บทถอดความฉบับเต็มของ FINRA Continuing Membership Applications: Ownership & Control Changes

additional 20% of the ownership from the other two owners and will become the third chair on the firm's board of directors. 00:05:47.199 --> 00:06:12.319 So while the change in ownership interest, based on just these facts and circumstances, would not by itself be material requirements, since he the current owner only would only then have 24% of the total ownership, as the third chair on the firm's board, he would now control 33% of the board, and therefore uh would be material as far as a change in control of the member firm. 00:06:12.959 --> 00:06:15.360 Yeah, that's an excellent point, Armando. 00:06:15.839 --> 00:06:29.519 Um, and it's not the analysis isn't necessarily always as simple as just the the change in ownership and and the direct ownership percentages, but the change in control is an important factor to consider as well. 00:06:29.759 --> 00:06:47.360 Um and and another CMA trigger under Rule 1017, which can sometimes come into play when considering um changes in ownership and or changes in control is the transfer of 25% or more of a firm's assets. 00:06:47.759 --> 00:07:11.839 Um and there's a there's a a detailed analysis that can go into that where firm needs to determine whether or not the assets being transferred or or a business line of operation that is being transferred um that generates 25% or more of a firm's earnings, and it's measured on a 36-month rolling average. 00:07:12.079 --> 00:07:18.000 Now that often um raises a lot of questions for firms as to how best to measure that. 00:07:18.240 --> 00:07:38.560 Um but it's usually best to take a more conservative approach, and and if you think you're getting close to that line, something that that you'd want to consult with your risk monitoring analyst at FINRON to see how the how they would view it and hopefully get some guidance from them where available. 00:07:38.800 --> 00:07:54.480 Um but it's also important to keep in mind that in the context of of these kinds of asset transfers, um, FINRA will importantly look very closely to see if the transferring firm has any pending or unpaid arbitrations. 00:07:54.720 --> 00:08:06.800 And this is really um this is really where FINRA's uh core mission of customer protection kind of uh crosses over into FINRA Rule 1017. 00:08:07.120 --> 00:08:42.000 Um and so if there are any unpaid arbitrations or pending arbitrations, um, something a firm should keep in mind um in those scenarios is to provide FINRA with a clear plan for resolving those arbitrations because that's something that FINRA will be very interested in the context of filing a CMA application and and not providing a clear plan will create a hurdle to the MAP group approving that application. 00:08:42.080 --> 00:08:52.480 So it's important that that firms come prepared with that analysis and with a clearly articulated plan to resolve those those uh arbitrations. 00:08:53.360 --> 00:08:54.240 Well, excellent. 00:08:54.399 --> 00:09:01.919 So let's say you have a client who's determined that they've met that threshold, or at least you know, think that they may have met that threshold. 00:09:02.080 --> 00:09:05.919 What do you advise them in terms of how to prepare for the filing? 00:09:06.559 --> 00:09:21.919 So no matter what your application is for, and Jonathan touched upon this, but I always advise my clients to discuss the change with their FINRA risk monitoring analyst before they even file an application. 00:09:22.080 --> 00:09:27.279 Again, it's just standard practice, no matter what change you're contemplating. 00:09:27.519 --> 00:09:41.200 I remember when I was over at the FINRA Mat group and we would receive an application from a firm, one of the first things we do is have a discussion with that firm's designated risk monitoring analyst. 00:09:41.679 --> 00:09:51.279 And typically, you know, if the if the risk monitoring analyst didn't know anything about the change, um, they they would find that a little surprising. 00:09:51.440 --> 00:09:59.279 So it's good to just start off on the right note, um, set a good tone and reach out to your RNA first. 00:10:00.159 --> 00:10:02.240 Yeah, I agree with that, Lisa. 00:10:02.480 --> 00:10:20.960 And and you know, we can understand and appreciate, um, so especially having worked inside FINRA, now sort of being on the outside, we can certainly understand and appreciate how approaching FINRA can sometimes be a little bit nerve-wracking for a firm. 00:10:21.120 --> 00:10:28.799 Um, but you know, it is very important to show that partnership and show that show FINRRA that you want to be transparent. 00:10:28.879 --> 00:10:34.960 And that's what we can do here at CRC Oyster, having been on both sides of the fence here. 00:10:35.120 --> 00:10:52.159 We're very good at navigating those conversations and at and shepherding and guiding firms through those conversations with their risk monitoring analysts to show that partnership because it really goes a long way in helping to smooth the process throughout the through the CMA. 00:10:54.399 --> 00:10:55.919 Seems like we're all aligned here. 00:10:56.080 --> 00:11:15.600 Um I was going to suggest that uh the firms uh take advantage of the early firm or pre-file meeting that MAP can set up with uh the review team as well as with the risk monitoring team, especially when the change that the firm is contemplating is with a complex transaction or involves more than one member firm. 00:11:15.840 --> 00:11:32.559 This is a great way to introduce the transaction to the review teams and gives the firm the ability to then address any questions or issues which came up as part of that meeting, as part of the initial filing, getting ahead of those questions and sort of cutting time in the review of the application. 00:11:33.519 --> 00:11:46.000 Yeah, I just wanted to add for that um for that pre-file or early firm meeting with FENRA, we here at CRC Oyster would certainly work with you prior to that call. 00:11:46.080 --> 00:11:47.440

