CMA_1017_Article

Regulatory Compliance frequently receives calls from clients with requests for Form BD amendments which may have farther reaching consequences than a simple BD amendment.

Have you called with a similar question?

Can you file a BD amendment for us adding private placements (or any other type of product)?
Can you amend our Schedule A to remove a principal and/or add a different principal?
Can you file a Form BR adding a branch office?
We need to add some Reps, can you file some U-4’s for us?
Can you amend our BD to change our clearing firm?

If you have, you may need to file a Continuing Membership Application (CMA) under NASD Rule 1017.

First, review your Membership Agreement (formerly named a Restriction Letter, if the bd was an approved NASD member prior to 1990). It will tell you any restrictions imposed by the NASD. If you do not have a copy of your Membership Agreement, request a copy from your district office. It is imperative you maintain a copy of this important document in your files as it outlines the scope of your approved business.

Next, you’ll need to make a determination if the proposed change is material. Clearly, some changes are material, such as:

Adding a product line unrelated to your current busines;
Increasing sales reps or branch offices beyond the Safe Harbor limit (discussed below);
A transfer or sale of 25% or more of the firms assets or ownership

You are approved for municipal securities; but now want to underwrite munis
Moving your main office to another district
Removing a principal
Adding or removing shareholders

If you are not sure if a change is material, you may make a written request for guidance from your NASD district office. You’ll need to outline the nature of the change, how it will affect your net capital requirement, the relationship between the new business or expansion and your existing business, the qualifications of your supervisory personnel and how your financial, operational, supervisory and compliance systems can accommodate the change. Of course, you may always contact Regulatory Compliance for guidance as well. Keep in mind, you are allowed to make a materiality judgment on your own, but you must document how you arrived at your judgment.

Next, let’s take a look at the NASD’s Safe Harbor limits. Provided your Membership Agreement does not state otherwise, you may, on a 12 month rolling basis:

Add personnel as follows:
- If you have 10 or less Reps, you may add 10 more
- If you have 11 or more Reps, you may add 10 Reps or make a 30% increase, whichever is greater

If you have 5 or less offices, you may add 3 more
If you have 6 or more offices, you may add the greater of 3 offices or a 30% increase, whichever is greater

If you are a market maker, increase markets made as follows:

If you make less than 11 markets, you may add 10 more
If you make 11 or more markets, you may add 10 more or 30%, whichever is greater

If you do use Safe Harbor for business expansion, you are required to document the dates and types of changes made. This will be reviewed during your next cycle exam using a one year look-back period. Members who have a disciplinary history as defined in IM-1011 may not use Safe Harbor and are required to file a CMA with their district office.

If you determine you need to file a CMA, you must submit the application to your NASD district office, in writing, 30 days prior to the change. The NASD has 30 days to review and respond to your request. You may make the change 30 days after your submission, provided the NASD does not place an interim restriction on the firm.

Members requesting a CMA must meet the 14 standards of admission outlined in Rule 1017 (think new member application process). This process can be daunting. To put it simply, you’ll need to demonstrate who, what, when, where, why and how by providing the NASD with:

A business plan outlining the nature of the proposed expansion or change which encompasses all elements of NASD Rule 1013(a)(2)(E);
Current financial projections, as well as proposed financial projections, taking into consideration the proposed change as well as any net capital impact, capital added or withdrawn and the source of the funding;
Updated Supervisory Procedures, AML, BCP and Continuing Education manuals;
A pro-forma Form BD;
An organizational chart showing management and supevrisory lines “before” and “after” the proposed change; and
A detailed description of all supervisory personnel

For further guidance please check these resources: Notice to Members 00-73, 04-10, 06-56; Interpretive Material 1011-1; and NASD Rules 1014 and 1017; or contact Regulatory Compliance.

Do you need to file a Continuing Membership Application?