• FINRA Proposes Automated Process for Continuing Membership Application (Rule 1017) Filings
  • March 20, 2012 | Authors: Margaret R. Blake; Amy Natterson Kroll
  • Law Firm: Bingham McCutchen LLP - Washington Office
  • On March 2, 2012, the U.S. Securities and Exchange Commission (“SEC”) published for comment Notice of Filing of Proposed Rule Change to Amend NASD Rules 1012 (General Provisions) and 1017 (Application for Approval of Change in Ownership, Control, or Business Operations) to Adopt New Standardized Electronic Form CMA (“Notice”). The Notice, filed by FINRA with the SEC on Feb. 28, 2012, seeks to change the process by which member firms currently notify and obtain approval for various changes in ownership, control or business. Specifically, the Notice proposes to create an automated, standardized system for member firms to submit continuing membership applications (“CMA”) via Form CMA.1

    INTRODUCTION

    Member firms know all too well the ambiguities associated with the current CMA process under NASD Rule 1017. Although current Rule 1017 clearly sets forth those instances in which a CMA filing is required, and even sets forth certain documents that must be submitted, there is little consistency between any two CMA filings and FINRA’s review thereof.2 FINRA has begun taking gradual steps toward standardization of the process, most recently by centralizing the submission and review process through the Membership Application Process Department. However, according to FINRA, inefficiencies in the process remain, and the Notice is meant to address and resolve those issues.3

    THE NOTICE

    The Notice proposes to amend NASD Rules 1012 and 1017 to adopt a new standardized electronic form, Form CMA, to be used by all continuing membership applicants as part of their continuing membership applications. Much like the New Member Application (“NMA”) process, the proposed Form CMA will be an automated form existing in the Central Registration Depository (“CRD”). Members facing a change in ownership or control, or a material change in business, will access the Form CMA through CRD and begin the process of completing and submitting the automated Form and related materials. In the current process, a member firm undergoing a change falling within Rule 1017 submits a letter to FINRA with certain attachments that may vary from firm to firm and submission to submission. By contrast, the Form CMA walks the member through the process question by question and prompts when an exhibit must be uploaded to the application. Like the Form NMA, the Form CMA must be “substantially complete” upon submission or it may not be accepted in the system.

    Driven by the desire to reduce member firm administrative burdens when making a CMA filing, FINRA believes this streamlined process will facilitate a more effective and efficient CMA filing process compared to the current manual submission method.

    The Process

    As noted above, under the current CMA process, when a member firm submits a CMA, they must determine what information and attachments to include. Many times this involves multiple discussions with the relevant FINRA district office and multiple requests for information following submission. Under the proposed change, the Form CMA seeks responses to questions FINRA has determined are necessary to conduct its review. In addition, the Form CMA specifies those places where a member should upload an exhibit or particular information to substantiate a response. Though this does not eliminate FINRA’s ability to request additional information following submission, it likely will have the result of limiting those subsequent requests.

    According to the Notice, the Form CMA automatically will be populated with information pulled from other FINRA submissions (e.g., CRD entitlement forms and Form BD) to facilitate the completion of the form. A member will access the partially completed form and be able to identify any outstanding information required in order to make a substantially complete filing. In addition, while the current process requires that a member address in its submission the 14 standards set forth in NASD Rule 1014 (Department Decision), members tend to provide varying levels of detail with regard to the standards and in some instances choose not to address them at all. Under the proposed Form CMA, members will proceed through automated pages reflecting 12 standards and be required to respond to specific questions addressing their continued adherence to those standards.4

    Impact

    Implementation of the Form CMA and the automated process for completion will allow member firms to provide precisely the information desired by FINRA when reviewing CMA filings. In addition, it is likely that the use of the automated form will streamline the CMA process and provide efficiencies as FINRA hopes. However, it is unclear whether the Form CMA exists in one format - i.e., the format provided in the Notice - or whether it automatically adjusts itself as a member provides responses to certain questions. For example, the Form NMA automatically adds or eliminates questions as one provides certain determinative information in responses. If the Form CMA does not adjust based on information provided, it seems to presuppose that all 1017 filings are of equal complexity and require the same amount of information in order to obtain approval. This could require overly burdensome submissions by firms attempting to make a minor change in ownership or control, for example. Clarification on these points would be useful.

    CONCLUSION

    Member firms are encouraged to comment on the filing. Comments are due by March 29, 2012, and should be submitted as set forth in the Notice.


    ENDNOTES

    1 See Exchange Act Release No. 34-66508 (March 2, 2012); [77 FR 14052 (March 8, 2012).]

    2 Furthermore, currently, FINRA staff frequently suggests a “materiality consultation” when it is not clear whether a formal CMA is required. The consultation is provided based on a written submission that often is accepted as the CMA if, ultimately, FINRA staff determines that an application is necessary for the proposed change. The Notice does not address the impact, if any, that the proposed Form CMA would have on the materiality consultation process and whether that process would become more formal as well.

    3 It is unclear how the Notice impacts FINRA Notice 10-01, which proposed a consolidated rule to address the continuing membership process. That notice proposed new Rule 1160 to address the CMA process and the information required to be submitted. While FINRA has confirmed there will be a consolidated rule, it is unclear whether the rule will follow Notice 10-01 in light of comments received to date. See http://www.bingham.com/Media.aspx?MediaID=10163&search=true for more information.

    4 Form CMA does not address Standards 13 (FINRA does not possess information indicating that the applicant may circumvent the federal securities laws or FINRA rules) or 14 (the application is consistent with the federal securities laws and FINRA rules).