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18-23 FINRA Requests Comment on a Proposal Regarding the Rules Governing the New and Continuing Membership Application Process; Comment Period Expires: October 5, 2018

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Membership Application Proceedings

Regulatory Notice
Notice Type

Request for Comment
Referenced Rules & Notices

FINRA By-Laws Article I(h), Article I(rr) and Section 1 of Article IV
FINRA By-Laws Section 4(i) of Schedule A
FINRA Rules 4110, 4120, 4311, 4370, 9143, 9160, 9235, 9242, 9251, 9252, 9262, 9263, 9264, 9311, 9322, 9347 and 9349
FINRA Rule 9000 and 9300 Series
NASD Rule 1010 Series
NASD Rules 1021, 1090 and 3140
Notices to Members 97-19, 98-38 and 00-73
NYSE Rules 311, 312, 313 and 321
NYSE Rule Interpretations 311(f) and (g)
Regulatory Notices 08-66, 09-42, 10-01, 13-29, 15-10, 18-06, 18-15 and 18-16
SEA Rules 15c3-1, 15c3-3 and 17a-11
SEA Section 3(a)(39)
Securities Investor Protection Act of 1970
Suggested Routing

Compliance
Legal
Operations
Senior Management
Systems
Key Topics

Continuing Membership
Membership Rules
New Membership

Comment Period Expires: October 5, 2018

Summary

FINRA seeks comment on proposed amendments to the NASD Rule 1010 Series (Membership Proceedings) (collectively, the Membership Application Program (MAP) rules). The proposal is the result of FINRA's retrospective review of the MAP rules and processes, and is intended to reduce unnecessary burdens on new and existing firms, while strengthening investor protections. The proposed amendments would replace the NASD Rule 1010 Series with the proposed FINRA Rule 1100 Series (New and Continuing Membership). The proposed amendments would also include additional provisions to address regulatory issues FINRA staff identified and codify existing membership-related interpretations and practices.

A chart detailing the restructuring of the proposed rules and the text of the proposed rules are set forth in Attachments A and B, respectively.

Questions regarding this Notice should be directed to:

•   Kosha Dalai, Associate Vice President and Associate General Counsel, Office of General Counsel (OGC), at (202) 728-6903;
•   Sarah Kwak, Assistant General Counsel, OGC, at (202) 728-8471; and
•   Alissa Robinson, Senior Director, Membership Application Program, at (212) 858-4764.

Questions concerning the Economic Impact Assessment in this Notice should be directed to:

•   Lori Walsh, Senior Director, Office of the Chief Economist (OCE), at (202) 728-8323; and
•   Dror Kenett, Economist, OCE, at (202) 728-8208.

Action Requested

FINRA encourages all interested parties to comment on the proposal. Comments must be received by October 5, 2018.

Comments must be submitted through one of the following methods:

•   Emailing comments to pubcom@finra.org; or
•   Mailing comments in hard copy to:

Jennifer Piorko Mitchell
Office of the Corporate Secretary
FINRA
1735 K Street, NW
Washington, DC 20006-1506

To help FINRA process comments more efficiently, persons should use only one method to comment.

Important Notes: All comments received in response to this Notice will be made available to the public on the FINRA website. In general, FINRA will post comments as they are received.1

The proposed rule change must be filed with the Securities and Exchange Commission (SEC or Commission) pursuant to Section 19(b) of the Securities Exchange Act of 1934 (SEA or Exchange Act).2

Background & Discussion

The MAP rules govern the way in which FINRA's Department of Member Regulation, through the Membership Application Program Group (together, the Department), reviews new membership applications (NMAs) and continuing membership applications (CMAs).3 These rules require an applicant to demonstrate its ability to comply with rules and laws including observing high standards of commercial honor and just and equitable principles of trade applicable to its business. The Department evaluates an applicant's financial, operational, supervisory and compliance systems to ensure that each applicant meets the standards set forth in the MAP rules. Among other elements, the MAP rules require consideration of whether an applicant and persons associated with an applicant have disciplinary actions taken against them by FINRA and other industry authorities, customer complaints, adverse arbitrations, pending or unadjudicated matters, civil actions, remedial actions imposed, or other industry-related matters that could pose a threat to public investors. Finally, the MAP rules provide for the administration of the MAP appeal process, setting forth specified time periods for holding hearings and satisfying document production requests, the evidence and testimony that may be considered, and the information that the applicant is required to provide to FINRA.

In Regulatory Notice 15-10 (March 2015), FINRA launched a retrospective review of the MAP rules to assess opportunities to improve their effectiveness and efficiency.4 The retrospective review confirmed that while the rules largely have been effective in meeting their intended investor protection objectives, the rules could benefit from some updating and recalibration to better align their investor protection benefits with their economic impacts. Consistent with a number of recommendations by stakeholders5 during the retrospective review, FINRA is proposing amendments to the MAP rules to address these and other concerns while maintaining strong investor protections. The proposed amendments to the MAP rules would include the following key changes:

•   restructure the MAP rules to make them more streamlined and eliminate procedural redundancy between NMAs and CMAs;
•   codify current Department practices aimed at reducing the overall application review period from 180 days to 150 days, such as the initial assessment of an application to determine whether it can proceed under standard review timeframes set forth under the MAP rules or expedited timeframes (i.e., "Fast Track"6 ), and the materiality consultation process;
•   modify the NMA and CMA processes by, among other things, amending definitions and standards for granting or denying an application, and clarifying the ability of the Department to reject and lapse an application;
•   modify the CMA process by, among other things, clarifying the events that would require a CMA (e.g., change in ownership or control), and eliminating the related ability of the Department to impose interim restrictions pending review; and
•   streamline and update the rules relating to the MAP appeal process by codifying current practices and updating terminology and concepts to align more closely with the Rule 9000 Series (Code of Procedure).

While many of the proposed amendments are technical and administrative in nature, the proposal is responsive to the issues raised during the assessment phase of the retrospective review. The proposal clarifies a number of provisions or terms; amends or deletes provisions that need recalibration or have become outdated; and streamlines the rule and its attendant processes by eliminating or consolidating duplicative provisions and codifying existing Department practices. As a result, FINRA believes the proposal strikes an appropriate balance between maintaining strong investor protections and enhancing the efficiency of the MAP rules and processes.

Structure of the MAP Rules

FINRA proposes to restructure the MAP rules, which currently consist of 11 rules, by organizing them into six distinct areas (See Attachment B):

•   General Provisions
•   New Membership
•   Continuing Membership
•   Standards for Approval of Application
•   Department Decision
•   Review of Department Decision

General Provisions (Proposed FINRA Rule 1110 Series)

The rules contained within the proposed FINRA Rule 1110 Series are intended to address the aspects of the membership process that are common to NMAs and CMAs.

A. Definitions (Proposed FINRA Rule 1111)
1. "Application"

The proposed rule would define, for the first time, the term "Application" to refer to either an NMA (or Form NMA) or a CMA (or Form CMA) depending on the context. This label is intended to improve the readability of the MAP rules.
2. "Associated Person"7

FINRA is proposing to amend the definition of the term "Associated Person" in NASD Rule 1011(b) to include a member of a limited liability company as an Associated Person. In addition, the proposed rule would exclude from the definition any person with a de minimis ownership interest (i.e., less than 10 percent) in a partnership, corporation, association or other legal entity, unless that person is entitled, under the legal entity's constituent documents, to 10 percent or more of such entity's profits or distributions or otherwise controls the applicant. This proposed de minimis exclusion would provide greater clarity regarding the Associated Person status of owners with small ownership interests in the applicant that do not otherwise control the applicant by virtue of an entitlement to significant portions of an applicant's profits or distributions or otherwise have the power, directly or indirectly, to control the applicant.8
3. "Control"9

FINRA is proposing to define, for the first time, the term "control." Currently, the Department relies on the definition of "controlling" under the FINRA By-Laws.10

The proposed definition for purposes of the MAP rules is derived, in part, from the existing FINRA By-Laws definition, but differs, most notably, by increasing the threshold establishing the presumption of control from 20 percent to 25 percent and including more factors that would lead to a presumption of control. The additional factors are derived, in part, from the definition of "control" in Form BD,11 but, consistent with the existing FINRA By-Laws definition, the definition replaces the references to "company" with "person," which is defined in Rule 0160 to include "any natural person, partnership, corporation, association, or other legal entity."12 In addition, the proposed definition would add "limited liability company" as another legal entity to reflect that such entity is a common organizational structure.

The proposed new definition would define "control" to mean the possession of the power to direct or cause the direction of the management or policies of a person whether through ownership of voting securities, by contract or otherwise. Under the proposed definition, control over a person would be presumed if such person, directly or indirectly:
(1) is a director, general partner, managing member, or officer or principal exercising executive responsibility (or person occupying a similar status or performing similar functions) of the other person;
(2) has the right to vote 25 percent or more of a class of voting securities;
(3) has the power to sell or direct the sale of 25 percent or more of a class of voting securities;
(4) is entitled to receive 25 percent or more of the profits; or
(5) in the case of a partnership or limited liability company, has the right to receive upon dissolution, or has contributed, 25 percent or more of the capital.
In addition, the proposed definition would clarify that ownership interests of less than 25 percent would not preclude aggregation of such interests for the presumption of control. The proposed definition also would provide that the presumption of control may be rebutted by proving that any of the factors listed above does not exist or by showing other factors that negate the presumption of control. Finally, the proposed definition would set forth that the presumption would not apply where such person holds voting securities of the applicant, in good faith, as an agent, bank, broker, nominee, custodian or trustee for one or more owners who do not individually or as a group have control of such entity.

FINRA believes that defining "control" for purposes of the MAP rules lends clarity and consistency to the control standards under proposed Rule 1131 (Continuing Membership Application Process) described below.
4. "Sales Practice Event"13

Currently, the term "sales practice event" means any customer complaint, arbitration or civil litigation that has been reported to the Central Registration Depository (CRD®) or otherwise has been reported to FINRA. FINRA is proposing to expand the term to include a "statutory disqualification," as defined in Section 3(a)(39) of the Exchange Act, of an applicant or Associated Person.14
5. Other Proposed Amendments to Definitions

FINRA is proposing to make several non-substantive changes to the definitions to correct cross-references, relocate portions to other rules as part of the restructuring or update the terminology consistent with other FINRA rules.
B. General Procedures (Proposed FINRA Rule 1112)

Currently, NASD Rule 1012 (General Provisions) sets forth the methods of delivery of an NMA or CMA, and their corresponding documents or information. The rule also addresses the Department's service of notice and decision on an application, application lapse, prohibitions on ex parte communications with applicants or Interested FINRA Staff, recusals or disqualifications of Governors and members of the National Adjudicatory Council (NAC) or Subcommittee, and the computation of time periods.

FINRA is proposing to adopt NASD Rule 1012, with amendments, as proposed Rule 1112. The proposed changes would first, move the provisions pertaining to the prohibitions on ex parte communications, and recusals or disqualifications to the proposed Rule 1160 Series (Review of Department Decision) described below, and the computation of time periods to proposed Rule 1111. Second, the proposed changes would bring together under a single rule the provisions common to the review of NMAs and CMAs. These common provisions currently reside under NASD Rules 1012, 1013 (New Member Application and Interview) and 1017 (Application for Approval of Change in Ownership, Control, or Business Operations) as described below.
1. Filing and Service; Timing—Proposed FINRA Rule 1112(a)

Currently, NASD Rule 1012(a) requires an applicant to file an NMA or CMA in the manner prescribed under NASD Rule 1013 or 1017, as appropriate, along with the timely submission of an application fee pursuant to Schedule A to the FINRA By-Laws. Paragraph (a) sets forth the various channels through which an applicant may file its application, documents or information with the Department, and the methods by which the Department must serve notice or a decision upon the applicant. Paragraph (a) also specifies when a filing by an applicant or service by the Department is deemed complete depending upon the delivery method.

