With respect to CMAs, if there is a proposed transaction closing date that is distant from the time of the FINRA District Office staff's review, will the staff delay or alter its review?
Generally, the proposed transaction closing date should not delay or alter the CMA review process. The applicants have the burden of production 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 completion of FINRA's review of the application.
Is NASD Rule 1017 applicable if the change of ownership occurs in increments of less than 25 percent?
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 member for the first time.
When FINRA staff learns of a change of ownership or control through the course of an examination, when does the clock begin to run?
When the staff learns of a change of ownership or control through the course of an examination, the staff will send a letter to the firm notifying them that, pursuant to NASD Rule 1017, members are required to give at least 30 days prior written notification of a change of ownership or control, among other things, and that their failure to notify FINRA constitutes a violation of NASD Rule 1017(c). The 45-day clock (or 180-day clock if additional information and/or a membership interview is required) begins on the date that the applicant sends the CMA to the FINRA District Office staff through first class mail, or the date of receipt if the applicant sends the CMA to the FINRA District Office staff through commercial courier, hand delivery or facsimile.
May "control" extend to persons or entities that are not shown as owners or managers but who may affect the management or direction of the member firm?
Yes. Persons who are not owners or managers could be considered control persons. The staff will document and explain its basis for concluding a control relationship and the applicant will be given an opportunity to respond.
If a member firm currently operating without a written Membership Agreement adds a business line to its operations, is the member required to give notice under NASD Rule 1017?
Under NASD Rule 1017(a), a member must file an application for approval of a material change in its business operations and may not effect such change prior to receiving FINRA approval. Depending on the facts and circumstances, an addition of a business line to its operations may or may not be material whether or not the member is operating with a written Membership Agreement.
What is the effect on the CMA process where the only notice given of the CMA event is the filing of the Form BD Amendment?
Receipt of a Form BD Amendment does not constitute "notice" under the Rule 1010 Series. If the FINRA District Office staff learns of a change in ownership in this way, it 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 application, the clock will start in accordance with NASD Rule 1012(a).
Do all business expansions require approval by FINRA?
Only those changes specified by NASD Rule 1017 require approval. The purpose is to ensure that FINRA is able to verify that significant changes in a firm'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 firms will continue to meet all of the standards and criteria for membership in FINRA.
What is a "material change" in business that would trigger a review under NASD Rule 1017?
It depends on the specific facts and circumstances in each case. Generally, we have advised firms 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 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 the Rules, members 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. (See NASD Rule 1011(i)).
