Approval for membership with FINRA is contingent upon the submission of an executed written Membership Agreement (Agreement). The Agreement memorializes the contractual relationship between the Applicant and FINRA.
Among other things, the Agreement includes certifications that the Applicant will comply with various securities rules and regulations, as well as maintain high standards of commercial honor and just and equitable principles of trade. In addition, the Agreement outlines the Applicant's business activities as indicated on the Form BD and in the Applicant's business plan. Any restrictions imposed on the Applicant will also be included in the Agreement, and the membership decision letter will set forth rationale for the restriction(s) based on the Standards for Admission in NASD Rule 1014.
In some exceptional instances, MAP Group staff may determine that the Applicant should receive a waiver of the two-principal requirement, in which case the Agreement will memorialize this determination. Moreover, the Agreement will set forth notifications that the Applicant is required to make when changes occur with regard to the member firm's ownership, control or business operations pursuant to NASD Rule 1017.
This Agreement is normally executed at the conclusion of the application process, so that there is a clear understanding as to the full scope of the Applicant's intended business operation.
The president of the member firm must sign the Agreement. MAP Group staff may, at their discretion and based upon specific rationale, require other principals of the Applicant to sign the Agreement.
Restrictive agreements are specific limitations on the scope of a member firm's business or conditions on the manner in which the member firm must conduct its business. Restrictions are imposed in a Membership Agreement only when an Applicant for membership is unable to satisfy one or more of the Standards for Admission in NASD Rule 1014 and an appropriate restriction can be fashioned that remedies the shortcoming, thus permitting the application to be granted consistent with the public interest and the protection of investors. For example, an Applicant seeking to make markets may be restricted to a more limited number of issues than proposed in the application based on concerns about the financial capacity of the Applicant, the qualifications and experience of its registered persons, the number of qualified traders, and/or shortcomings in its operational, supervisory or financial controls. Restrictions also are employed when the disciplinary history of an Applicant, its principals or registered persons raise concern about the capacity of an Applicant to comply with federal securities laws and FINRA Rules.
There are two mechanisms for removing restrictions. The first is provided through the FINRA member firm examination process. All member firms are examined on-site on a one-, two- or four-year cycle. As part of the examination process, FINRA staff routinely reviews business restrictions to determine whether they continue to be necessary and appropriate. If not, the examination staff is required to amend, modify or delete them. Restrictions have been removed via this mechanism, particularly those that are obsolete, inconsistent with the current Rules or appear not to be supported by a rationale that would be acceptable under the current Rules.
The other tool for dealing with outdated restriction agreements is NASD Rule 1017. It was adopted in 1997 to provide members subject to a restriction with the explicit right to apply for relief based on a wide variety of circumstances. When an application is made, FINRA must consider whether maintenance of the restriction is appropriate in light of five specific factors: the membership standards set forth in NASD Rule 1014; the circumstances that gave rise to the imposition of the restriction; the Applicant's operations since imposition of the restriction; a change in ownership or control or supervisors and principals of the Applicant; and any new evidence submitted by the Applicant. If circumstances warrant, FINRA staff will grant the application. In every case, staff must issue a written decision providing a detailed rationale. Adverse decisions are subject to review by the National Adjudicatory Council.
Under which Rule should the Applicant file a combined change of operations/restriction modification request, as is common in ownership changes?
A combined change of operations/restriction modification request should be filed as an NASD Rule 1017 application. This application will be filed with the District Office for the District in which the member firm filing the Rule 1017 application has its principal place of business.
Will FINRA MAP Group staff delineate periods of time during which a member firm may not request the removal of restrictions imposed?
FINRA will not "freeze" a period of time during which the member may not request a modification to a Membership Agreement. Nevertheless, the period of time, experience, compliance efforts and other matters are considered in connection with the modification.
Are restrictions imposed in most membership agreements?
No. FINRA resorts to imposition of restrictions sparingly as a matter of policy.