We'd have a prep call. 00:11:47.600 --> 00:11:54.799 You know, we're never going to put you in front of FENRA without having a discussion and making sure we're all on the same page. 00:11:54.960 --> 00:11:57.919 So that's one of the things that we're here to help you with. 00:11:58.320 --> 00:11:58.559 Okay. 00:11:58.639 --> 00:12:09.039 So let's say you're working with a client, they've talked to the risk monitoring analyst and you've had those pre-filing meetings with the membership group, and now it comes time to actually do the filing. 00:12:09.120 --> 00:12:16.159 What are the important things that firms should uh be thinking about in terms of making sure that they have available and provided in the filing? 00:12:17.200 --> 00:12:28.960 Well, I think it's important to always, from the perspective of uh of a CMA, yeah, the the approach for that filing is always like, what is the impact of the changes to the broker dealer? 00:12:29.200 --> 00:12:36.399 And so that goes all the way through from its uh operations, systems, financials, technology. 00:12:36.799 --> 00:12:40.240 Discuss if there are any changes to the control of the broker dealer. 00:12:40.399 --> 00:12:45.279 Will the new owner be involved in the day-to-day operations or supervision of the firm? 00:12:45.519 --> 00:12:50.320 If so, does that new owner have the appropriate FINRA licenses? 00:12:50.559 --> 00:12:57.600 For example, the Series 24 and the underlying uh license uh to supervise that activity. 00:12:57.919 --> 00:13:05.279 If there is an owner that the individual is not going to be involved in the day-to-day management, FINRA requires an attestation of non-involvement. 00:13:05.440 --> 00:13:08.320 Perhaps discuss how FINRA is not putting this directly. 00:13:08.480 --> 00:13:27.039 And one of the things that FINRA is doing is that they're actually putting this information, uh, that undertaking uh or attestation language in the undertaking section of the membership agreements for the firm once it's approved, documenting representations made by the new owners regarding their involvement. 00:13:27.440 --> 00:13:36.480 With the introduction of the new owner, will there be any changes to the business lines or products of the firm or technology or systems that the firm will be using? 00:13:37.039 --> 00:13:42.639 You also want to provide a complete set of transaction documents for the purchase or sale agreements. 00:13:42.720 --> 00:13:45.919 Uh, this includes all exhibits and disclosure schedules. 00:13:46.080 --> 00:14:09.679 Um, oftentimes without submitting the exhibits and disclosure schedules referenced in the in the transaction documents, the legal review of those documents cannot be completed and could cause delay, not only the application being accepted by the math group, but in actually uh, you know, perhaps closing by the time that uh the you had anticipated uh or planned to as part of that change. 00:14:10.240 --> 00:14:22.960 You want to uh provide information regarding the new owners and or and you want to have organizational charts of existing ownership and post-change ownership structure. 00:14:23.120 --> 00:14:26.879 Um, and it's important that you know the ownership totals 100%. 00:14:27.600 --> 00:14:38.000 They will also request to know any affiliates uh or entities that will be coming into the under under the same control or ownership as the broker dealer. 00:14:38.240 --> 00:14:51.759 And you also have to provide the source of funding for the purchase, which may be bank statements or some other type of financial information that sort of evidences the funds are uh and the wherewithal in the future to provide future funds to the broker dealer. 00:14:52.000 --> 00:15:19.840 And one item which I think um for most simple ownership changes is that you know uh requesting a fee waiver, providing information for why uh, you know, this because the transaction sort of uh does not really have any touch point with the broker dealer, um, or it's not going to impact, have a significant impact to the broker dealer, um, you know, requesting a waiver of the of the fee, I think, is always a good idea and and could result in a free filing. 00:15:20.559 --> 00:15:21.600 Well, that's great advice. 00:15:21.679 --> 00:15:29.440 And I think there's probably a lot of firms out there that that don't know that the opportunity for a fee waiver is out there and wouldn't even know to ask for one. 00:15:29.679 --> 00:15:36.480 Um another thing that you had mentioned that I think is really important to take note of is you mentioned the attestation that some firms provide. 