FINRA is proposing to delete NASD Rule 1012(a) in its entirety, and adopt proposed Rule 1112(a). The proposed rule would:
•   update the method for delivering and filing applications to move away from paper-based methods to an electronic process or such other process as FINRA may prescribe;15
•   clarify the starting times for submitted and filed applications for purposes of calculating the time by which the Department must issue its decision on an application; and
•   expressly provide that the timeframes specified in the MAP rules may be extended or shortened upon the mutual written consent of the Department and the applicant.
2. Rejection of Application Following Department's Initial Assessment-Proposed FINRA Rule 1112(b)

NASD Rules 1013(a)(3) and 1017(d), which pertain to NMAs and CMAs, respectively, contain nearly identical language for applications that are "not substantially complete" at the time of filing. These provisions give the Department 30 days from the date on which the applicant files the application to reject it as "not substantially complete" and deem it not to have been filed on the basis that the application is so deficient upon initial submission that the Department cannot begin reviewing it.16 In such case, the Department is required to notify the applicant of the reasons underlying the rejection and refund the application fee, less a $500 processing fee. If the applicant determines to apply for approval of an NMA or CMA, the applicant is required to submit a new application and appropriate fee pursuant to Schedule A to the FINRA By-Laws.

FINRA is proposing to delete NASD Rules 1013(a)(3) and 1017(d) in their entirety, and adopt proposed Rule 1112(b) to reflect current Department practices in handling applications that are deficient upon submission ("Application Submission Date"). The proposed rule would eliminate the concept of an application that is "not substantially complete" at the time of filing and instead, more appropriately focus on whether there are sufficient documents and information accompanying the application for the Department to commence a meaningful review and deem it "filed" for purposes of calculating the date on which the decision is due ("Application Filed Date").

Under the proposed rule, the Department would have 15 days from the Application Submission Date (as that term is defined under proposed Rule 1112(a)) to conduct an initial assessment to determine whether an application includes the documents or information necessary for the Department to conduct a meaningful review.17 Should the Department determine that the application does not contain sufficient documentation or information to begin a meaningful review, the Department would be required to provide the applicant with written notification of the deficiency. An applicant would then have five business days after notification to cure the deficiency, and failure to timely do so would result in the Department's rejection of the application. In such case, the applicant would receive a refund of the application fee, less a $500 processing fee. If the applicant determines again to apply for approval of an NMA or CMA, the applicant would be required to submit a new one and the appropriate fee pursuant to Schedule A to the FINRA By-Laws. The proposed rule would also clarify that an application that has been rejected does not constitute final action by the Department for purposes of the proposed Rule 1160 Series.
3. Request for Additional Documents or Information—Proposed FINRA Rule 1112(c)

NASD Rules 1013(a)(4) and 1017(e), which pertain to NMAs and CMAs, respectively, permit the Department to request, at any time during the application review process, any additional information or documents necessary to render a decision on the application. Depending on whether the application is for new or continuing membership, the provisions provide differing timeframes for when the Department must serve its request on the applicant and when the applicant must respond to such request.

For an NMA, NASD Rule 1013(a)(4) requires the Department to serve its initial request for any additional information or documents necessary to render a decision on the application within 30 days after the application is filed. Unless otherwise agreed to by the Department and the applicant, the applicant is required to file any additional information and documents with the Department within 60 days thereafter, and for any subsequent requests for information or documents that the Department may serve, the applicant has 30 days in which to respond to such request. For a CMA, NASD Rule 1017(e) requires the Department to serve a request for any additional information or documents necessary to render a decision on the application within 30 days after the application is filed. An applicant has 30 days in which to respond to any such request (unless otherwise agreed to by the Department and the applicant).

FINRA is proposing to consolidate and adopt NASD Rules 1013(a)(4) and 1017(e), with amendments, as proposed Rule 1112(c). The proposed changes would eliminate the timing differences based on application type. Under the proposed rule, the Department would be required to serve its initial request for any additional documents or information within 30 days after the Application Filed Date (as that term is defined under proposed Rule 1112(a)), and the applicant must respond to the initial request within 30 days after service. In addition, the applicant would be required to respond to any subsequent request for documents or information within 15 days after the Department's request or within such other time period agreed to by the Department and the applicant.
4. Lapse of Application—Proposed FINRA Rule 1112(d)

Currently, NASD Rule 1012(b) gives the Department the authority to lapse an NMA or CMA, if, absent a showing of good cause, the applicant fails to timely respond to the Department's request for additional documents or information (or within such other period agreed to by the Department and the applicant), appear at or otherwise participate in a scheduled membership interview, or file an executed membership agreement within 25 days after service of the agreement (or within such other period agreed to by the Department and the applicant). An applicant that determines again to seek approval of its application is required to submit a new one (under either NASD Rule 1013 or 1017, as appropriate) and the appropriate fee pursuant to Schedule A to the FINRA By-Laws.

FINRA is proposing to adopt NASD Rule 1012(b), with amendments, as proposed Rule 1112(d). The proposed amendments would add a new event that would result in an application to lapse. Currently, the MAP rules provide a 180-day timeframe in which the Department must issue a written decision on an application.18 During this timeframe, the Department has experienced, with some frequency, applicants that make substantial changes to their applications well into the review process.19 To curtail these situations, FINRA is proposing to add a new provision to provide that in instances where an applicant makes a substantial change to the application that materially impacts the Department's review of the application, the Department would have the authority to lapse the application. Under the proposed rule, the Department would be required to notify the applicant, in writing, of the pending lapse and the applicant would have five business days from notification to remedy the application. The applicant's failure to timely remedy the application would result in its lapse.

Under the proposed rule, an application that has lapsed within 30 days after the Application Filed Date would result in a refund to the applicant of the application fee, less a $500 processing fee. An application that has lapsed after 30 days of the Application Filed Date would not result in a refund of the application fee. An applicant that determines again to seek approval of its application would be required to submit a new one and the appropriate fee pursuant to Schedule A to the FINRA By-Laws. The proposed rule would also clarify that an application that has lapsed does not constitute final action by the Department for purposes of the proposed Rule 1160 Series.
5. Withdrawal of Application—Proposed FINRA Rule 1112(e)

NASD Rules 1013(a)(5) and 1017(f), which pertain to NMAs and CMAs, respectively, contain nearly identical language permitting an applicant to withdraw its application. If the applicant withdraws the application within 30 days after filing the application, FINRA will refund the application fee, less a $500 processing fee. An applicant that determines again to seek approval of its application is required to submit a new one (under either NASD Rule 1013 or 1017, as appropriate) and the appropriate fee pursuant to Schedule A to the FINRA By-Laws.

FINRA is proposing to revise these rules as proposed Rule 1112(e). The proposed changes would clarify that if an applicant withdraws the application after the Application Submission Date, but not later than 30 days after the Application Filed Date, FINRA will refund the application fee, less a $500 processing fee. The proposed rule would also clarify that an applicant that withdraws its application after 30 days of the Application File Date would not receive a refund of the fee. Finally, the proposed rule would clarify that an application that has been withdrawn does not constitute final action by the Department for purposes of the proposed Rule 1160 Series.
6. Membership Interview—Proposed FINRA Rule 1112(f)

FINRA is proposing to revise NASD Rules 1013(b) and 1017(g) as proposed Rule 1112(f) to address the membership interview process for NMAs and CMAs, expressly providing that an interview for a new member applicant is mandatory, and discretionary for a continuing member applicant. Proposed paragraph (f) would retain the requirement that the Department conduct the interview in the district office for the district in which the applicant has its principal place of business or at an agreed upon location, and allow the flexibility to conduct more than one membership interview and permit the interview(s) to occur by video conference or by other means. Proposed Rule 1112(f) would also retain the current seven-day timeframe in which the Department must provide the applicant written notice of the interview, but update the delivery method to move away from paper-based methods such as facsimile or overnight courier to an electronic process or such other process as FINRA may prescribe as specified under proposed Rule 1112(a).
7. Proposed Supplementary Materials
•   Initial Assessment by Department (Supplementary Material 1112.01)

FINRA is proposing to add new Supplementary Material .01 to proposed Rule 1112 to codify an existing procedure to conduct an initial assessment of an application. Specifically, the proposed supplementary material would provide that the Department shall conduct an initial assessment of an application to determine, at a minimum, whether the documents or information included with the application are correctly identified and contain the information they purport to address and whether the application may be eligible for expedited review. The proposed supplementary material would further describe that as part of the initial assessment, the Department may also review several aspects of the application including, but not limited to, the disciplinary history of the applicant and its Associated Persons, and scale and scope of the proposed activities of the applicant, the history of sales practice events, disciplinary history, licenses and registrations, and experience of the relevant principals and registered persons of the applicant, and the written supervisory procedures.
•   Department Decision to Expedite Review (Supplementary Material 1112.02)

FINRA is proposing to add new Supplementary Material .02 to proposed Rule 1112 providing that as part of the initial assessment, the Department may, in its discretion, determine that the application is eligible for expedited review and notify the applicant of such eligibility.
•   Membership Interview (Supplementary Material 1112.03)

FINRA is also proposing to add new Supplementary Material .03 to proposed Rule 1112 to codify existing guidance on membership interviews.20 The proposed supplementary material would provide a general description of the membership interview and the topics that may be discussed during the interview to demonstrate the applicant's ability to satisfy the standards for approval of an application. Topics would include the nature and scope of the business, financial condition, source of funds, the background and experience of the applicant's principals and representatives, documents or information that the Department obtained from CRD or a source other than the applicant and upon which the Department intends to base its decision, among others.21
•   Waiver of Two-Principal Requirement (Supplementary Material 1112.04)

Rule 1210.01 requires that a member, except a member with only one Associated Person, have a minimum of two officers or partners who are registered as General Securities Principals, provided that, a member whose activities are limited in scope, may instead have two officers or partners who are registered in a principal category that corresponds to the scope of the member's activities.22 The requirement that a member have a minimum of two principals applies to a broker-dealer seeking to become a new FINRA member, as well as an existing or continuing member. Rule 1210.01 provides that pursuant to the Rule 9600 Series (Procedures for Exemptions), FINRA may waive the requirement that a member have a minimum of two principals in situations that indicate conclusively that only one person associated with an applicant for new or continuing membership should be required to register as a principal.

In practice, an applicant submits its waiver request in writing, stating the basis on which the applicant believes it has demonstrated that only one person associated with the applicant should be required to be registered as a principal, along with any supporting documentation for the waiver request to the Department as part of the supporting documentation in Form NMA or Form CMA.23 The decision on a two-principal waiver request is made by the Department.24

Currently, the MAP rules do not expressly address how an applicant may seek a waiver of the two-principal requirement, but Forms NMA and CMA address this waiver.25 FINRA is proposing to add new Supplementary Material .04 to proposed Rule 1112 to make the nexus between the NMA and CMA processes and Rule 1210.01 more evident. In addition, the proposed supplementary material would describe the factors the Department may consider in determining whether to grant a waiver. Factors may include, but are not limited to, the regulatory history of the applicant and its Associated Persons, the type of business the applicant conducts or for which it is approved to conduct, and the number, location and experience of Associated Persons and their designated offices and locations. The proposed supplementary material would also set forth that the decision to grant the waiver rests with the Department, and the applicant's ability to appeal the decision pursuant to the Rule 9600 Series. The proposed supplementary material would clarify that an appeal of the Department's decision on the waiver may cause the underlying application review process to be held in abeyance pending the outcome of the appeal.

