BROKER-DEALER CONTINUING MEMBERSHIP APPLICATIONS
FINRA requires broker-dealers to file a Continuing Membership Application (“CMA”) in certain situations when the broker-dealer seeks to expand its operations or activities, and for other business events, such as specific ownership changes, mergers, acquisitions and successions, where such changed is deemed to be a “Material Change.”
Whether a change is material or not is a matter of case by case analysis. I can help you answer that question but ultimately it is up to FINRA to make the final determination, and this must be done prior to submitting the CMA. See my segment below about FINRA’s Materiality Consultation request (“MatCon”), which provides a potential avenue to avoiding the Continuing Membership Application.
Broker-dealers also must file with FINRA whenever they seek to modify or remove restrictions previously imposed in a FINRA Membership Agreement (a membership agreement change or a “MAC”). The purpose is to ensure that FINRA is able to verify that significant changes in a broker-dealer's business or method of operation are accompanied by appropriate corresponding enhancements to supervisory, compliance, financial, and internal control systems and that appropriate personnel are qualified to handle the expansion. This, in turn, ensures that member broker-dealers will continue to meet all of the standards and criteria for FINRA Membership.
If your broker-dealer’s requested ownership changes, additional business lines, additional registered representatives or additional branch offices, are deemed to fall under the CMA process, I can file the CMA with FINRA, which will include all corresponding documentation and information required under the Rule. I can lead your broker-dealer through this process until FINRA approval is granted.
The CMA process has a 180-day window for FINRA approval, although I will strive to shorten this period substantially to the best of my abilities.
The “FINRA Safe Harbor for Business Expansions” may allow a broker-dealer to add registered representatives, branch offices or markets made (above what is stated on the most current FINRA Membership Agreement) without application to FINRA. I can research, guide, and provide internal documentation in support of such process in order to determine if “Safe Harbor” can be utilized.
Certain types of expansions are presumed not to be material and, thus, do not require an application for FINRA approval.
The Safe Harbor is not always available to all broker-dealers. Broker-dealers that do not have a membership agreement (a rarity as time goes on); Broker-dealers that have a membership agreement that does not contain a restriction on the types of expansions otherwise permitted by the safe harbor; and Broker-dealers that do not have a disciplinary history as defined in the safe harbor, all may usually take advantage of the Safe Harbor opportunity for expansion.
Three types of expansions are permitted:
- Certain increases in the number of associated persons involved in sales;
- Number of offices (registered or unregistered);
- Number of markets made.
I can discuss the specific calculations that must be made immediately prior to any Safe Harbor expansion. Let’s schedule a time to speak.
Here’s something to ponder: Proposed expansions outside of the scope of the safe-harbor provisions are not necessarily material changes simply because they fall outside. For expansions beyond the safe-harbor limits, a broker-dealer is obliged to determine whether the proposed expansion requires an application under Rule 1017. A prudent starting point in the process is often the FINRA Materiality Consultation request. See next segment.
A “Materiality Consultation” request (a “MatCon”) is a safe method to use when you are not sure whether a contemplated change in your broker-dealer’s business is material. In one sense, it sits above the Safe Harbor allowances on expansion as described above, and below an outright, full blown Continuing Membership Application (“CMA”) (also described elsewhere).
A Materiality Consultation request takes the form of a letter and is used when seeking (rather than chancing your own determination, unless you’re extremely confident of your result and have sufficient back-up support) FINRA’s opinion as to whether your suggest change in business is, indeed, material, without going directly into the Continuing Membership Application process and usually takes less than two weeks to receive a definitely answer from FINRA.
If FINRA deems the request to be a “material change” in the broker-dealer’s business operation, then the CMA process is required. FINRA's decision depends on the specific facts and circumstances in each case.