00:15:36.559 --> 00:15:46.639 If somebody's gonna say that they're not involved in the day-to-day activity of the firm, it's one of the things that FINRA is likely to look at when they conduct their next examination. 00:15:46.799 --> 00:15:55.360 So if you are providing those attestations, make sure that the activity that you're engaged in comports with what you said in those attestations. 00:15:56.639 --> 00:16:03.679 Um so you made the filing, um, and now the application process is underway. 00:16:04.159 --> 00:16:08.240 And managing and navigating through that process can be very tricky. 00:16:08.320 --> 00:16:11.840 And I know you guys have each worked on a number of these, and they're all very unique. 00:16:12.000 --> 00:16:22.559 I was wondering, can you talk about some of the issues that you've seen come up recently that firms should be mindful of in order to make sure that they're prepared for any of these issues that might arise? 00:16:23.279 --> 00:16:32.960 Issues that I've been seeing coming up lately really have to do with FINRA digging into details on foreign ownership. 00:16:33.679 --> 00:16:49.440 So I've seen recently FINRA is getting very specific and asking very specific, detailed information on um owners that are even less than 10% ownership. 00:16:49.600 --> 00:17:11.359 So let's say you have a 2% owner, the individual appears to be

foreign, FINRABAL asks for their primary address or other details on owners that are not going to have any involvement whatsoever in the broker dealer. 00:17:11.680 --> 00:17:24.559 I even had um one time FINRA asked for the resume of a 2% owner who was not going to have any involvement in the day-to-day operations of the broker dealer. 00:17:24.720 --> 00:17:28.480 So that was um really interesting to me. 00:17:28.799 --> 00:17:41.680 Um, but again, that's why we here at CRC Oyster can reach out to FINRA to understand why they need this information or if they really need this information. 00:17:41.839 --> 00:17:43.839 So that's one of the things that I've seen. 00:17:44.559 --> 00:17:44.799 Right. 00:17:44.960 --> 00:17:46.160 Yeah, that's right, Lisa. 00:17:46.240 --> 00:18:00.000 And you know, it's important to note that this is a change for FINRA, how they've how they've previously kind of conducted these reviews and and the way they've viewed incoming owners. 00:18:00.240 --> 00:18:09.839 Um, and sort of up until very recently, um FINRA has kind of drawn a line at 10%, right? 00:18:10.000 --> 00:18:32.640 The the uh any owners of of less than 10% of the broker dealer, um, oftentimes they would kind of allow for the the firm to provide an attestation regarding what what due diligence they've done on those individuals in terms of vetting them to make sure that there's no bad actors. 00:18:32.880 --> 00:18:38.240 And as Lisa's pointed out, recently they've been going much deeper on that. 00:18:38.319 --> 00:18:51.519 And and you know, this is this is Finris sort of taking cues from Washington on some of the you know the the more hot button current hot button items of the administration. 00:18:51.759 --> 00:19:08.480 And so to Lisa's point, they're really digging in on the identities of anybody coming into ownership of a broker dealer, regardless of how small or insignificant their their share of ownership might be. 00:19:08.640 --> 00:19:19.279 And in many respects, it's also that inquiry is start is also taking on sort of an anti-money laundering um aspect to it. 00:19:19.440 --> 00:19:29.599 And of course, this is you know, this is again one of very important to FINREN, kind of their core mission of market integrity um and customer protection. 00:19:29.680 --> 00:19:51.599 And and so you can understand how it dovetails, it's just it's a new approach, kind of given the granularity that they're looking at these things um at and the lens that they're passing these things through now, particularly in the context of these ownership change applications and the the level of the AML uh due diligence that that they're doing. 00:19:51.759 --> 00:19:59.759 They may even go so far as to dig into AML procedures of the of a firm, which would be something that would be completely. 00:20:00.319 --> 00:22:40.319 unrelated to an ownership change typically speaking um but because of the this this sort of new um this new this new initiative um to dig to dig much

more deeply into into owners and in particular into foreign ownership um and anybody who may have a have an indirect tie to a broker dealer um the map group has even started to dig into these AML procedures um of broker dealers on on the CMAs and and again this is not something we've we've been used to seeing historically um but we're seeing a lot of recently another area is is sort of the cybersecurity um Finn was asking about the cybersecurity controls and the sorry uh in the firm systems and technology and procedures to understand uh that those controls are adequate based on sort of the risk assessment for that firm uh with the foreign touch point the questions can go from firms serving uh where the firm servers including servers provided through a third party vendor are located with a very in-depth uh review of any and any answer that's that does is not the