New Membership (Proposed FINRA Rule 1120 Series)

FINRA proposes to adopt a new rule series dedicated to the unique requirements and processes for new membership. The proposed Rule 1120 Series would encompass rules pertaining to membership waive-in, foreign members and the NMA process.

A. Membership Waive-In (Proposed FINRA Rule 1121)

NASD Interpretative Materials 1013-1 and 1013-2 describe a waive-in application process to allow certain New York Stock Exchange (NYSE) and NYSE American LLC (NYSE American) (formerly, NYSE Alternext US LLC) member organizations to automatically become FINRA members and to register automatically all Associated Persons whose registrations are approved with either NYSE or NYSE American, as applicable, in registration categories recognized by FINRA. In general, upon such member organization's submission of a signed waive-in membership application to the Department, the Department is required to review the waive-in application within three business days of receipt and if complete, issue a letter notifying the applicant that it has been approved for FINRA membership.

FINRA is proposing to consolidate, with amendments, the Interpretative Materials as proposed Rule 1121. The proposed amendments would delete the description of the waive-in application process that was established in connection with the consolidation of NASD and NYSE Regulation, Inc. in 2007, which has now become obsolete, but would retain some aspects of the Interpretative Materials.26 The proposed rule would clarify that a member organization would be required to execute a membership agreement prior to expanding its business operations, and that if such expansion would be considered a "material change in business operations" as that term is described under proposed Rule 1131(b), then such member organization would be required to undergo the CMA process described under the proposed Rule 1130 Series. The proposed rule would also provide that upon approval of the business expansion, the member organization would be subject to all NASD rules, in addition to the consolidated FINRA rules and those NYSE rules incorporated by FINRA.
B. Foreign Members (Proposed FINRA Rule 1122)

NASD Rule 1090 (Foreign Members) requires a foreign broker-dealer that does not maintain an office in the United States responsible for preparing and maintaining regulatory filings to meet specific requirements for FINRA membership. The requirements enable FINRA to ensure a foreign member's compliance with applicable securities laws and regulations, and with applicable FINRA rules. Paragraph (d) of the rule requires foreign members to "utilize, either directly or indirectly, the services of a broker-dealer registered with the Commission, a bank or a clearing agency registered with the Commission located in the United States in clearing all transactions involving members of the Association, except where both parties to a transaction agree otherwise." FINRA is proposing to adopt NASD Rule 1090, with one substantive change, as proposed Rule 1122.27 The proposed change would delete NASD Rule 1090(d) because the provision is addressed by Rule 4311 (Carrying Agreements).
C. New Membership Application Process (Proposed FINRA Rule 1123)

NASD Rule 1013 sets forth the requirements for an NMA, including how to file the application, the documents and information that must be submitted with the application,28 and the requirement for an applicant to file its uniform registration forms (Forms U4, U5, BD) electronically. The rule also addresses the Department's ability to reject an application that is "not substantially complete" and the Department's ability to request additional documents or information, the applicant's withdrawal of the application and the process for conducting the membership interview.

FINRA is proposing to revise NASD Rule 1013 as proposed Rule 1123. The proposed revisions would streamline the rule by moving to one consolidated rule, proposed Rule 1112, procedural elements of the NMA review process that are common with the CMA process, such as the procedures for application rejection, the request for additional documents or information, application withdrawal and the membership interview. The proposed rule also would add a new provision that would indicate the actions a prospective applicant would need to undertake before filing an NMA. Those actions would include, among others as FINRA may prescribe, filing Form BD with the SEC, reserving a firm name, completing the necessary forms to establish access to FINRA systems, submitting fingerprints for each Associated Person and paying the appropriate fee pursuant to Schedule A to the FINRA By-Laws.29 Finally, FINRA is proposing to delete references to the detailed list of items because these items are already included in Form NMA or are referenced in the standards for admission.30

Continuing Membership (Proposed FINRA Rule 1130 Series)

FINRA is proposing to adopt a new rule series dedicated to aspects of FINRA membership that are unique to continuing FINRA membership. The proposed Rule 1130 Series would encompass the rules pertaining to the CMA process, the circumstances that would obviate the filing of a CMA, the materiality consultation process and the safe harbor provision.

A. Continuing Membership Application Process (Proposed FINRA Rule 1131)

Currently, NASD Rule 1017 describes the events requiring a CMA and sets forth the documents or information required to support the application, depending upon the nature of the application.31 In addition, the rule sets forth the timing and conditions for filing a CMA. Most notably, for a member that is filing an application for approval of a change in ownership or control, the member must file the application at least 30 days before the Regulatory Notice event takes place. While a member may effect such change prior to the conclusion of the Department's review of the application, the Department may place new interim restrictions on the member based upon the standards contained in NASD Rule 1014 (Department Decision) pending final action. For other specified events, a CMA for approval by the Department can be filed at any time before effectuating such event.

NASD Rule 1017 also addresses the Department's ability to reject an application that is "not substantially complete" and to request additional documents or information, the applicant's withdrawal of the application, the process for conducting the membership interview, the Department's decision on the application, the Department's ability to remove or modify a restriction on its own initiative, and the lapse or denial of an application for a change in ownership. Other areas covered by the rule include service and effectiveness of the Department's decision on an application and the applicant's ability to file a written request for a review of the Department's decision with the NAC.

FINRA is proposing to revise NASD Rule 1017 as proposed Rule 1131 described below.
1. Streamlining Amendments
•   Redesignation and Consolidation of Procedural Elements in NASD Rule 1017 to Proposed Rule 1112

FINRA is proposing to limit proposed Rule 1131 to the CMA process by deleting procedural elements of the CMA review process that either duplicate or closely parallel those elements that exist in the NMA process. Common elements include the procedures for application rejection, the request for additional documents or information, application withdrawal, application lapse and the membership interview. FINRA is proposing to consolidate these aspects of the application review process in proposed Rule 1112 as described above.
•   Submission of One Application for an Event Affecting Two or More Members32

With some frequency, two or more member firms are involved in the same event requiring a CMA. In an effort to bring more efficiency to the review process for CMAs, FINRA is proposing to add a new provision under proposed Rule 1131(a) that would provide the Department with the discretion to permit the filing of a single CMA where two or more members are involved in the same contemplated event. The filing of a single CMA would be subject to a single fee pursuant to Schedule A to the FINRA By-Laws.
2. Events Requiring Submission of Application and Department Approval

The criteria for a CMA appear under paragraphs (a) and (b) of NASD Rule 1017. FINRA is proposing to integrate these paragraphs, with amendments described below, in proposed Rule 1131(b).33 In addition, FINRA is proposing to add headers to more easily discern among the various events requiring a CMA. The clarifying headers would include merger, acquisition, divestiture or transfer, change in capital structure, business expansion, material change in business operations, and removal or modification of a membership agreement restriction. These headers describe events covered by NASD Rule 1017.34

Currently, NASD Rule 1017(a) specifies the changes in a member firm's ownership, control or business operations that require a CMA and Department approval. Specifically, the events that require a member firm to file a CMA and obtain Department approval thereon are:
•   a merger of the member with another member, unless both members are members of the NYSE or the surviving entity will continue to be a member of the NYSE;
•   a direct or indirect acquisition by the member of another member, unless the acquiring member is a member of the NYSE;
•   direct or indirect acquisitions or transfers of 25 percent or more in the aggregate of the member's assets or any asset, business or line of operation that generates revenues composing 25 percent or more in the aggregate of the member's earnings measured on a rolling 36-month basis,35 unless both the seller and acquirer are members of the NYSE;
•   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
•   a material change in business operations as defined in NASD Rule 1011(k).
•   Elimination of Exclusion for NYSE Member Organizations36

In the case of a merger, acquisition or transfer in which a NYSE member organization is involved, NASD Rule 1017(a) currently excludes such member organization from the requirement to file an application for approval of the specified event. FINRA is proposing to eliminate this exclusion on the basis that NYSE Regulation, Inc. no longer conducts its own review of such transactions. The proposed rule would require a member seeking to effect any of these events to file a CMA for the Department's review whether or not the other broker-dealer is a member of FINRA.
•   Addition of Event Requiring a CMA-Change in Control Person37

FINRA is proposing to add a new event that would require the submission of a CMA for a change in control person because the Department has encountered with some frequency situations where a member has changed its control person without filing a CMA. Proposed Rule 1131(b)(5) would require a CMA for a direct or indirect change of a member's control person, other than the appointment or election of a natural person as a partner, officer, director, principal of the member, or any person occupying a similar status or performing similar function, in the normal course of business, regardless of whether the change resulted from a change in capital structure.
•   Additions to List of Activities Viewed as "Material Change in Business Operations"

Currently, the term "material change in business operations," defined in NASD Rule 1011(k) and referenced in NASD Rule 1017(a)(5), includes, but is not limited to, three categories of changes:
•   removing or modifying a membership agreement restriction;
•   market making, underwriting or acting as a dealer for the first time; and
•   adding business activities that require a higher minimum net capital under SEA Rule 15c3-1.
Consistent with the prior proposals presented in Notices 10-01 and 13-29, FINRA is proposing to supplement this list to include a member engaging, for the first time, in settling or clearing of transactions for the member's own business or for other broker-dealers, or carrying customer accounts.38 FINRAis also proposing to require a member to submit a CMA for the Department's approval before making a business change that would change its SEA Rule 15c3-3(k) exemptive status, which would effectively incorporate NASD Rule 3140 (Approval of Change in Exempt Status Under SEC Rule 15c3-3).39
•   Removal or Modification of a Membership Agreement Restriction

Currently, the removal or modification of a membership agreement restriction is addressed under NASD Rule 1017(a)(5), which cross-references to NASD Rule 1011(k)'s definition of "material change in business operations."40 For clarity, FINRA is proposing to move NASD Rule 1011(k)(1)—removing or modifying a membership agreement restriction—to proposed Rule 1131(b)(8). FINRA believes that positioning this event as a separate subparagraph represents a more sensible presentation of the criteria requiring a CMA and Department approval thereon.
3. Elimination of Timing of CMA Filings and Pre-approval of Changes

NASD Rule 1017(c) sets forth three timing considerations for filing specified types of CMAs. The first timing consideration concerns whether a member is contemplating a change in ownership or control. NASD Rule 1017(c)(1) requires a member to file an application for approval of such change at least 30 days before the change is expected to occur. Occasionally, it may take the Department more than 30 days to complete its review of the application. In such case, the member may decide to proceed with the proposed change before the Department has completed its review. If the member elects to do so, then the Department may impose new interim restrictions on the member consistent with the standards set forth under NASD Rule 1014, pending final Department action. A member may encounter difficulty if it decides to proceed with the change when the Department determines that the application is in need of additional documents or information, or that the member must to reverse or unwind the effected change.

The second timing consideration under NASD Rule 1017(c)(2) involves whether a member is seeking to remove or modify a membership agreement restriction. In this case, the member may file the CMA at any time, but any existing restriction would remain in place until the Department has completed its review.

