The FINRA journey of changes in ownership and control for a FINRA member firm is one that can be difficult to traverse without a proper guide.
The FINRA Continuation of Membership Application (“CMA”) process is covered under NASD Rule 1017. The rule provides that should a member firm wish to make any changes as detailed in Rule 1017(a), an application must be filed with FINRA. More specifically, these events include: a merger, an acquisition, an asset acquisition, a change in ownership or control or a material change in business operations as defined in NASD Rule 1011(k).
With reference to CMA filings centered upon changes in ownership or control of the existing member firm, FINRA requires advance notice of the proposed change. Such advanced notice shall be in the form of an application at least 30-days prior to the time that the change is to be implemented. While FINRA requires advance notice of such change, it does not require prior approval. Per FINRA, the 30-day advance notice requirement gives FINRA prior notice and an opportunity to conduct a preliminary analysis of the change based upon NASD Rule 1014.
A member firm is allowed to implement the proposed change prior to the time that FINRA issues a final, written decision; however, FINRA does have the ability to impose an interim restriction that would remain in effect until the application is decided or is otherwise removed by FINRA. The imposition of an interim restriction is described in NASD Rule 1017(c)(1) and may include a prohibition on the member firm from effecting the proposed change until the completion of the processing of the application.
So, under what circumstances would FINRA impose an interim restriction? Generally speaking, it is ordinarily because FINRA has made a preliminary determination that the applicant may not meet one or more of the specifications as outlined in NASD Rule 1014. This is not to say that if FINRA will not issue an interim restriction for other reasons or causes outside of Rule 1014. As of late, FINRA has been imposing interim restrictions often when there is a full change in ownership and control of a member firm. For instance, a 100% change in ownership coupled with a new Chief Executive Officer and Chief Compliance Officer.
It should also be noted, just because FINRA does not impose an interim restriction on an application does not necessarily mean that the application will be approved and can proceed with the proposed change after the expiration of the 30-day notice timeframe. Should you make the determination to go ahead and effect the change prior to FINRA issuing a final decision, the most tangible threat is that FINRA may, after reviewing all of the material provided with the application, determine not to grant its approval. If this is the outcome and the change has already been effected, the member firm has limited choices as to how to proceed: a new application can be filed, the change can be unwound or the firm can file Form BDW and withdraw from FINRA membership. None of these options are too enticing.
The key to submitting a successful CMA to FINRA for a change in ownership or control is to ensure that you have a good roadmap and a proper guide who is experienced with the process. With these tools in place, the journey can be an enjoyable one.
For more posts related to the Continuing Membership Application, please see Continuing Membership Application and New Product Considerations for Broker-Dealers.