Change of Ownership or Control
FINRA requires advance notice but does not require prior approval of changes of ownership or control. The 30-day advance notice requirement specified in NASD Rule 1017(c) is a method of giving the staff prior notice that the change will occur and permits the staff to analyze the change of ownership and render a decision based on the standards of NASD Rule 1014. A member firm may effect the change before the decision is issued, but the FINRA District Office may impose interim restrictions on the member firm that would remain in effect until the application is decided. In the event of a denial or lapse, new owners (if the transaction has been consummated) may not conduct business.
Rule 1017 also requires 30 days advance notice of and approval for any merger, acquisition, and changes in equity ownership or partnership capital as contemplated by the rule. The Rule applies to transfers as well as sales of a firm’s assets, including sales and transfers of assets to an affiliated entity. Additionally, Rule 1017(a)(3) was amended to require an application prior to the sale or transfer of 25% or more of the member’s assets or any asset, business line, or operation that generates revenues of 25% or greater of the selling member’s earnings over a rolling 36-month period. The 36-month period is measured backwards from the date that the member initially notifies FINRA of its intent to sell or transfer assets by submitting an application pursuant to Rule 1017. (See Notice to Members 04-10 for more information).
Checklist for Organizational Change: Mergers, Acquisitions, and Successions
If your firm is undergoing an organizational change, it may affect the ways in which you interact with FINRA, such as your membership application and system-related privileges. In order to make your firm's transition easier, we have compiled a checklist of steps to consider.
Changes in or Expansions of the Business
The Rule also requires an application and prior approval of "material changes" in operations of a firm. These changes are all subject to review and approval by FINRA. Also, firms operating pursuant to a restriction agreement (see “Membership Agreement” section of “How to Become a Member”) must request and obtain prior FINRA approval to remove or modify the restriction. FINRA's membership program is administered by the Department of Member Regulation of FINRA, primarily through its 15 District Offices.
In an effort to add greater clarity to the process and still preserve flexibility in applying the Rule to individual situations, FINRA staff developed amendments that (1) create a "safe harbor" for certain changes that would be presumed not to be material and therefore not require an application and (2) provide a non-inclusive definition of the term "material change" that would alert members to some of the types of business expansions that can be expected to trigger the need to file an application. See “An Important Note on Business Expansions: Material Changes and Safe Harbors,” below.
An Important Note on Business Expansions: Material Changes and Safe Harbors
When contemplating expansions to their business activities, firms should consider 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 of the change pursuant to Rule 1017; or (2) may be effected pursuant to the safe harbor provisions of IM-1011-1. Each of these is briefly discussed below.
A. Material Changes in Business Operations
Many firms will, from time to time, seek to expand their business, either by adding a new line of business or by substantially increasing the scope and size of the existing business. NASD Rule 1017(a)(5) requires that a member file an application for approval of a material change in business operations as defined in Rule 1011(i).
Rule 1011(i) defines the term "material change in business operations" to include, 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.
Member firms must determine whether a proposed business expansion is material. If so, it must be approved by FINRA pursuant to Rule 1017.
The characterization of a proposed expansion as material ultimately depends on an assessment of all relevant facts and circumstances, including the following:
B. Safe Harbors
Pursuant to IM 1011-1 (the "safe harbor" provision), certain types of expansions are presumed conclusively not to be material and to therefore not require an application for FINRA approval.
The safe harbors apply to (1) firms that do not have a membership agreement; (2) firms that have a membership agreement that does not contain a restriction on the types of expansions otherwise permitted by the safe harbor; and (3) firms that do not have a disciplinary history as defined in the safe harbor.
The three types of expansions permitted are certain increases in the number of associated persons involved in sales, the number of offices (registered or unregistered), and the number of markets made.
The Safe Harbor Provisions are as follows:
| Business Expansion | Safe Harbor Increase Permitted in 12 Month Period |
| I. Associated Persons Involved In Sales | |
| 1-10 | 10 persons |
| 11 or more | The greater of 10 persons or 30% |
| II. Number of Offices | |
| 1-5 | 3 offices |
| 6 or more | The greater of 3 offices or 30% |
| III. Number of Markets Made | |
| 1-10 | 10 markets |
| 11 or more | The greater of 10 markets or 30% |
Expansions in each area are measured on a rolling 12-month basis. Members are required to keep records of increases in personnel, offices, and number of markets made to document compliance with the safe harbor.
Note: Proposed expansions outside of the scope of the safe harbor provisions are not necessarily material changes in the member's business operations. For expansions beyond the safe harbor limits, a member is obliged to determine whether the proposed expansion requires an application under Rule 1017. Members may, but are not required to, consult with the District Office in making this determination.