The third timing consideration under NASD Rule 1017(c)(3) pertains to whether a member is contemplating a material change in business operations. In such situation, the member may file a CMA at any time, but must wait for the Department's final determination, unless the Department and member agree otherwise.
•   Elimination of Timing Considerations

FINRA is proposing to eliminate the timing considerations for filing a CMA depending upon the type of contemplated change or event because these varied timing considerations tend to generate confusion. FINRA believes that requiring a member to file an application before effecting any change specified in paragraph (b) under proposed Rule 1131 establishes more clarity and certainty in the process.
•   Pre-approval of Changes

The purpose of interim restrictions is to protect investors. During the retrospective review, various stakeholders said that the nature and scope of interim restrictions were unclear or hampered real-time business decisions. In addition, interim restrictions may result in costly logistical impacts to the member should they require the member to reverse or unwind the transaction or event. Moreover, NASD Rule 1017 contains an incongruity in the way in which the Department handles the risks inherent in changes in ownership, control or business operations. For example, because of the potential risk to the investing public, a member cannot effect a material change in business operations before obtaining the Department's approval, but a member can effect a change in ownership or control while the Department processes the application. Given the inherent risks under both types of changes, FINRA believes that any change specified under proposed Rule 1131(b), including a change in ownership or control, should not be permitted until such time as the CMA has been approved by the Department. FINRA is proposing to eliminate NASD Rule 1017(c) in its entirety in order to bring more uniformity to the CMA review process.
4. Permissible Events for Form CMA Waiver (Proposed Supplementary Material 1131.01)

FINRA is proposing new supplementary material to set forth the circumstances under which the Department may consider waiving the CMA filing requirement.41 The proposed supplementary material would describe the circumstances under which a member contemplating a change in capital structure or control person may request a waiver of the CMA filing requirement. Under the proposed provision, the Department may grant a member's request to waive the CMA filing requirement where the contemplated change does not make any material changes in the applicant's business activities, management, supervision, assets or liabilities, and the applicant is only proposing a change in the: (1) applicant's legal structure (e.g., changing from a corporation to a limited liability company) or (2) equity ownership, partnership capital or other ownership interest in an applicant held by a corporate legal structure that is due solely to a reorganization of ownership or control of the applicant within the corporate legal structure (e.g., reorganizing only to add a holding company to the corporate legal structure's ownership or control chain of the applicant).

The proposed supplementary material would also provide that the Department may grant a member's request to waive the CMA filing requirement for an acquisition, or divestiture or transfer of 25 percent or more in the aggregate of the member's assets or any asset, business or line of business that generates revenues composing 25 percent or more in the aggregate of the member's earnings measured on a calendar-year basis for the three years preceding the event where the member is: (1) ceasing operations as a broker-dealer; (2) filing a Form BDW (Uniform Request for Broker-Dealer Withdrawal) with the SEC; and (3) neither the member nor any of its Associated Persons is the subject of any claim (including, but not limited to, arbitration awards, or pending or settled arbitration claims or litigation actions) that could be disadvantaged by the proposed transaction. In any instance where a claim against a member or any of its Associated Persons is awarded or settled, such claim will not be deemed satisfied for purposes of proposed Rule 1131 until all payments are satisfied in full including any payments to be made on behalf of the member by a third party, pursuant to an agreement among the parties. Under the proposed provision, a member would be required to seek a waiver in the manner prescribed under the materiality consultation process set forth under proposed Rule 1132.42
B. Materiality Consultation (Proposed FINRA Rule 1132)

A member is required to file a CMA when it plans to undergo an event specified under NASD Rule 1017 (e.g., merger, acquisition, material change in business operations). Before taking this step, a member has the option of seeking guidance, or a materiality consultation, from the Department on whether or not such proposed change would require a CMA. The materiality consultation process is voluntary and no fee is assessed, and the Department has publicly shared guidelines about this process on FINRA.org.43

In general, a member initiates a materiality consultation with the Department by submitting a letter, requesting the Department's determination on whether a proposed change is material such that it requires the submission of a CMA. The characterization of a proposed change as material depends upon an assessment of all the relevant facts and circumstances. The Department may communicate with the member to obtain further information regarding the proposed change and its anticipated impact on the member. Where the Department determines that a proposed change is material, the Department will instruct the member to file a CMA if the member intends to proceed and will advise that effecting the change without approval would constitute a violation of NASD Rule 1017.

FINRA is proposing to further codify the materiality consultation process under proposed Rule 1132. The proposed rule would retain the voluntary nature of this process, except that it would mandate consultation where there is a request to waive the submission of a CMA under the circumstances in proposed Supplementary Material 1131.01 described above.44 The proposed rule would also mandate a materiality consultation where an applicant seeks to engage in, for the first time, retail foreign currency exchange activities, variable life settlement sales to retail customers, options activities or municipal securities activities.45 The proposed rule would set forth the Department's ability to, among other things, assess the nature and scope of the contemplated activity; the history of sales practice events and disciplinary history of the applicant and its Associated Persons; the impact on the member's supervisory and compliance structure, personnel and finances; and any other impact on investor protection raised by the contemplated activity.
C. Safe Harbor from the CMA Process (Proposed FINRA Rule 1133)

While NASD Rule 1017 sets forth the events that require a CMA, NASD IM-1011-1 (Safe Harbor for Business Expansions) creates a safe harbor for three categories of business expansions that a member may undergo without filing a CMA. The permissible areas of business expansion under the safe harbor include the number of Associated Persons involved in sales, number of offices (registered or unregistered), and number of markets made,46 with those expansions measured on a rolling 12-month basis. The safe harbor is unavailable to a member that has a membership agreement that contains a specific restriction as to one or more of those three areas of expansion or to a member that has a "disciplinary history" as defined in NASD IM-1011-1.47

FINRA is proposing to revise NASD IM-1011-1 as proposed Rule 1133. The proposed rule would retain the existing three areas of expansion and their corresponding thresholds, as well as the recordkeeping obligations for increases in personnel, offices and markets to determine whether they are within the safe harbor. The proposed rule would also continue to exclude a member from relying on this provision if such member has a defined "disciplinary history."

The proposed amendments would relocate the defined terms "disciplinary history"48 and "Associated Person involved in sales" from NASD IM-1011-1 to proposed Rule 1111. The proposed amendments would adjust the way in which the expansions are measured from a rolling 12-month basis to a 12-month period preceding the event.49 In addition, the proposed rule would modify the existing practice of prohibiting any expansion in the safe harbor areas if any one type of expansion was restricted, and instead permit a member to rely upon the safe harbor for those types of business expansions from which it is not restricted.50

Standards for Approval of Application (Proposed FINRA Rule 1140 Series)

NASD Rule 1014 sets forth the standards for admission for an application, the process and timing for granting or denying an application, the timing and content requirements for the Department's decision and submission of a membership agreement, and the effectiveness of restrictions in the membership agreement. The Department evaluates both NMAs and CMAs to determine whether the applicant meets the 14 standards set forth in NASD Rule 1014(a)51 and for that reason, FINRA is proposing to restructure NASD Rule 1014 for clarity by separating key milestones in the application review process into separate rules housed under the proposed Rule 1140 Series and Rule 1150 Series (Department Decision). The proposed Rule 1140 Series (and the Rule 1150 Series described below) would encompass rules applicable to NMAs and CMAs.

A. General Provisions (Proposed FINRA Rule 1141)

FINRA is proposing to adopt proposed Rule 1141 to expressly state that all applications shall satisfy the standards set forth in proposed Rule 1142, but would permit an applicant to identify any standard that it believes is not applicable to the Department's review by providing a detailed written description of its rationale to the Department.52 The Department would have the authority to make the final determination of the applicability of any standard, and the applicant would be bound by that determination. The proposed rule would also make clear that such determination would not represent final action on the application for purposes of an appeal under the proposed Rule 1160 Series.
B. Standards (Proposed FINRA Rule 1142)

FINRA is proposing to revise standards for admission in NASD Rule 1014(a) as proposed Rule 1142. As discussed further below, FINRA is also proposing to revise the other remaining paragraphs in NASD Rule 1014 concerning the decision-making aspects of an application such as granting or denying an application, the presumption to deny an application, the effectiveness of a restriction, and the content, service and effectiveness of the Department's decision, as the proposed Rule 1150 Series.

NASD Rule 1014(a) provides that after considering the application, the membership interview, other information and documents, the public interest and the protection of investors, the Department must determine whether the applicant meets 14 standards for admission set forth below.
NASD Rule 1014 Standard Description
Standard 1 Complete and Accurate Application (Overview of the Applicant)
Standard 2 Licenses and Registrations Required by State and Federal Authorities and Self-Regulatory Organizations
Standard 3 Compliance with Industry Rules, Regulations, and Laws
Standard 4 Contractual or Other Arrangements and Business Relationships
Standard 5 Business Facilities
Standard 6 Adequacy of Communications and Operational Systems
Standard 7 Determining the Adequacy of Net Capital
Standard 8 Financial Controls
Standard 9 Control Mechanisms Consistent with Industry Practices
Standard 10 Adequate Supervisory System
Standard 11 Recordkeeping System
Standard 12 Continuing Education
Standard 13 Other Information Possessed by FINRA
Standard 14 Consistency with Federal Securities Laws


FINRA is proposing to streamline the standards under proposed Rule 1142 by deleting those that are obsolete and redundant, and consolidating others with the standards that are closely related. This streamlining effort would result in the reduction of the total number of standards from 14 to 10.
•   Consolidation of Standards 1 and 14—Complete and Accurate Application

Standard 1 requires that an application and all supporting documentation are complete and accurate. Standard 14 requires that an application and all supporting documents are consistent with applicable securities laws and regulations, and with applicable FINRA rules. FINRA is proposing to consolidate Standard 14 into Standard 1 to require that an application and all supporting documents are complete, accurate, and consistent with the federal securities laws, the rules and regulations thereunder, and FINRA rules.53
•   Consolidation of Standards 2 and 12—Licenses and Registrations, and Continuing Education

Standard 2 requires that an applicant and its Associated Persons have all licenses and registrations required by state and federal authorities and self-regulatory organizations (SROs). Standard 12 requires that an applicant has completed a training needs assessment and has a written continuing education plan. FINRA is proposing to consolidate Standard 12 into Standard 2 because both standards pertain to registration and qualification. The proposed standard would also include the requirement that the applicant and its Associated Persons have paid all applicable fees.54
•   Consolidation of Standards 7 and 8—Financial and Operational Controls; Capital; and Clarification of Criteria

Under Standard 7, an applicant must meet the provisions set forth under SEA 15c3-1, the SEC's net capital rule. If necessary, the Department may impose a reasonably determined higher net capital requirement beyond the minimum requirement after considering six specified factors. These factors include, among others, the applicant's ability to comply with SEA Rule 17a-11, the SEC's early warning rule, and meet expenses net of revenues for at least 12 months, based on reliable projections agreed to by the applicant and the Department. Under Standard 8, an applicant must have financial controls to ensure compliance with the federal securities laws, the rules and regulations thereunder, and FINRA rules.

FINRA is proposing to consolidate Standard 8 into Standard 7 because both standards pertain to an applicant's financial and operational responsibilities, and to amend the consolidated standard to clarify that an applicant's financial and operational controls comply with SEA Rules 15c3-1 and 15c3-3, and Rule 4110 (Capital Compliance).55 In addition, FINRA is proposing to amend the consolidated standard to clarify that the Department may consider the amount of net capital sufficient to avoid early warning level reporting requirements, such as SEA Rule 17a-11 and Rule 4120 (Regulatory Notification and Business Curtailment), as applicable.56

Finally, FINRA is also proposing a clarifying amendment to Standard 7, deleting the phrase "net of revenues" to clarify the Department's current practice to consider the amount of capital necessary to meet expenses for at least 12 months based on reliable projections of revenue agreed to by the applicant and the Department.
•   Consolidation of Standards 9 and 10—Supervisory System; and Clarification of Criteria

Standard 9 requires that the applicant demonstrate that its compliance, supervisory, operational and internal control practices and standards are consistent with practices and standards regularly employed in the investment banking or securities business, taking into account the nature and scope of applicant's proposed business. Standard 10 requires the applicant to demonstrate that it has an adequate supervisory system, including written supervisory procedures, internal operating procedures (including operational and internal controls), and compliance procedures designed to prevent and detect, to the extent practicable, violations of federal securities laws and rules and regulations thereunder, and with applicable FINRA rules. In evaluating Standard 10, the Department is required to consider the overall nature and scope of the applicant's intended business operations and other specified factors that include, among others, whether each Associated Person identified in the applicant's business plan to discharge a supervisory function has at least one year of direct experience or two years of related experience in the subject area to be supervised; whether the applicant will recommend securities to customers; and whether the applicant should be required to place one or more Associated Persons under heightened supervision pursuant to Notice to Members 97-19.

