing it is critically important that they have expert professional guidance from a FINRA CMA expert. Mitch Atkins, FINRA’s former South Region Senior Vice President, has over 21 years of experience dealing with NASD and FINRA CMA applications of all types. If you are considering a material change, use an expert who can help you shorten the duration of your FINRA CMA filing . Contact Mitch Atkins at FirstMark Regulatory Solutions by calling 561-948-6511.