Continuing Membership Guide

 

Frequently Asked Questions

 

 

 

When to File

 

Q1. When does a firm need to file a CMA with FINRA?

 

A1. Events that require a firm to file a CMA are:

  • a merger with another member firm;
  • a direct or indirect acquisition of another member;
  • direct or indirect acquisitions or transfers of 25 percent or more in the aggregate of the firm's assets, or any asset, business or line of operation that generates revenues comprising 25 percent or more in the aggregate of the firm's earnings measured on a rolling 36-month basis;
  • a change in the equity ownership or partnership capital of the firm that results in one person or entity directly or indirectly owning or controlling 25 percent or more of the equity or partnership capital; or
  • a material change in business operations as defined in Rule 1011(k).

 

Q2. Is adding a branch office considered a “material change” in business?

 

A2. Adding a branch office may be considered a material change on its own, depending on how many offices your firm has already, how many your firm has added in the past year, as well as whether your firm is operating subject to a restriction. It could also cause a material change depending on the specific facts and circumstances.

 

Q2. What is a "material change" in business that would trigger a review under NASD Rule 1017?

 

A. It depends on the specific facts and circumstances in each case. Generally, we advise that whether any particular business expansion—including the addition of a proposed new business line—is a "material change" in a firm'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 firm's existing business;
  • the effect the proposed expansion is likely to have on the firm's capital;
  • the qualifications and experience of the firm's personnel; and
  • the degree to which the firm's existing financial, operational, supervisory and compliance systems can accommodate the proposed expansion or addition.

 

Under FINRA rules, firms are responsible for deciding whether a particular change is material and notifying FINRA in appropriate situations. Firms are free to consult with FINRA about individual situations, but they are not required to do so. (See NTM 00-73 and NASD Rule 1011(i).)

 

Q3. Do all business expansions require approval by FINRA?

A3. No, only those changes specified by NASD Rule 1017 require approval. These changes include things like your firm's merger with another firm, your firm being acquired by another firm, a change in your firm’s ownership or control or a material change in your firm’s business operations.

 

Q4. Are firms required to submit a CMA for partial ownership changes?

 

A4. It depends on the circumstances. If a new person or entity will end up controlling 25 percent or more of your firm, then a CMA is required.

 

Q5. Is NASD Rule 1017 applicable if the change of ownership occurs in increments of less than 25 percent?

A5. NASD Rule 1017 is not limited to changes that occur all at once. The rule is triggered when the change, whether in increments or otherwise, results in one person or entity owning or controlling 25 percent or more of the equity or partnership capital of the firm for the first time.

 

Q6. May "control" extend to individuals or entities that are not shown as owners or managers, but who may affect the management or direction of the firm?

A6. Yes. Individuals who are not owners or managers could be considered control persons. FINRA will document and explain its basis for concluding a control relationship and the applicant will be given an opportunity to respond.

 

Q7. If a firm currently operating without a written membership agreement adds a business line to its operations, is it required to give notice under NASD Rule 1017?

A7. Depending on the facts and circumstances, an addition of a business line to a firm’s operations may or may not be material—whether or not the firm is operating with a written membership agreement.

 

Q8. Are firms required to submit a CMA for changes in product mix?

 

A8. A CMA is required for any material change in business. Though it’s possible that a change in product mix might not require a CMA, one will be required if the result is a material change to your firm’s business.

 

For example, such a change in product mix would require a CMA (and prior FINRA approval) if it removed or modified a membership agreement restriction; caused your firm to become a market-maker, underwriter or dealer for the first time; or if the new products required a higher net capital. A CMA may also be required if there are changes to the size of your firm, including the number of associated persons and branch offices. When considering such changes, please review Rule 1017 carefully. If you have additional questions, you should contact your FINRA District Office or Coordinator.

 

Q9. Can the filing of a Form BD amendment qualify as notice to FINRA of a CMA event?

A9. Receipt of a Form BD amendment does not constitute "notice" under the NASD Rule 1010 Series. If FINRA staff learns of a change in ownership in this way, FINRA will send a letter to the firm stating that it is required to comply with NASD Rule 1017(a) and has failed to provide at least 30 days prior written notice. Upon receipt of notice and an application, the clock will begin to run in terms of when FINRA will issue a written decision, in accordance with NASD Rule 1012(a).

Q10. My firm is planning to add eight representatives to its staff. Do we have to request approval from FINRA for this change?

 

A10. In short, it depends on a number of factors, including the size of your firm, and whether your firm is eligible to take advantage of the safe harbor for business expansions (see IM-1011-1), or if your firm has a membership agreement that does not contain a restriction on the types of expansions permitted by the safe harbor.