FINRA is proposing to consolidate Standard 9 into Standard 10 because both standards pertain to an applicant's supervisory responsibilities,57 and to amend some of the specified factors that the Department is required to consider under Standard 10 in the following ways. First, one of the factors concerns the requirement that an Associated Person have at least one year of direct experience and two years of related experience in the subject area to be supervised. FINRA is proposing to amend this factor to permit the applicant to identify that each Associated Person in the application is qualified, either by virtue or experience or training, to carry out his or her assigned responsibilities. This amendment would align with Rule 3110(a)(6), which specifies the minimum requirements for a member's supervisory system including "[t]he use of reasonable efforts to determine that all supervisory personnel are qualified, either by virtue of experience or training, to carry out their assigned responsibilities."

Second, another factor is whether the applicant will recommend securities to customers. FINRA is proposing to extend this factor to include whether the applicant will recommend transactions or investment strategies involving a security or securities to customers.58 Finally, with respect to the factor concerning whether the applicant should be required to place Associated Persons on heightened supervision pursuant to Notice to Members 97-19, FINRA is proposing to amend the standard to clarify that the Department will consider whether the applicant will implement heightened supervisory procedures on any Associated Person whose record reflects a history of industry or regulatory-related incidents, including one or more disciplinary actions or sales practice events.59
•   Elimination of Standard 5—Business Facilities

Standard 5 requires an applicant to have adequate plans to obtain facilities that are sufficient to initiate the operations described in the applicant's business plan, considering the nature and scope of operations and the number of personnel, and comply with the federal securities laws, the rules and regulations thereunder, and FINRA rules. In reviewing NMAs and CMAs under this standard, the Department considers not only the obvious factors, such as office space and computer equipment, but also the location of such facilities to determine whether the applicant's business plan can be effected with adequate supervision of the applicant's business activities for compliance with all relevant securities rules. During the retrospective review, various stakeholders said that Standard 5 does not reflect modern business operations. For example, an applicant that does not have the traditional "bricks and mortar" presence because it operates through online electronic platforms would not clearly satisfy this standard. FINRA is proposing to delete this standard because it currently has little utility in the Department's review of an application.
•   Codification of Department Practice to Review Source of Funding

FINRA is proposing to codify the Department's existing practice to evaluate whether direct and indirect funding sources present any regulatory concerns or may be derived from a person subject to a statutory disqualification. The proposed standard would require an applicant to fully disclose and establish through documentation all direct and indirect sources of funding.60
C. Pending Qualifications for Associated Persons (Proposed Supplementary Material 1142.01)

FINRA is proposing to add new Supplementary Material .01 to proposed Rule 1142. The proposed supplementary material would permit the Department, at its discretion, to approve a CMA where one or more Associated Persons have applied for, but not acquired, all licenses and registrations required by federal and state authorities, and SROs, subject to specified conditions. The conditions would include that all Associated Persons must acquire their required licenses and registrations within 90 days of the date of approval of the CMA; the applicant promptly notifies the Department when such licenses and registrations are acquired; the applicant does not engage in business activities that require a license or registration that has not been acquired; and if all required licenses and registrations are not acquired within the 90-day timeframe, the applicant must cease business operations until all such licenses and registrations have been acquired. FINRA believes that this proposed supplementary material would allow the Department to exercise its discretion, based on the facts and circumstances of the applicant and its Associated Persons, to provide some leeway to applicants for continuing membership and their Associated Persons to obtain the requisite licenses and registrations after the CMA has been approved. This proposed supplementary material would not apply to an applicant for new membership.

Department Decision (Proposed FINRA Rule 1150 Series)

As noted above, FINRA is proposing to redesignate and amend, as the Rule 1150 Series, the other remaining paragraphs of NASD Rules 1014 concerning the decision-making aspects of an application, such as granting or denying of an application, the presumption to deny an application, the effectiveness of a restriction, the content, service and effectiveness of the Department's decision, and membership agreement. Moreover, NASD Rule 1017, which pertains to CMAs, includes similar concepts and language on the decision-making aspects of a CMA. FINRA believes that redesignating these provisions under a single set of rules would bring more clarity to the review process for both NMAs and CMAs.

A. Timing of Decision (Proposed FINRA Rule 1151)

NASD Rules 1014(c)(3) and 1017(h)(3) contain nearly identical language. Both provisions provide that if the Department fails to issue a written decision within 180 days after the filing of the application (new or continuing) or such later date as the Department and the applicant have agreed in writing, the applicant may file a written request with the FINRA Board requesting that the FINRA Board direct the Department to serve a decision. Within seven days after the filing of such a request, the FINRA Board shall direct the Department to serve its written decision immediately or to show good cause for an extension of time. However, under NASD Rule 1014(c)(3), if the Department shows good cause for an extension of time, the FINRA Board may extend the 180-day time limit for issuing a decision on an NMA by not more than 90 days and under NASD Rule 1017(h)(3), the FINRA Board may extend the time limit for issuing a decision on a CMA by not more than 30 days.

FINRA is proposing to revise NASD Rules 1014(c)(3) and 1017(h)(3) as proposed Rule 1151. The proposed rule would adjust the timeframes by directing the Department to issue its written decision on an application within 150 days of the Application Filed Date (or such other date as the Department and the applicant have agreed to in writing) and retain the current seven-day timeframe in which the FINRA Board must direct the Department to serve a decision, and if the Department shows good cause for an extension of time, the FINRA Board may extend the 150-day time limit by not more than 90 days.
B. Department Decision on Application (Proposed FINRA Rule 1152)
•   Department Decision on Application and Effectiveness of Restriction

NASD Rules 1014(b) and 1017(h) set forth the various decision outcomes on an application: the Department may grant the application in whole or in part subject to one or more restrictions, or deny the application. NASD Rule 1014(f) addresses the effectiveness of a restriction. FINRA is proposing to redesignate these provisions to paragraphs (a) and (b), respectively, under proposed Rule 1152. FINRA is also proposing to add a new provision under paragraph (a) to clarify that contingent upon the applicant's submission of an executed membership agreement, the Department's decision would become effective upon service and would remain in effect during an appeal under the proposed Rule 1160 Series.
•   Presumption to Deny Application

NASD Rules 1014(b)(1) and 1017(h)(1) provide that the existence of specified events enumerated in Standard 3 (NASD Rule 1014(a)(3)) will create a rebuttable presumption to deny the application.61 FINRA is proposing to redesignate and adopt these provisions, with no substantive changes, as proposed Rule 1152(c).62
C. Content of Decision (Proposed FINRA Rule 1153)

NASD Rules 1014(c)(2) and 1017(h)(2) set forth the content requirements of the Department's decision on an application. If the Department denies an application, NASD Rule 1014(c)(2) requires the Department to issue a decision that explains the reason for denial, referencing the applicable standard(s). Under NASD Rule 1014(c)(2), if the Department grants an application subject to restrictions, the Department's decision must explain in detail the reason for each restriction, referencing the applicable standard(s) upon which the restriction is based, and identify the specific financial, operational, supervisory, disciplinary, investor protection or other regulatory concern that the restriction is designed to address, and the manner in which the restriction is reasonably designed to address the concern. Similarly, NASD Rule 1017(h)(2) provides that for a CMA that is granted or denied in whole or in part, the Department's decision must explain its reasons, referencing the applicable standard in NASD Rule 1014. FINRA is proposing to consolidate and adopt these provisions as proposed Rule 1153, and include a provision to address the Department's obligation to provide written notification to the applicant when the application is granted.63
D. Submission of Executed Written Membership Agreement (Proposed FINRA Rule 1154)

Currently, NASD Rules 1012(b), 1014(d) and 1017(h)(4) pertain to the submission of a membership agreement for NMAs and CMAs. Under NASD Rule 1012(b), if an applicant fails to file an executed membership agreement within 25 days after the Department serves the membership agreement (or within such other period agreed to by the Department and the applicant), the NMA or CMA will lapse. Under NASD Rule 1014(d), if the Department grants an NMA (with or without a restriction), the Department's final approval on the NMA is contingent upon the applicant's submission of an executed membership agreement pursuant to which the applicant agrees to abide by any restriction specified in the Department's decision, and obtain the Department's approval of a change in ownership, control or business operations under NASD Rule 1017. This contingency, however, is not present for a CMA. If the Department approves a CMA in whole or in part, NASD Rule 1017(h)(4) provides that the Department may require the applicant to submit an executed membership agreement.

To bring more clarity and uniformity to the submission of membership agreements, FINRA is proposing to consolidate and adopt these provisions, with amendments, as proposed Rule 1154. The amendments would require an applicant to submit an executed written membership agreement for an approved (with or without restrictions) NMA or CMA, and would shorten the timeframe in which the applicant must do so from 25 days to 15 days. The shorter timeframe would align with the general practice of applicants submitting their executed written membership agreements well within 25 days. Moreover, the proposed rule would clarify that upon submission of the membership agreement, the applicant may begin operating subject to the terms of such agreement.
E. Service and Effectiveness of Decision; Final Action (Proposed FINRA Rule 1155)

Currently, NASD Rules 1014(e) and 1017(i), which pertain to NMAs and CMAs, respectively, address the service and effectiveness of a decision on an application in nearly identical language. In an effort to bring more efficiency to the review process for the application review process, FINRA is proposing to consolidate and adopt these two provisions, with non-substantive changes, as proposed Rule 1155.

Review of Department Decision (Proposed FINRA Rule 1160 Series)

Unlike disciplinary procedures, where FINRA determines when and if to initiate a proceeding, an applicant for new or continuing membership determines when to file an application, and when to initiate a proceeding with the NAC to review the Department's decision on an application.

In general, NASD Rule 1015 (Review by National Adjudicatory Council) permits an applicant to submit a request for review by the NAC of an adverse decision rendered on a NMA or CMA. NASD Rule 1016 (Discretionary Review by FINRA Board) also permits a Governor of the FINRA Board to call for discretionary review of a membership proceeding. Finally, a person aggrieved by final action of FINRA under the NASD Rule 1010 Series may apply to the SEC for appellate review. Collectively, these rules provide for the administration of MAP appeals. Among other things, these rules set forth specified time periods for holding hearings, satisfying document production requests, specify the evidence and testimony that may be considered, and identify information that the applicant must provide to FINRA.

As noted above, FINRA is proposing to incorporate within the proposed Rule 1160 Series, paragraphs (c) and (d) of NASD Rule 1012, which address ex parte communications and recusal or disqualification, respectively, and NASD Rules 1015, 1016 and 1019 (together, the MAP appeal rules). FINRA is also proposing to restructure these provisions by separating key milestones within NASD Rule 1015 into five distinct rules within the proposed Rule 1160 Series to present the MAP appeal process in a more sequential manner:

•   Appeal to the NAC;
•   Appointment and Powers of the Subcommittee; Recusal and Disqualification, or Withdrawal;
•   Transmission of Record, Exhibit and Witness Lists; Withheld Documents;
•   Hearing; and
•   Recommended Decision of the Subcommittee and Decision of the NAC.

