Safe Harbor for Business Expansions
FINRA developed amendments that create a "safe harbor" for certain changes that would be presumed not to be material and therefore would not require an application for FINRA approval (see IM 1011-1, the "safe-harbor" provision). The safe harbor applies to:
- Firms that do not have a membership agreement;
- Firms that have a membership agreement that does not contain a restriction on the types of expansions otherwise permitted by the safe harbor; and
- Firms that do not have a disciplinary history as defined in the safe harbor.
The three types of expansions permitted are within certain limits:
- The number of associated persons involved in sales;
- The number of offices (registered or unregistered); and
- The number of markets made.
|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. Firms are required to keep records of increases in personnel, offices and number of markets made to document compliance with the safe harbor.
If a firm relies on the safe harbor without going through the CMA process, FINRA will still review whether the safe harbor was used appropriately during the firm's next examination or when a CMA is filed for another purpose.
- Proposed expansions outside of the scope of the safe-harbor provisions are not necessarily material changes in the firm's business operations. For expansions beyond the safe-harbor limits, a firm is obliged to determine whether the proposed expansion requires an application under Rule 1017. Firms may, but are not required to, consult with the FINRA MAP Group in making this determination through a Materiality Consultation.
- 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.