US I I think that you know they're asking for you know physical street addresses for the locations uh and also uh when there are no changes in the business model and no changes to the vendors of the firm no other changes other than an ownership change involving a foreign owner somewhere above the the the broker dealer um you know these are the types of uh kind of questions that are sort of creeping up uh in that part of that review right that's right and I mean it's even extending into questions about access to books and records and again kind of going back to this idea of of new foreign owners coming into a a firm's ownership structure we we're seeing questions about whether or not that an individual again regardless of how small their their percentage of of ownership might be whether or not they would have access to books and records of the firm and so you know these are all things that we're we're encountering on on our filings and and we can help to navigate for prospective clients to help move through some of these questions and and even get out in in front of them because the questions are always evolving and the initiatives from the map group are always changing. 00:22:40.640 --> 00:22:52.400 We bring that expertise and that perspective to all of our client engagements and in a way that we hope helps to make for the most effective and efficient filings for our clients. 00:22:53.039 --> 00:23:18.640 No that's all terrific information and you if you think about it I mean being prepared for these types of questions that come up around things like cybersecurity and AML, foreign ownership are things that firms and clients probably aren't going to be aware of and might not be prepared to respond to and so that might cause some delays unless they have somebody that can help navigate them through the process and get them prepared for those types of answers. 00:23:18.880 --> 00:23:37.680 And I'm wondering kind of following on that um are there things that you're seeing that you know in terms of the process that might not be included in their published guidance so that firms should be aware of be prepared for dot dot dot Lisa do you want to take that one? 00:23:37.920 --> 00:23:48.720 Yeah sure I think a lot of the things that we're talking about here today um I don't think has been included in the published guidance. 00:23:49.519 --> 00:24:18.480 Perhaps things are just changing so quickly um maybe FINRA just hasn't had a chance to update the guidance um but again that's why we're here to help with this um we keep up to date on the new requirements coming out of the map group and of course we call FINRA and question things that might seem to be a bit off or misplaced as we receive our request letters from FINRA. 00:24:20.160 --> 00:25:09.440 No that's terrific and I think that kind of expertise and familiarity with the process can be really helpful in those areas and you know in speaking to all you about um different clients that you've worked with and I know you've said it's important to make sure that you're on point and to try to avoid discussing issues that might bring you down a rabbit hole um especially if they don't pertain to um the the change or the application are there some ways that firms can steer clear of those types of issues well I I find like a I think a common uh rabbit hole uh that that sometimes occurs in these types of changes in ownership is where the firm is caught in a rabbit hole of trying to prove that the change will not impact the broker dealer. 00:25:09.680 --> 00:25:25.839 For example, you may have a new owner but let's say that's in the crypto industry entering the ownership structure Vinra will have a million questions wanting to understand what what the role of that of the new crypto owner will will have on the on the broker dealer. 00:25:26.240 --> 00:25:35.920 But the answer could be as simple as like we don't anticipate anything to happen in the near future you know in the you know the forward period for the application is still 12 months. 00:25:36.079 --> 00:25:49.599 So the idea is that well we don't anticipate anything to happen in that 12 months but the questions will keep coming and so uh firms uh you know find themselves in a position where they where they have to keep trying to prove that nothing is going to change in the near term. 00:25:50.160 --> 00:26:24.960 And I think it it's important to be able to push back a little bit on those types of questions and and being able to to you know provide representations as to what the firm anticipates is going to happen within the next 12 months and representations that you know the firm will you know reach out to the risk monitoring analyst should things change and you know they determine that there will be some kind of change in the future and just being transparent with FINRA and I think again going back to the pushing back you know every question that comes on an application should be tied to the standards relative to the application. 00:26:25.200 --> 00:26:58.640 If you don't understand why something is being asked or the relevance to the