Under the safe harbor, some expansions are not considered material, and thus do not require FINRA approval. The following expansions are permitted under the safe harbor:

 

Business ExpansionSafe Harbor Increase
Permitted in 12-Month Period
I. Associated Persons Involved In Sales 
1 - 1010 persons
11 or moreThe greater of 10 persons or 30%
II. Number of Offices 
1 - 53 offices
6 or moreThe greater of 3 offices or 30%
III. Number of Markets Made 
1 - 1010 markets
11 or moreThe greater of 10 markets or 30%

 

See the next question and the Safe Harbors section of the Continuing Membership Guide for more details.

 

Q11. When can a firm use the safe-harbor provisions of IM-1011-1?

 

A11. A firm can use the safe-harbor provisions of IM-1011-1 if it is eligible to do so. If a firm or a principal of the firm has a disciplinary history (as that term is defined in IM-1011-1) within the last five years, or if the firm is subject to a restriction in its membership agreement, then it may not take advantage of the safe harbor. Note that the safe-harbor provisions only apply to business expansions listed in the table above.

 

If you rely on the safe harbor without going through the CMA process, FINRA will still review your expansions during the next cycle examination or when a CMA is filed for another purpose. The examiner or analyst will check to see if the safe harbor was used appropriately.

 

 

How to File

 

Q12. How does a firm file a CMA?

 

A12. Effective August 27, 2012, firms must submit the new electronic Form CMA via the Firm Gateway. Firms may begin to use the electronic Form CMA on July 23, 2012. See the Application Content Guidance for additional details on the  documents that should be included in an application.

 

Note that because each continuing membership request is unique, each CMA requires different supporting documentation specific to the facts and circumstances of that CMA.

 

Once the firm determines which documents it should include in its application and the documents are complete, the firm should complete the CMA Fee Computation Worksheet, which is found on Firm Gateway, attach it to the Form CMA and submit via Firm Gateway.

 

Q13. Is there a fee for filing a CMA?

 

A13. Yes, all CMAs filed on or after July 23, 2012, will be charged an application filing fee as set forth in Regulatory Notice 12-32 and Schedule A, Section 4 of the By-Laws. The new fee structure is outlined in the table below:

 

Number of Registered Persons Associated with ApplicantSmallMediumLarge
Tier 11-10151-300501-1,000
Tier 211-100301-5001,001-5,000
Tier 3101-150N/A> 5,000

 

Application Fee per Tier and Application TypeSmallMediumLarge
Merger
Tier 1$7,500$25,000$50,000
Tier 2$12,500$30,000$75,000
Tier 3$20,000N/A$100,000
Material Change
Tier 1$5,000$20,000$35,000
Tier 2$10,000$25,000$50,000
Tier 3$15,000N/A$75,000
Ownership Change$5,000$10,000$15,000
Transfer of Assets$5,000$10,000$15,000
Acquisition$5,000$10,000$15,000

 

 

What Happens After Filing

 

Q14. How long does it usually take for FINRA to review a CMA?

 

A14. NASD Rule 1017(g)(2) requires FINRA to issue a written decision for CMAs “within 30 days after the conclusion of the membership interview or the filing of additional information or documents, whichever is later. If the Department does not require the Applicant to participate in a membership interview or request additional information or documents, the Department shall serve a written decision within 45 days after the filing of the application under paragraph (a)….” Note that overall, Rule 1017(g)(2) provides for the CMA review process to be completed within 180 days after the filing of a CMA.

 

Experience has shown that one of the main causes of delays in CMA processing is whether sufficient information is supplied to support the request.

 

Q15. When FINRA learns of a change of ownership or control through the course of an examination, when does the clock begin to run in terms of when FINRA will issue a written decision?

A15. When FINRA learns of a change of ownership or control through the course of an examination, it will send a letter to the firm notifying them that, among other things, firms are required to give at least 30 days prior written notification of a change of ownership or control and that failure to notify FINRA constitutes a violation of NASD Rule 1017(c).

 

Q16. If our firm is involved in a transaction with a proposed/projected closing date far out from when we submit our CMA, will FINRA delay or alter the schedule for our CMA review?

A16. Generally, no— a proposed transaction closing date should not delay or alter the CMA review process. Applicants have the burden to update all application information as it changes. Applicants should be aware of the fact that delays on their part in producing information due to "closing" issues may, in turn, delay FINRA's review of the application.

 

 

Further Questions

 

Q17. Who can we contact if we have further questions about CMAs and NASD Rule 1017?

 

A17. You may contact the FINRA MAP Group or your firm's Coordinator.

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    Section II – Specific Documents for Selected Expansions