FINRA Materiality Consultation

A smart alternative to a CMA

FINRA MATCON

Avoids FINRA CMA Fees
Shorter Turnaround Time

  • NASD Rule 1017(a)(5)

    NASD Rule 1017(a)(5) requires that a FINRA member that desires to implement a material change in business operations file an application for approval prior to implementing that change. FINRA charges fees for such applications which start at $7,500. So knowing whether the change is material is important both in terms of compliance with the rule and avoiding unnecessary expense.

  • NASD Rule 1011(k)

    NASD Rule 1011(k) is a definitional rule. Material change in business operations is defined therein as:

    • removing or modifying a restriction in a broker-dealer’s FINRA Membership Agreement
    • adding market making, underwriting, or acting as a dealer for the first time
    • adding business lines or activities that require a higher net capital requirement

    The rule specifies that a material change in business operations includes these items, but is not limited to these items. Thus, there are many, many other changes that could be considered by FINRA to be material. In practice, FINRA often requires that members file a CMA if they add new business lines, even if those business lines do not require a higher net capital requirement. FINRA has also specified certain variations on business lines that require CMA filings – for example, a firm approved to sell variable products would still be required to seek approval to sell variable life settlements (See FINRA Regulatory Notice 09-42) .

  • FINRA Safe Harbor for Business Expansions

    Business expansions can be considered material changes in business operations. However, the FINRA Safe Harbor for Business Expansions provides guidelines for levels of growth that it will not consider material. Before filing a FINRA materiality consultation or CMA, make sure you check the FINRA Safe Harbor for Business Expansions. Visit FirstMark’s CMA page for more details.

  • Material Change - Other Factors

    Other factors that must be considered by a member in determining whether a proposed change will be considered by FINRA to be material include:

    • The facts and circumstances of any proposed expansion, taking into account the membership standards, such as capital, facilities, systems, etc.
    • The relationship between any proposed new business line and the existing businesses of the member
    • The impact of the proposed change on the member’s capital
    • The qualifications and experience of a member’s supervisory personnel

WHO IS ELIGIBLE FOR A MATCON?

Generally speaking, when FINRA member wants to make a material change in business operations, it must file a Continuation of Membership Application with FINRA and await approval before making the change. Currently, FINRA’s definition of what constitutes a material change is found in NASD Rule 1011(k). Unfortunately, this rule is fairly narrow, and what FINRA actually constitutes a “material change in business operations” is, in practice, quite different than what the rule states. FINRA has undertaken a Membership Application Rule Retrospective, and some of the commenters have also made this observation. More information on that is outlined in Mitch Atkins’ MAP Rule Retrospective article on LinkedIn. The issue of whether a change is considered material under the rule is more important since FINRA implemented fees for CMA applications. Before paying a significant fee for a CMA filing, members should consider whether the change they are considering is material. FINRA has created a voluntary process for all members so that they may receive an opinion as to exactly that point. This process is called a FINRA materiality consultation.

FINRA Materiality Consultation

FINRA Materiality Consultation Requirements

While a FINRA materiality consultation is a voluntary filing, it is important that it contains all of the required elements so that FINRA may make and appropriate determination. Absent the right elements, FINRA may view the change as material when in fact it is not. For this reason it is important to work with a FINRA CMA Expert in preparing your FINRA materiality consultation.