Overview of Materiality Consultation Process

What is a Materiality Consultation?

Pursuant to NASD Rule 1017(a)(5), a member firm that plans to undergo a material change in business operations is required to file a Continuing Membership Application (“CMA”) with FINRA’s Membership Application Program (“MAP”) Group prior to implementing the material change.

Sometimes, however, changes contemplated by a firm do not clearly fall into a CMA category, and so a firm may seek guidance in terms of how best to proceed with the change. Is this something for which the firm needs approval or is this something that can fit within the framework of the firm’s current activities and structure without need for an application? This is where the materiality consultation process can be helpful.

Materiality consultations are submitted by firms voluntarily. If a firm believes that a change in business or expansion is not material, and the firm does not wish to obtain a written assessment from FINRA, the firm should document the reasons why it believes the change is not material, and retain this as part of its books and records for when the firm is examined by FINRA examination staff.

What is a "material change" in business that would trigger a continuing membership application requirement?

It depends on the specific facts and circumstances in each case. Member firms planning to undergo changes in business operations should review the following literature in order to assess the materiality of the proposed change(s):

  • NASD Rule 1017(a)(5), which states that a member shall file an application for approval of “a material change in business operations as defined in Rule 1011(k).”
  • NASD Rule 1011(k), which states that the phrase "material change in business operations" includes, 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 SEA Rule 15c3-1
  • Notice to Members 00-73 provides guidance on additional criteria member firms should take into consideration when assessing the materiality of a proposed change. Notably, FINRA staff review this as well when firms request a materiality consultation. These include:
    • 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;
    • the degree to which the firm's existing financial, operational, supervisory and compliance systems can accommodate the proposed expansion or addition; and
    • whether the firm can utilize the Safe Harbors for Business Expansions (further addressed in the NASD IM -1011-1) to effect the change without an application.

Importantly, any unique, novel, complex product/business line or platform, or any product considered to be an emerging regulatory issue may be considered material. Furthermore, FINRA MAP Staff will review, among other sources, investor alerts and FINRA’s Examination Priorities Letter, in conjunction with a firm’s current business model, so as to determine the materiality of a proposed business line.

How do I start the process?

When considering any material change to your firm’s business, you should first speak with your FINRA assigned Regulatory Coordinator. Your Regulatory Coordinator can offer sound guidance on the materiality of the change and what issues FINRA would generally be interested in regarding the potential impact to your firm, and relevant areas to incorporate in the analysis portion of your materiality consultation submission, should you choose to submit one.

If, after careful assessment of a proposed change in accordance with the above rules and guidance, a member firm believes the proposed change does not constitute a material change or there is uncertainty as to the materiality of the proposed change, the Firm can submit a materiality consultation letter describing its position as to why the proposed change should not be deemed material in nature. The letter, along with any relevant supporting documentation, should be uploaded via the FINRA Firm Gateway, under the Materiality Consultation section. For technical assistance please contact the Firm Gateway at (301) 869-6699.

What should my materiality consultation submission cover?

The submission should include, but is not limited to the following, in conjunction with the guidance set forth in Notice to Members 00-73:

  • A description of the proposed change in business sufficient for staff to understand the scope of the business and how it will be conducted;
  • Why the firm believes that the proposed new business or product is similar in scope or nature to their existing business;
  • The anticipated impact the change will have to the firm’s supervisory structure;
  • Any impact the proposed change will have  to the Firm’s capital or liquidity;
  • The nature and scope of updates required to written supervisory procedures, systems and firm operations;
  • Any recent disciplinary matters that relate to the proposed activities as well as how the firm’s overall regulatory history may impact the ability of the firm to effectively conduct the activity; and
  • Any relevant documentation to support the proposal.

Once submitted, what is the Materiality Consultation process?

Once the request is filed via Firm Gateway, the matter is assigned to a MAP examiner who will review the filing and contact the firm. Staff  may request additional information in order to make a determination as to the materiality of the proposed change. The examiner will assess the submission in accordance with the above rules and guidance and in consultation with the firm’s FINRA assigned Regulatory Coordinator. As such, the Firm’s submission should address all relevant provisions and criteria described above in support of its position on the materiality of the proposed change.

How is the Materiality Consultation process completed?

When the staff’s review is completed, following management review, a written communication as to the materiality of the proposed changes will be issued to the firm. If it is determined that the firm’s proposal constitutes a material change, a CMA must be filed and ultimately approved before the firm undergoes the material change. If, however, the change is deemed not material in nature, the firm may implement the change in business operations without having to complete the CMA process.

How long does the Materiality Consultation process take?

Unlike other matters, Materiality Consultations are not formal applications and as such there are no formal timeframes associated with them. However, the MAP Group works with the firm and assigned surveillance staff to ensure the request is reviewed as quickly and efficiently as possible. 

Is there a fee to file a Materiality Consultation?

There is no fee associated with filing a materiality consultation.