In addition, FINRA is proposing to amend the provisions to reflect current practices that would align, in large part, with the Rule 9000 Series (Code of Procedure), and update nomenclature to reflect usage consistent with the Rule 9000 Series.64

A. Ex Parte Communications (Proposed FINRA Rule 1161)

Currently, NASD Rule 1012(c) pertains to ex parte communications with applicants or Interested FINRA Staff, and is derived from paragraphs (a) and (b) under Rule 9143 (Ex Parte Communications). FINRA is proposing to redesignate, with technical changes, NASD Rule 1012(c) to proposed Rule 1161. The technical changes would align with Rule 9143(a) and (b).
B. Appeal to the National Adjudicatory Council (Proposed FINRA Rule 1162)

FINRA is proposing to consolidate under proposed Rule 1162, the elements associated with initiating or ending the MAP appeal process by the aggrieved applicant by incorporating paragraphs (a) and (h) under Rule 1015, which pertain to the initiation, content of a request for review and abandonment of a request for review. In addition, FINRA is proposing to include within proposed Rule 1162 new provisions that would clarify the logistical aspects of initiating an appeal, such as directing where the applicant must file the notice of appeal and methods of service, the effect of an appeal and the applicant's ability to withdraw the notice of appeal.65

Currently, NASD Rule 1015(h) provides that if the applicant fails to specify the grounds for the appeal, appear at a hearing for which the applicant has notice, or file information or briefs as directed, the NAC or Subcommittee may dismiss the appeal as abandoned, and the Department decision shall become the final action of FINRA. FINRA is proposing to include other circumstances that would cause an appeal to be viewed as abandoned. Under the proposed provision, the other circumstances would include when an applicant files Form BDW, becomes expelled from FINRA membership or enters into liquidation proceedings under the Securities Investor Protection Act of 1970.
C. Appointment and Powers of Subcommittee; Recusal and Disqualification, or Withdrawal (Proposed FINRA Rule 1163)

Paragraph (d) of NASD Rule 1012 sets forth the procedures for the recusal or disqualification of a Governor or member of the NAC or Subcommittee. Paragraphs (d) and (e) of NASD Rule 1015 address the appointment and powers of the Subcommittee, respectively, and paragraph (g) pertains to the filing of additional information or briefs. FINRA is proposing to incorporate these provisions, with amendments, under proposed Rule 1163. The proposed amendments are described below.
•   Powers of Subcommittee

FINRA is proposing to add new provisions to clarify the powers of the Subcommittee. Under the proposed rule, the Subcommittee may extend or shorten any time limits set forth in the Rule 1160 Series, and do all things necessary and appropriate to regulate the course of a proceeding including, but not limited to, resolving any and all procedural and evidentiary matters. In an effort to enhance procedural efficiency, FINRA is also proposing to add a new provision that would expressly require the applicant and the Department to participate in a scheduling conference at which the parties to the appeal may agree to a hearing date and the date for the Subcommittee to present its recommended decision to the NAC. The proposed rule would also permit the Subcommittee to cancel a previously scheduled hearing for good cause shown due to abandonment or other similar unreasonable unavailability of the applicant.66
•   Recusal and Disqualification, or Withdrawal

As noted above, FINRA is proposing to redesignate NASD Rule 1012(d), which governs recusals or disqualifications, to proposed Rule 1163.67 In addition, FINRA is proposing to add new provisions that would set forth the procedures for an applicant or the Department to move for disqualification of a member of the NAC or Subcommittee. This motion would be based upon a reasonable, good faith belief that a conflict of interest or bias exists or circumstances otherwise exist where the fairness of the member of the NAC or a Subcommittee thereof might reasonably be questioned. The proposed rule would also set forth a process for such member to withdraw from appointment should the member have a conflict of interest of bias, or circumstances otherwise exist where the fairness of the member might reasonably be questioned.68
D. Transmission of Record, Exhibit and Witness Lists; Withheld Documents (Proposed FINRA Rule 1164)
•   Transmission of Record, Exhibit and Witness Lists

Paragraphs (b) and (f)(3) under NASD Rule 1015 govern the transmission of documents and the exchange of hearing exhibit and witness lists, respectively.

NASD Rule 1015(b) requires the Department to transmit the documents the Department considered in connection with the Department's decision and an index to the NAC and the applicant within 10 days after the filing of the request for review. FINRA is proposing to redesignate this provision, with amendments, to proposed Rule 1164. The proposed amendments would include lengthening the timeframe from 10 days to 21 days after the filing of the notice of appeal, which would align more closely with the timeframe under Rule 9321 (Transmission of Record), and specifying that such transmission is to be made electronically or in any other manner FINRA may prescribe.

NASD Rule 1015(f)(3) sets forth the time in which the parties on appeal must exchange their proposed hearing exhibits and witness lists.69 Currently, such lists must be exchanged not later than five days before the hearing. FINRA is proposing to lengthen the time in which the parties must exchange their exhibit and witness lists from five days to 21 days before the hearing. In practice, five days is insufficient time to review these materials. Extending the timeframe to 21 days would afford the parties to the appeal and the Subcommittee a more reasonable amount of time to review exhibits and witness lists as well as afford the parties to the appeal more time to make objections to the proposed hearing exhibits or witnesses.70 In addition, FINRA is proposing to add a new provision concerning expert witnesses. Under the proposed provision, at any time prior to the hearing, the Subcommittee or NAC, in the exercise of its discretion, may order the applicant and Department to disclose any expert witness and information related to the expert, including a statement of the expert's qualifications, a listing of other proceedings in which the expert has given expert testimony, a list of the expert's publications and copies of those publications.71
•   Withheld Documents

FINRA is proposing to add a new provision to address the circumstances under which the Department may withhold documents and submit a list of documents withheld. This proposed new provision is derived from paragraphs (b) and (c) under Rule 9251 (Inspection and Copying of Documents in Possession of Staff), which addresses withheld documents and the list of withheld documents, respectively. FINRA believes that it would be prudent to include this provision to explicitly permit the Department to withhold a document from production under specified criteria. Criteria would include, among others, a document that is privileged or constitutes attorney work product, would reveal examination or investigative information, or is prohibited from disclosure by federal law. In addition, the amendment would include a provision governing the Subcommittee or NAC's authority to require the Department to submit a withheld document list, or submit to the Subcommittee or the NAC any document withheld. Upon review, the Subcommittee or the NAC may order the Department to make the list or any document withheld available to the other parties for inspection and copying unless federal law prohibits disclosure of the document or its existence. A motion to require the Department to produce a list of documents withheld would be based upon some reason to believe that a document is being withheld in violation of the proposed rule.
E. Hearing (Proposed FINRA Rule 1165)

Paragraphs (f)(1), (f)(2), (f)(3) and (f)(4) under NASD Rule 1015 set forth the hearing process, including the timing and notice of the hearing, the ability of the applicant and Department to be represented by counsel at the hearing, evidence and the hearing transcript, respectively. FINRA is proposing to redesignate these subparagraphs, with amendments, as proposed Rule 1165. As described below, the proposed amendments pertain to the time in which a hearing must be held, and evidence, and introduces a new provision concerning testimony.
•   Lengthening Time for Hearing to be Held from 45 Days to 90 Days

Currently, NASD Rule 1015(f)(1) provides that a hearing must be held within 45 days after the filing of the request for review. In practice, this 45-day timeframe is difficult to meet, and in most cases, the hearing is held well after the 45-day timeframe. The proposed amendment to this provision would lengthen the time in which a hearing must be held from 45 days to 90 days. This expansion of time represents a more reasonable and practical approach to the appeal process for the parties involved. In addition, the proposed amendment would move away from paper-based methods of delivery of notice to an electronic process or in any other manner FINRA may prescribe.
•   Evidence

As noted above, NASD Rule 1015(f)(3) provides in part, that the formal rules of evidence do not apply to a hearing before the NAC or Subcommittee. FINRA is proposing to redesignate the reference to the applicability of the formal rules of evidence in NASD Rule 1015(f) (3) to proposed Rule 1165 and add a new provision that would expressly provide that the Subcommittee or NAC may exclude all evidence that is irrelevant, immaterial, unduly repetitious or prejudicial.72

In addition, FINRA is proposing to add a new provision that would expressly indicate that the Subcommittee or NAC's review would be limited to the documents and information the Department considered in connection with the Department's decision on the application, admitted exhibits submitted by the Department and the applicant in accordance with proposed Rule 1164, witness testimony, and any additional information or briefs the Department or applicant files as ordered by the Subcommittee or the NAC. The proposed new provision would also provide that other than the information specified above, any other evidence would be presumptively irrelevant, but that upon a showing of good cause by the parties to the appeal, the Subcommittee or NAC may admit other evidence presented by the parties to the appeal.
•   Testimony

Currently, the MAP appeal rules do not address testimony given at a hearing. In order to address this gap in the hearing process, FINRA is proposing to include a new provision that would expressly provide that an applicant and its representative, and any other person subject to FINRA's jurisdiction must testify under oath or affirmation.73
F. Recommended Decision of Subcommittee and Decision of National Adjudicatory Council (Proposed FINRA Rule 1166)

Paragraphs (i) and (j) under NASD Rule 1015 pertain to the Subcommittee's recommended decision and the NAC's decision after considering the Subcommittee's recommended decision and all matters presented on appeal. FINRA is proposing to redesignate these two provisions, with amendments, as proposed Rule 1166.74
•   Lengthening Time in Which Subcommittee Must Present Recommended Decision to the NAC from 60 days to 75 Days

Currently, NASD Rule 1015(i) provides that the Subcommittee's written recommended decision must be presented to the NAC within 60 days after the conclusion of the hearing. FINRA believes that 75 days reflects a more reasonable amount of time for the Subcommittee to make this presentation.
•   Adding "Remand" as a Disposition

Currently, NASD Rule 1015(j)(2) provides that the NAC's decision must include, among others items, a statement on whether the Department's decision is affirmed, modified or reversed, and a rationale underlying the disposition, referencing the application standards under NASD Rule 1014(a). The proposed change would clarify that the NAC's decision may remand the Department's decision, while giving a rationale for the remand. Adding this disposition to the rule would align with the NAC's ability to remand the membership proceeding currently set forth under NASD Rule 1015(j)(1), which describes the NAC's decision, and NASD Rule 1015(j)(3), which describes the issuance of the NAC's decision after the expiration of the call for review period.75
G. Discretionary Review by FINRA Board (Proposed FINRA Rule 1167)

FINRA is proposing to adopt NASD Rule 1016, with no substantive changes, as proposed Rule 1167.
H. Application to SEC for Review (Proposed FINRA Rule 1168)

FINRA is proposing to adopt NASD Rule 1019, with no substantive changes, as proposed Rule 1168.

Other Proposed Amendments

A. Amendment to Section 4(i) of Schedule A to the FINRA By-Laws

Section 4(i)(3) of Schedule A to the FINRA By-Laws specifies the changes that may qualify for a waiver of the fee associated with filing a CMA. As described above, FINRA is proposing to recast the changes specified under Section 4(i)(3)(A)(i) and (ii) to proposed Rule 1131.01 (Permissible Events for Form CMA Waiver) as events that may qualify for a waiver from the CMA filing requirement.

Section 4(i)(3) also includes other examples of changes in ownership, control or business operations that may qualify a CMA for a fee waiver. Under Section 4(i)(3)(A)(iii) a CMA may qualify for a fee waiver where the proposed change does not make any day-to-day changes in the applicant's business activities, management, supervision, assets or liabilities, and the applicant is only proposing a change in the "percentage of ownership interest or partnership capital of an applicant's existing owners or partners resulting in an owner or partner owning or controlling 25 percent or more of the ownership interest or partnership and that owner or partner has no disclosure or disciplinary issues in the preceding five years[.]"

