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. However, 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, pursuant to FINRA Rule 1017(a)(5).
When contemplating expansions to their business activities, firms must determine whether the proposed expansion (1) represents a material change in business operations as defined in FINRA Rule 1011(k), thereby requiring an application for FINRA approval; or (2) may be effected in line with the safe harbor provisions of IM-1011-1.
On This Page
What is a “material change” in business?
What is a Materiality Consultation?
How do I start the process?
What should a materiality consultation submission cover?
Once submitted, what is the Materiality Consultation process?
How long does the Materiality Consultation process take?
Is there a fee to file a Materiality Consultation?
As defined in Rule 1011(k), the term "material change in business operations" includes, but is not limited to:
- Removing or modifying a membership agreement restriction;
- Market making, underwriting or acting as a dealer for the first time; and
- Adding business activities that require a higher minimum net capital under SEC 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. 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 use the Safe Harbors for Business Expansions (further addressed in the FINRA IM-1011-1) to effect the change without an application.
Sometimes changes contemplated by a firm do not clearly fall into a CMA category. A firm may still wonder, “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. They allow firms to seek guidance on whether a continuing membership application is required for the proposed business change.
During a materiality consultation, FINRA MAP Group staff examine the proposed change based on the criteria above. FINRA MAP Staff review, among other sources, investor alerts and FINRA’s Examination Priorities Letter, in conjunction with a firm’s current business model to determine the materiality of a proposed business line. Any unique, novel, complex product, business line or platform, or any product considered to be an emerging regulatory issue may be considered material.
NOTE: 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.
When considering any material change to your firm’s business, you should first speak with your FINRA assigned Risk Monitoring Analyst (RMA). Your RMA 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 Firm Gateway under the Materiality Consultation section.
For technical assistance please contact the Gateway Business Application Support (GBAS) group at (800) 321-6273.
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 the request is filed via Firm Gateway the matter is assigned to a MAP examiner who will review the filing with the firm and may consult with the firm’s FINRA assigned Risk Monitoring Analyst and other internal experts as needed. Staff will issue a communication to the firm at the completion of the process.
Unlike other matters, Materiality Consultations are not formal applications and as such there is no established timeframe. However, the MAP Group works with the firm and assigned risk monitoring staff to ensure the request is reviewed as quickly and efficiently as possible.
There is no fee associated with filing a materiality consultation.