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Checklist for Mandatory Materiality Consultations Under Rule 1017(a)(6)

A member must submit a letter requesting a materiality consultation for specified changes in ownership, control, or business operations, including business expansions, involving a defined “covered pending arbitration claim,” unpaid arbitration award or unpaid settlement related to an arbitration.  Such letter must be submitted through FINRA Firm Gateway®, under the Materiality Consultation section.1 There is no fee associated with a mandatory materiality consultation.

The following checklist is intended to assist a member firm when it is required to submit a materiality consultation under Rule 1017(a)(6) for these circumstances:

  • A member firm seeks to engage in any direct or indirect acquisition or transfer of a member’s assets or any asset, business or line of operation where the transferring member or an associated person of the transferring member has a covered pending arbitration claim,2 an unpaid arbitration award or unpaid settlement related to an arbitration, and such member is not otherwise required to file Form CMA; or
  • A member firm seeks to add one or more associated persons involved in sales as described in IM-1011-2, and one or more of those associated persons has a covered pending arbitration claim,3 an unpaid arbitration award or unpaid settlement related to an arbitration, and such member is not otherwise required to file Form CMA.

Additional information and documentation may be requested once the Membership Application Program Group (MAP Group) has had an opportunity to review the member firm’s letter along with any additional information and documentation provided with the letter.

 

Firm Contact Information

☐  Firm Name

☐  Firm Contact Person – Full Name; E-mail Address; Phone Number

☐  Firm Mailing Address – Company Name; Street Address; City; State; Zip Code

Identify the Event for Which you are Seeking a Mandatory Materiality Consultation

☐  Any direct or indirect acquisition or transfer of a member’s assets or any asset, business or line of operation, where the transferring member or an associated person of the transferring member has a covered pending arbitration claim, an unpaid arbitration award or unpaid settlement related to an arbitration (Rule 1017(a)(6)(A); Rule 1011(c)(2))

☐  The addition of one or more associated persons involved in sales as described in IM-1011-2, and one or more of those associated persons has a covered pending arbitration claim, an unpaid arbitration award or unpaid settlement related to an arbitration (Rule 1017(a)(6)(B); Rule 1011(c)(1))

Information or Documentation to be Included in the Written Submission

(Note: Failing to provide the information or documentation described below may result in prolonging the review of the terms of the materiality consultation, the materiality consultation being rejected, or the determination that a CMA is required)

Any direct or indirect acquisition or transfer of a member’s assets or any asset, business or line of operation, where the transferring member or an associated person of the transferring member has a covered pending arbitration claim, an unpaid arbitration award or unpaid settlement related to an arbitration (Rule 1017(a)(6)(A); Rule 1011(c)(2)).4

☐ Provide the name and CRD number of the transferring firm, and the name and CRD number of the acquiring firm.

☐ Provide a copy of the documents governing the transaction (e.g., asset purchase agreement).

☐ Provide a description of the assets and business line(s) of operation that will be transferred.

☐ Provide a description of how the assets will be acquired or transferred.

☐ Provide a description of whether the transferring firm has a covered pending arbitration claim, unpaid arbitration award or unpaid settlement related to an arbitration.

☐  Indicate whether the transferring firm plans to file Form BDW (Uniform Application for Broker-Dealer Withdrawal).

NOTE: Filing Form BDW may require a CMA.  Please review Rule 1017(a)(3).

☐ Provide the name, title and CRD number of each associated person of the transferring firm who has a covered pending arbitration claim, an unpaid arbitration award or unpaid settlement related to an arbitration.

☐ Indicate whether any of the associated persons of the transferring firm with a covered pending arbitration claim, unpaid arbitration award or unpaid settlement related to an arbitration will become associated with the acquiring firm; if so, provide the name, title and CRD number of each such person.

☐ Provide a detailed rationale explaining why the firm believes a CMA is not required.

The addition of one or more associated persons involved in sales as described in IM-1011-2, and one or more of those associated persons has a covered pending arbitration claim, an unpaid arbitration award or unpaid settlement related to an arbitration (Rule 1017(a)(6)(B); Rule 1011(c)(1))

☐   For each associated person, provide the name, CRD number, and anticipated job functions and responsibilities at the receiving firm.

☐ Provide a detailed rationale explaining why the firm believes a CMA is not required.

Supplemental Documentation and Information Pertaining to:

Payment of Unpaid Arbitration Awards, Other Adjudicated Customer Awards, Unpaid Arbitration Settlements or Pending Arbitration Claims

☐  Arbitration Case Information – Names of claimant(s) and respondent(s); CRD number; claim number; description of the award, settlement or claim.

☐ Legal Opinion – Did the firm obtain a written opinion from an independent, reputable U.S. licensed counsel knowledgeable as to the value of such arbitration claims and any other documentation?  If so, please provide the written assessment.

☐  Amount Set Aside – Specify the dollar amount that the firm has set aside or anticipates setting aside to account for the award, settlement or claim.

☐  Supporting Evidence for Payment – Provide evidence to support how the firm will provide for payment of the award, settlement or claim (e.g., escrow agreement, insurance coverage, clearing deposit, a guarantee, a reserve fund or the retention of proceeds from as asset transfer) and that the funds will be used to satisfy the award, settlement or claim.  If the firm does not have evidence as noted above, please so state.

☐  Employment of Associated Person – Indicate whether the associated person(s) named in the arbitration matter is still employed by the firm.  If so, please indicate the associated person’s job functions or responsibilities (e.g., registered representative, principal; if a principal, provide the business lines or products the principal is responsible for supervising).

☐  Heightened Supervision – Indicate whether the associated person(s) named in the arbitration claim is subject to heightened supervision.  If so, identify the person(s) that will be on heightened supervision, describe the parameters of the heightened supervision, including but not limited to, the name, and title and CRD number of the immediate supervisor.

 


1. For technical assistance, please contact the FINRA Gateway Call Center at (301) 869-6699.

2. Rule 1011(c)(2) defines “covered pending arbitration claim” to mean “An investment-related, consumer initiated claim filed against the transferring member or its Associated Persons in any arbitration forum that is unresolved; and whose claim amount (individually or, if there is more than one claim, in the aggregate) exceeds the transferring member’s excess net capital.”

3. Rule 1011(c)(1) defines “covered pending arbitration claim” to mean “An investment-related, consumer initiated claim filed against the Associated Person in any arbitration forum that is unresolved; and whose claim amount (individually or, if there is more than one claim, in the aggregate) exceeds the hiring member's excess net capital.”

4. Note that pursuant to Rule 1017(a)(3), a CMA is required for approval where a member seeks to effect an acquisition or transfer of 25 percent or more in the aggregate of the member’s assets or any asset, business line of operation that generates revenues composing 25 percent or more in the aggregate of the member’s earnings measured on a rolling 36-month basis, unless both the seller and acquirer are members of the New York Stock Exchange, Inc.