In addition, Section 4(i)(3)(B) provides that a CMA may qualify for a fee waiver where the proposed change is filed by an applicant in connection with a direct or indirect acquisition or transfer of 25 percent or more in the aggregate of the applicant's assets or any asset, business or line of operation that generates revenues composing 25 percent or more in the aggregate of the applicant's earnings measured on a rolling 36-month basis where the applicant also is ceasing operations as a broker-dealer (including filing a Form BDW with the SEC) and there are either:
(i) no pending or unpaid settled customer related claims (including, but not limited to, pending or unpaid settled arbitration or litigation actions) against the applicant or any of its Associated Persons; or
(ii) pending or unpaid settled customer related claims (including, but not limited to, pending or unpaid settled arbitration or litigation actions) against the applicant or its Associated Persons, but the applicant demonstrates in the CMA its ability to satisfy in full any unpaid customer related claim (e.g., sufficient capital or escrow funds, proof of adequate insurance for customer related claims).
In addition to deleting Section 4(i)(3)(A)(i) and (ii) as they would be recast as proposed Rule 1131.01, FINRA is proposing to delete the remaining provisions under Section 4(i)(3), specifically Section 4(i)(3)(A)(iii) and Section 4(i)(3)(B), in their entirety. FINRA has found that in practice, such circumstances do not qualify a CMA for a fee waiver because of the Department's review of such situations is substantial.
B. Deletion of Incorporated NYSE Rules and Related Interpretations

FINRA is proposing to delete the following Incorporated NYSE rules and related rule interpretations as they are either redundant or obsolete:
•   Incorporated NYSE Rule 311 (Formation and Approval of Member Organizations);
•   Incorporated NYSE Rule Interpretation 311(f) (Principal Place of Business);
•   Incorporated NYSE Rule Interpretation 311(g)/02 (Divisions of Member Organizations-Names);
•   Incorporated NYSE Rule 312 (Changes Within Member Organizations);
•   Incorporated NYSE Rule 313 (Submission of Partnership Articles-Submission of Corporate Documents); and
•   Incorporated NYSE Rule 321 (Formation or Acquisition of Subsidiaries).

Economic Impact Assessment

A. Regulatory Need

FINRA's retrospective review of the MAP rules, coupled with both internal and external stakeholder input, indicate that the current rules and their attendant processes may benefit from changes that would enhance their efficiency, and better achieve investor protection.
B. Economic Baseline

The economic baseline for this proposal is the current set of MAP rules, and related guidance and Department practices. To obtain the Department's approval (in whole or part) of an application, an applicant must not only ensure that its application includes the necessary documents and information for the Department to undertake the review, but the applicant must also navigate a series of steps for the review process to proceed in a timely manner under either the regular timeframes described in the current rules or expedited (i.e., Fast Track) timeframes, or risk the Department's rejection or lapse of the application. This proposal would affect all prospective (or new) member firms and existing (or continuing) member firms (and their Associated Persons).
1. Number of Submissions of NMAs, CMAs and Materiality Consultations by Year

As displayed in Figure 1 below, in 2017, the Department received 125 NMAs, 340 CMAs and 407 materiality consultations (known as "MatCons"). Over the past 10 years, from 2008 through 2017, the number of NMAs and CMAs the Department has received has decreased, but the number of MatCons the Department has received has increased. The decrease in the number of CMAs could be due to the increased use of MatCons.



Figure 1: Number of NMA, CMA and MatCon submissions received, on an annual basis, for the period 2008 through 2017.

In general, NMAs are submitted by small firms76 or firms without any registered representatives. CMAs are submitted by firms of varying sizes. The number of CMAs submitted by large firms and mid-size firms has remained relatively flat over the past 10 years, and the number of CMAs submitted by small firms has declined. The number of MatCons submitted by large firms has remained relatively flat, number of submissions by mid-size firms has shown a small increase and number of submissions by small firms has shown a substantial increase over the same period. Based on these trends, it is likely that most of the costs and benefits associated with this proposal will accrue to small firms, which account for the majority of all submissions.
2. Department Processing Times

As displayed in Figure 2, the average processing time per submission for all three categories has decreased since 2013 following the introduction of the Fast Track review process. As described further below, the MAP Triage Program and the Fast Track review process have dramatically reduced processing times for all applications and MatCons. During the retrospective review, stakeholders had provided positive feedback on the Fast Track review process.



Figure 2: Average processing time of NMA, CMA and MatCon submissions, on an annual basis, for the period 2008 through 2017.
3. Costs of Compliance with Current MAP Rules and Processes

As part of the retrospective review, a survey sent to all FINRA members provided information about the economic impacts of complying with the current MAP rules and processes.77 The costs of compliance included those associated with business interruptions, employing third-party resources (such as outside external professional assistance), internal expenses (such as staff hours, technology and other resources) and application fees. Most notably, the retrospective review revealed that for an NMA that underwent a full review, on average, the costs associated with employing third-party resources and internal costs each represented approximately 35 percent of the total compliance costs. About 20 percent of the costs were attributable to application fees and the remainder to indirect costs, such as business interruption. For an NMA that underwent an expedited review and a CMA that either underwent an expedited review or was subject to regular timeframes as described under the current rules, the greatest source of cost was associated with internal expenses, representing approximately 40 percent of the total compliance costs. For all applications, on average, the application fees accounted for approximately 20 to 33 percent of the total compliance costs.
C. Economic Impacts

The proposed amendments to the MAP rules are designed to make them more concise through restructuring and streamlining, codifying existing guidance and Department practices, and updating terms consistent with other FINRA By-Laws and rules. FINRA believes that these proposed amendments will have a positive impact on the membership application and MatCon processes that will ease burdens on firms without materially diminishing investor protections.
1. Restructuring and Streamlining the MAP Rules

The proposed restructuring and streamlining amendments to the MAP rules would lead to a more concise and efficient MAP process, updated to reflect technological advancements and changes in the industry, and will ultimately benefit the applicant firms, with a potential cost reduction to the investor community. An updated, streamlined set of the MAP rules and attendant processes would ultimately reduce costs for firms, including those associated with third-party resources. Lower direct costs to the application process that accrue to firms may benefit investors to the extent that firms may pass those cost-savings to them. While FINRA does not anticipate any increased risks to investors, periodic reviews of the new processes would help ensure that the changes are working as anticipated.
2. Proposed Codification of Existing Department Practices

Under the proposal, several existing Department practices would be incorporated into the MAP rules, which would positively impact the overall review period for applications and MatCons. Most notably, the proposal would reference the Department's discretion to determine whether an application may be eligible for expedited review and incorporate the MatCon process into the MAP rules.
•   Initial Assessment and Expedited Review

FINRA is proposing to codify existing Department practices that would result in reducing the overall application review period from 180 days to 150 days. This 30-day reduction reflects the success of the MAP Triage Program. Under this Program, the Department conducts an initial assessment of the risk, complexity, regulatory significance, completeness, scale and scope of all applications and other MAP-related matters to determine whether the application or matter is eligible for expedited review, subject to shorter timeframes, or full review, subject to standard timeframes set forth under the MAP rules. During the retrospective review, stakeholders had viewed the expedited review process favorably, indicating that it effectively achieves its intended goal of identifying low-risk and low-complexity matters, and reducing processing times.

Since the program's launch in 2013, the overall processing times for applications and MatCons have decreased. As the program has matured, the number of applications and MatCons eligible for expedited review have significantly increased. As Figure 3 indicates below, in 2013, the number of NMAs, CMAs and MatCons that underwent expedited review was 5, 71 and 182, respectively. In 2017, the number of NMAs, CMAs and MatCons that underwent expedited review increased to 35, 189 and 358, respectively, representing 28 percent of the NMAs, 55 percent of the CMAs and 87 percent of MatCons submitted for Department review. The benefit of the expedited or Fast Track option is a better use of limited staff resources and more efficient handling of ex ante lower risk submissions. The program's impact on reducing the Department's overall review process is clear. As shown in Figure 2 above, in 2017, the overall processing timeframes for NMAs, CMAs and MatCons was 120 days, 63 days and 12 days, respectively.



Figure 3: Number of NMA, CMA and MatCon submissions eligible for Fast Track review, on an annual basis, for the period of 2008 through 2017.

After the Department considers various factors as described in proposed Rule 1112.01, an application may be eligible to undergo Fast Track review. As an option that is provided to the applicant, FINRA believes that a firm is likely to agree to the expedited processing if the incurred cost savings are deemed to be greater than the increased costs (e.g., faster turnaround times for document requests) resulting from the expedited nature of the process. However, some firms may not want to expedite the application, as they will deem that such a process will not provide a net benefit and thus opt to go through the standard processing track. Shortening the timelines could potentially benefit the investor community by enabling the firms to provide services to their customers more quickly. As with the other efficiency improving process changes, risks to investors could arise from the expedited nature of the process, potentially leading to applications being approved that should not have been.
•   MatCon Process

As described above, with a MatCon, a member has the option of seeking guidance from the Department on whether a proposed change in ownership, control or business operations would require a CMA. The MatCon process is voluntary and no fee is assessed, and guidance on this process appears on FINRA's website.78 Because this process has existed for several years, FINRA expects that the economic impact that members may sustain as a result of codifying this process to be minimal. Currently, there is no fee assessed for this process, and this would remain so under the proposal. While the proposal would retain the voluntary nature of this process, it would mandate consultation in two instances where there is a request to waive the submission of a CMA under specified circumstances and when an applicant seeks to engage in a specified activity for the first time.79 Even with these two instances mandating a member to submit to the MatCon process, the economic impact of codifying this practice would be minimal as members would not be assessed a fee for this option.
3. Proposed Amendments to the MAP Rules Affecting the NMA and CMA Processes
•   Definition of New Term, "Control"

FINRA is proposing to define, for the first time, "control" to apply only to the MAP rules.80 FINRA believes that the proposed definition would provide clarity to the control standards under the CMA process set forth under the proposed Rule 1130 Series described above. As the concept of control is entwined in several provisions of the MAP rules, the proposed definition would benefit firms in terms of the constraints and conditions relating to internal organizational structure. This would provide more transparency on the roles and ownership structures of the firms, which would provide additional monitoring capabilities and ultimately decrease potential risks to the investor community. It is possible that firms could strategically allocate ownership percentages to keep certain individuals from meeting the definition, possibly leading to increased risks to customers. However, to mitigate this potential risk, the Department will maintain discretion in defining an individual as a control person. Moreover, the Department will maintain its discretion in aggregating ownership interests when considering the designation of control and control persons, even in cases where Associated Persons meet the de minimis definition per interest.
•   Expansion of Definition of "Sales Practice Event"

Consistent with the prior proposals presented in Notices 10-01 and 13-29, FINRA is proposing to amend the existing definition of "sales practice event" to include an applicant or Associated Person who is subject to a "statutory disqualification" as defined in SEA Section 3(a)(39). This proposed change would be in conjuncture with FINRA's separate initiative on high-risk brokers. FINRA believes that while this potentially imposes a burden on the applicant, it would enhance investor protections.
•   Application Rejection and Application Lapse

Currently, the MAP rules specify the circumstances that will either preclude an applicant from proceeding with the application at the outset (via rejection) or cause the Department to cease its review of the application (via lapse).

With respect to the rejection of an application, FINRA is proposing to eliminate the concept of an application that is "not substantially complete" by shifting the focus to whether an application includes the documents or information necessary for the Department to commence a "meaningful review" and deem the application "filed" for purposes of rendering a decision. As described above, under the proposed rule, the Department would have 15 days in which to make this assessment and should the Department determine that the application is deficient, then the applicant would have five business days to cure the deficiency. The applicant's failure to do so would result in a rejection of the application. Should the applicant wish to submit another application, it would be required to start the process anew thereby incurring additional time and expense.

