The Firm should review areas of its business to determine if any current or future changes to the Firm’s business may warrant a change in membership application (a.k.a. “CMA” or “1017”). FINRA requires firms to file a continuing membership application (CMA) whenever they seek to expand their operations activities, and for other business events, as indicated in NASD Rule 1017(a) (Continuance in Membership Application or CMA). Firms also must file an application whenever they seek to modify or remove restrictions previously imposed in a membership agreement (a membership agreement change). Failure to comply with this requirement may provide a basis for suspension or cancellation of the Firm’s FINRA membership.

Events Requiring Application

Members are required to file an application for approval for any of the following changes to its ownership, control, or business operations:

  1. A merger of the member with another member, unless both are members of the New York Stock Exchange, Inc., or the surviving entity will continue to be a member of the New York Stock Exchange, Inc.;
  2. Direct or indirect acquisition by the member of another member, unless the acquiring member is a member of the New York Stock Exchange, Inc.;
  3. Direct or indirect purchases or transfers of 25% or more in the aggregate of the member’s assets or any asset, business, or line of operation that generates revenues comprising 25% or more 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;
  4. A change in the equity ownership or partnership capital of the member that results in one person or entity directly or indirectly owning or controlling 25 percent or more of the equity or partnership capital; or
  5. A material change in business operations as defined in Rule 1011(k).

Changes of Ownership or Control

FINRA requires advance notice by submitting an application according to NASD Rule 1017 but does not require prior FINRA approval of changes of ownership or control. The 30-day advance notice requirement specified in NASD Rule 1017(c) is a method of giving the staff prior notice that the change will occur and permits the staff to analyze the change of ownership and render a decision based on the standards of NASD Rule 1014. A member firm may affect the change before the decision is issued. Still, the FINRA Membership Application Program (MAP) Group may impose interim restrictions on the member firm that would remain in effect until the application is decided. In the event of a denial or lapse, new owners (if the transaction has been consummated) may not conduct business.

Changes in or Expansions of the Business

The NASD Membership Rules provide that certain types of business changes contemplated by members require the submission of an application under NASD Rule 1017 and approval of the application by FINRA. The Rule applies to transfers as well as sales of a member firm’s assets, including sales and transfers of assets to an affiliated entity. Additionally, NASD Rule 1017(a)(3) requires an application before the sale or transfer of 25 percent or more of the member firm’s assets or any asset, business line, or operation that generates revenues of 25 percent or greater of the selling member firm’s earnings over a rolling 36-month period. The 36 months is measured backward from the date that the member firm initially notifies FINRA of its intent to sell or transfer assets when the application is submitted under NASD Rule 1017. (See Notice to Members 04-10 for more information). The Rule also requires an application and prior approval of “material changes” in the operations of a member firm. These changes are all subject to review and approval by FINRA. Also, member firms operating according to a restriction agreement (see “Membership Agreement” section of “How to Become a Member”) must request and obtain prior FINRA approval to remove or modify the restriction.

For resources on this topic, check out FINRA Rule 1017 and this FINRA FAQ.

For more information on material changes in business operations that will require a member to file an application for approval with FINRA, check out our 1017 Material Change Determination blog, being posted to our blog page soon.

MasterCompliance provides expert consulting, outsourcing, and implementation tools in planning and budgeting for your firm’s compliance responsibilities. If your firm would like assistance with a change in membership, please contact us.