Generally, FINRA has advised broker-dealers that whether any particular business expansion, including the addition of a proposed new business line, is a "material change" in a member's operations ultimately depends on an assessment of such factors as:
- The nature of the proposed expansion;
- The relationship, if any, between the proposed new business line and the broker-dealer's existing business;
- The effect the proposed expansion is likely to have on the broker-dealer's capital; the qualifications and experience of the broker-dealer's personnel; and
- The degree to which the broker-dealer's existing financial, operational, supervisory, and compliance systems can accommodate the proposed expansion or addition.
Under the Rules, FINRA broker-dealer firms are responsible for deciding whether a particular change is material and notifying FINRA in appropriate situations. Members are free to consult with FINRA staff about individual situations, but they are not required to do so. While a MatCon is clearly a reasonable way to proceed, it is not required, but broker-dealers should be wary of effecting changes without FINRA guidance or approval unless they are absolutely certain those changes are not material.
Let me help you in your decision making process.
FINRA requires broker-dealers to file a Continuing Membership Application (“CMA”) in certain situations when they seek to effect specific ownership changes, mergers, acquisitions and successions. A Purchase CMA and a Sale CMA are one and the same depending upon whether you’re the Seller or Purchaser and I list them here separately solely because I have heard them described that way often enough. To be clear there is no effective difference.
There are many reasons someone may wish to sell their broker-dealer firm, all of which are not pertinent to the discussion here other than that the reason for selling may make the seller more “motivated” than he, she or it would otherwise be, to use a real estate term. More to the point, however, is that buying a broker-dealer makes sense for the purchaser in only a limited number of scenarios.
While there are many variants, they are slight, and the two primary reasons a purchaser would wish to purchase a broker-dealer firm are:
(a) The purchaser needs to conduct business during the FINRA “Continuing Membership Application” or “CMA” period and, presumably, although not necessarily, believes the broker-dealer may earn during the application period, through commissions or other fees, an amount that may offset partially or completely the cost of the purchase; and/or
(b) The broker-dealer entity itself has certain assets (client accounts, excellent reputation, and recognized name, for example) that justify paying any purchase amount rather than saving that amount building a broker-dealer from scratch.
A potential purchaser of a broker-dealer must consider the following points in order to successfully navigate the purchase process and the FINRA Continuing Membership Application (“CMA”):
- Will the target broker-dealer’s current management team stay on (a) during the application process and/or (b) after hopeful FINRA approval of the purchase? This leads to the question of who has the real leverage in the purchase/sale of a broker-dealer. Purchaser? Seller?
- Does the broker-dealer purchase agreement provide the proper “outs” or release of the purchaser should FINRA impose a restriction on doing business (very important) or closing pursuant to FINRA rules (surprisingly, less important)?
- FINRA doesn’t necessarily allow the purchase/selling of a broker-dealer firm to effectively eliminate for the purchaser’s benefit the potential liabilities that may exist with regard to business conducted by the broker-dealer prior to the closing.
- Is the purchaser, whether a natural person or a legal entity, and his/her/its affiliates aware of the depth of the material requests they shall be subject to during the FINRA Continuing Membership Application, including, most importantly, financial condition?
- OK, here’s a bonus consideration: The FINRA rule allowing the purchaser and seller to close the contemplated purchase after providing FINRA with the prescribed 30-day notice, is very rarely allowed.
For the complete story, please subscribe to receive my free PDF: “Buying vs. Building a Broker-Dealer: A Clear Perspective on What’s Right for You… and When”
FINRA requires broker-dealers to file a Continuing Membership Application (“CMA”) in certain situations when they seek to expand their operations or activities. Broker-dealers also must file an application whenever they seek to modify or remove restrictions previously imposed in a membership agreement (a membership agreement change).
An important note on Business Expansions, Material Changes and Safe Harbors is that when contemplating expansions to its business activities, broker-dealers should determine whether the proposed expansion (1) represents a material change in business operations as defined in Rule 1011(i), thereby requiring an application for FINRA approval; or (2) may be effected in line with the safe harbor provisions of IM-1011-1. These processes are described above.
Most business contractions do not necessarily require FINRA approval beforehand. I can advise on a case by case basis whether formal approval by FINRA would be required.