application you know it it's okay to reach out to FINRA you know in you when you have questions like this and they should be able to tell you why that question is uh is relevant to the review um it's uh so I think that you know that those are some of the ways to sort of avoid uh the pitfalls of the rabbit holes one of the the areas um that FINRA spends a lot of time on and is closely related to change of of ownership and control is funding and sources of capital. 00:26:58.960 --> 00:27:06.000 What should firms expect FINRRA to want to see with regards to how they're funding it and what the sources their capital are? 00:27:06.319 --> 00:27:22.319 You know as a general rule on on the funding question um as a general rule FINRA is going to expect to see the the most recent three months of bank statements to evidence source of funds. 00:27:22.559 --> 00:27:54.720 This can change depending on an application and every application's kind of facts and circumstances can be different but that's sort of the general guideline um that that clients should expect and you know we know sometimes either individuals or entities don't want FINRA to see their bank account statements for whatever reason but there's this is this is a a hard and fast requirement the vast majority of the time and nothing can be redacted. 00:27:54.960 --> 00:28:10.960 So this is one area that that's easy for FINRA to dig in on and clients should be prepared and and manage the expectation that they're going to have to be transparent with their source of funds. 00:28:11.839 --> 00:28:46.319 One exception to this can be when you have an incoming owner that's a a publicly traded company for instance um and in those situations we've had some we've had success um pointing FINRA to to that company's um 10Q or 10k filings you know the their publicly available financial financial filings can often satisfy FINRA's requirements in those instances that they that they're able to adequately source funds. 00:28:47.200 --> 00:30:07.839 And for furthermore to to that um it's common for the um the review of the source of funds to actually not occur until much later in the application review sometimes causing a lot of questions or last minute questions that cause delays and sort of requirement that then all of a sudden you uh you find yourself need to provide additional statements or or or provide a narrative um describing the source of the funds that are being used providing that narrative at the start where you um walk through what you know what the source of the funds that are in the account are are are from you know how whether they're from the day-to-day operations of that entity or capital raise and providing the documentation to support um uh the representation uh is a great way to get ahead of those questions and uh at least be prepared to answer those when when they come up uh and uh in some ways we'll cut time uh from the review of that application excellent well you know we talked earlier um in the considerations before filing an application about the role of the risk monitoring analyst and that's the individual at FINRA that knows the most about the firm they're the ones that are responsible for the firm on an ongoing basis. 00:30:08.000 --> 00:30:12.720 So I would anticipate that they would be involved in this process to some extent. 00:30:12.880 --> 00:30:23.119 So can you talk a little bit about the role of the risk monitoring analyst and whether or not their role has changed over the last several years as FINRA is restructured. 00:30:24.640 --> 00:30:46.079 Well you know like you said risk monitoring comes into the application with the most knowledge about the firm usually so the one of the first things that the map uh group will do is reach out to the risk monitoring analyst uh who will then share information with MAP on as to any concerns or any recent history the map team should be aware of. 00:30:46.240 --> 00:30:54.559 And it in many ways it's this information from the risk team that uh creates the scope for the review of that application. 00:30:54.720 --> 00:31:52.720 It brings into scope uh again uh recent uh issues that the firm may have had and so they do have a lot of input on on sort of the the what risk the change may have on the application yeah I would agree with that uh definitely Armando the risk monitoring team can play a significant role in any application and they certainly work closely with the map team I have seen uh requests from the map group recently that have been taking on more of an examination feel I don't know if that is due to the restructuring um but it is noticeable I believe across the board um but again that's why we here at CRC Oyster are available to help you navigate this process and to actually be your voice with FINRA on your new and continuing member applications. 00:31:53.839 --> 00:31:58.240 Well absolutely and I really want to thank you all for your time today. 00:31:58.640 --> 00:32:06.640 Sharing your experience and the things that you've learned in helping clients through this process is really valuable. 00:32:07.279 --> 00:32:09.359 And we appreciate your time today. 00:32:09.680 --> 00:32:10.400 Take care. 00:32:10.720 --> 00:32:18.640 If you found today's discussion helpful don't forget to subscribe for more episodes where we dive into industry strategies and best practices. 00:32:18.880 --> 00:32:27.039 For more information about our experts and our services visit our website at oysterlc.com Thanks for listening