With respect to a lapsed application, FINRA is proposing to expand the Department's authority to cease reviewing (or lapse) an application where the applicant makes substantial changes to the application well into the review process.81 The proposed amendment would give the Department the authority to stop reviewing an application where the applicant makes substantial changes to it. The proposed expansion of the Department's authority to lapse an application is intended to discourage applicants from trying to manipulate the Department's decision-making process towards approval by presenting insufficient or incomplete information with the application either at the outset of the review process or while it is well underway. Under the proposed amendment, if the Department views the circumstances as potentially causing the application to lapse, then the applicant would have five business days to remedy the situation. The applicant's failure to do so would result in a lapse of the application and should the applicant wish to submit another application, it would be required to start the process anew thereby incurring additional time and expense.

The aim of these proposed amendments is to provide clarity on the circumstances that may impede the application review process and the consequences of the specified circumstances. While these amendments may result in reduced flexibility and potentially higher initial costs for certain applicants, FINRA believes that overall, these review process safeguards would result in a more efficient and timely process that would ultimately benefit both applicants and the Department in terms of resource allocation. These proposed amendments may also encourage applicants to provide more complete information at the outset of the application review process, which would foster a more efficient MAP process.
•   Standards for Approval of an Application

The MAP rules currently set forth 14 standards for admission. FINRA is proposing amendments to the standards that would reduce the total number of standards to 10 by deleting those that are obsolete and redundant, and consolidating closely related standards. The proposed amendments would likely have some economic impact on applicants without adversely affecting investor protection. The consolidation and elimination of standards may reduce the amount of information collected by minimizing the potential for an applicant having to provide duplicative information without reducing the relevant information the Department would need to review the application against the standards. The proposal also provides the applicant an option to identify any standard that it determines is not applicable to the application, along with sufficient justification for this determination. In such situations, if approved, the applicant would benefit from the reduction in information and documentation required for application. In addition, FINRA is proposing to add a new standard that would codify the Department's existing practice to evaluate whether direct and indirect funding sources present any regulatory concerns such as funding that may be derived from a person subject to a statutory disqualification. Given that FINRA has already been requesting this information from submitting firms, this addition should have minimal impact on firms.
•   Amendments to the Membership Interview Procedures

The proposed amendments will provide more flexibility in the number, timing and location of interviews that are required throughout the application process. The proposed amendments will further eliminate the tie between the conclusion of the interview and when the decision is due. FINRA believes that this will benefit the applicants in terms of potentially reducing the costs associated with the interview process, without incurring any risks to the investor community.
4. Proposed Amendments to the MAP Rules Affecting the CMA Process
•   Waiver of the CMA Filing Requirement

FINRA is proposing to add a new provision that would describe the circumstances that may qualify for a waiver of the CMA filing requirement (e.g., Form BDW, no material change in the operations of the member firm). The proposed provision would provide examples of scenarios that may qualify for a waiver from filing a CMA and provide clarity on the waiver process, providing firms more clarity regarding the CMA submission process and when a waiver could be appropriately requested. Moreover, the proposed amendments could lead to greater future utilization of the CMA waiver request process, which would reduce the costs and resources firms incur throughout the CMA process without material diminution of investor protections.
•   Pending Qualifications for Associated Persons

FINRA is proposing to add a new provision to the MAP rules that would permit the Department, at its discretion, to approve a CMA where one or more Associated Persons have applied for, but not acquired, all licenses and registrations required by federal and state authorities, and SROs, subject to specified conditions.82 This proposed provision would lend members some flexibility in obtaining the requisite licenses and registrations within 90 days of CMA approval.83 However, this proposed new provision could increase risks to investors of utilizing the services of unlicensed or unregistered Associated Persons. Once the CMA is approved, there is risk that the unqualified Associated Persons could act in the capacity of a registered person during the pending period in violation of the proposed provision or that the Associated Persons fail to acquire the necessary licenses and registrations within the 90-day period.
D. Alternatives Considered

FINRA considered various suggestions in developing the proposal. The proposal reflects the changes that FINRA believes at this time to be the most appropriate for the reasons discussed herein.
•   Definition of "Affiliate"

In Notice 13-29, FINRA had proposed defining, for the first time, the term "Affiliate" to mean: (1) A person that directly or indirectly controls an applicant (excluding natural persons that control an applicant solely in his or her role as a director, general partner, limited liability company, managing member or officer exercising executive responsibility (or having similar status or functions); or (2) An entity that is controlled by, or is under common control with, an applicant.84 FINRA staff has determined to refrain from defining "Affiliate" in this proposal vis-á-vis the proposed definition of "control" and the proposed amendment to the definition of "Associated Person" to exclude a person with a de minimis ownership interest that does not otherwise control the applicant.
•   Standards for Approval of an Application

Standard 3 requires that an applicant and its Associated Persons are capable of complying with federal securities laws, the rules and regulations thereunder, and FINRA rules, including observing high standards of commercial honor and just and equitable principles of trade. This standard specifies various factors that the Department must consider to determine whether the applicant and its Associated Persons meet this standard.

FINRA considered additional factors for the Department to consider including whether the applicant or a percentage of its Associated Persons had a history of sales practice events (as that term is defined under proposed Rule 1111). FINRA staff considered various percentage thresholds for such factor and their respective impact on firms. FINRA staff has determined to refrain from specifying additional factors in Standard 3 pending further development of other separate initiatives to strengthen controls on brokers with a history of significant past misconduct and to ensure greater accountability for firms that choose to employ high-risk brokers, and to incentivize payment of arbitration awards.85

Request for Comment

FINRA requests comment on all aspects of the proposal. FINRA requests that commenters provide empirical data or other factual support for their comments wherever possible. FINRA specifically requests comment concerning the following issues.

1. What are the alternative approaches, other than the proposal, that FINRA should consider?
2. The proposal seeks to modify the NMA and CMA processes by, among other things, amending definitions and standards for granting or denying an application. Is there any potential uncertainty regarding the proposed definitions?
3. Do the proposed shortened timelines for different MAP processes, including the Fast Track option, increase the risk that an application is approved when it would not have been under the normal review? If yes, do you believe the higher risk unduly reduces investor protections? If so, are there ways to mitigate these risks?
4. The proposal allows for the conditional approval of a CMA where one or more Associated Persons have applied for, but not acquired, all required licenses and registrations. Does this conditional approval increase the risk of customer harm either by Associated Persons acting in a registered capacity during the window or by Associated Persons failing to acquire the licenses and registrations within the window? If so, do customers have adequate ability to seek redress? Are there ways to mitigate these risks?
5. What are the costs and benefits of the proposed provision to provide the Department discretion in lapsing applications, in addition to rejecting applications? What are the investor protection implications?
6. Are there other costs and benefits associated with the proposal that are not currently captured in the Economic Impact Assessment? If so, what are they? How likely are they to occur? How large or important are these economic impacts? Are there alternative approaches that would mitigate the costs or increase the benefits?

1. Persons submitting comments are cautioned that FINRA does not redact or edit personal identifying information, such as names or email addresses, from comment submissions. Persons should submit only information that they wish to make publicly available. See Notice to Members 03-73 (November 2003) (Online Availability of Comments) for more information.

2. See SEA Section 19 and rules thereunder. After a proposed rule change is filed with the SEC, the proposed rule change generally is published for public comment in the Federal Register. Certain limited types of proposed rule changes take effect upon filing with the SEC. See SEA Section 19(b)(3) and SEA Rule 19b-4.

3. An applicant is required to submit its application for new or continuing membership using Form NMA or Form CMA, respectively. FINRA expects to make conforming amendments to the standardized forms.

4. FINRA has previously sought comment on prior proposals to amend the MAP rules. See Regulatory Notices 10-01 (January 2010) (Notice 10-01) and 13-29 (September 2013) (Notice 13-29). Where applicable, the proposed amendments presented therein that have been carried over into this proposal are noted.

5. The term "stakeholder" is used to describe those entities, organizations and persons who may be impacted by or otherwise have an interest in the MAP rules and this proposal.

6. In 2013, the Department launched the MAP Triage Program to speed approval of non-complex applications. Under this program, the Department evaluates applications to determine whether the matter is eligible for expedited (or Fast Track) review, subject to shorter timeframes, or full review, subject to standard timeframes set forth under the MAP rules. During the retrospective review, stakeholders had provided positive feedback on the Fast Track review process, indicating that it effectively reduced processing times for low risk matters. In fact, the Triage Program and the Fast Track process have dramatically reduced processing times for all applications. In 2012, before the existence of the Triage Program and the Fast Track review process, the average processing time for an NMA was 213 days; in 2017, 117 days. For a CMA, the average processingtime in 2012 was 134 days; in 2017, 61 days. In 2017, the average processing time for a CMA that underwent Fast Track review was 34 days. For a materiality consultation, the average processingtime in 2012 was 67 days and in 2017, 11 days.

7. This definition of "Associated Person" only applies to the MAP rules. For other FINRA rules, the FINRA By-Laws definition of "associated person of a member" applies. FINRA By-Laws Article 1(rr) defines a "person associated with a member" or "associated person of a member" as: "(1) a natural person who is registered or has applied for registration under the Rules of the Corporation; (2) a sole proprietor, partner, officer, director, or branch manager of a member, or other natural person occupying a similar status or performing similar functions, or a natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by a member, whether or not any such person is registered or exempt from registration with the Corporation under these By-Laws or the Rules of the Corporation; and (3) for purposes of Rule 8210, any other person listed in Schedule A of Form BD of a member[.]"

8. These proposed amendments to the definition remain substantively unchanged from the language presented in Notice 13-29 for public comment.

9. This term was first presented in Notice 10-01. In response to commenters' concerns, the term was revised and presented in Notice 13-29 for comment. The proposed definition presented herein differs from the definition proposed in Notice 13-29.

10. See FINRA By-Laws, Art. I(h): "'controlling' shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting stock, by contract or otherwise. A person who is the owner of 20% or more of the outstanding voting stock of any corporation, partnership, unincorporated association or other entity shall be presumed to have control of such entity, in the absence of proof by a preponderance of the evidence to the contrary. Notwithstanding the foregoing, a presumption of control shall not apply where such person holds voting stock, in good faith, as an agent, bank, broker, nominee, custodian or trustee for one or more owners who do not individually or as a group have control of such entity[.]"

11. Contained within Form BD (Uniform Application For Broker-Dealer Registration) is an "Explanation of Terms," which defines "control" as follows:

CONTROL—The power, directly or indirectly, to direct the management or policies of a company, whether through ownership of securities, by contract, or otherwise. Any person that (i) is a director, general partner or officer exercising executive responsibility (or having similar status or functions); (ii) directly or indirectly has the right to vote 25% or more of a class of a voting security or has the power to sell or direct the sale of 25% or more of a class of voting securities; or (iii) in the case of a partnership, has the right to receive upon dissolution, or has contributed, 25% or more of the capital, is presumed to control that company. (This definition is used solely for the purpose of Form BD.)

FINRA notes that the proposed factors establishing the presumption of control are well-established as they appear, in varying degrees of similarity, in other definitions of "control." See, e.g., Form U4's "Explanation of Terms" and the New York Stock Exchange (NYSE) and NYSE American membership application for FINRA member firms.

12. See also the "Explanation of Terms" for Form BD and Form BR (Uniform Branch Office Registration Form), each defining a "person" to mean "[a]n individual, partnership, corporation, trust, or other organization."

13. This proposed amendment remains unchanged from the language presented in Notices 10-01 and 13-29 for public comment.

14. 15 U.S.C. 78c(a)(39).

15. This update would align with Article IV, Section 1(a) to the FINRA By-Laws which provides, in part, that an "Application for membership in [FINRA], properly signed by the applicant, shall be made to [FINRA] via electronic process or such other process as [FINRA] may prescribe[.]"

16. See Securities Exchange Act Release No. 43157 (August 15, 2000), 65 FR 51377 (August 23, 2000) (Order Approving File No. SR-NASD-99-67) (stating in part, "if an application is so deficient upon submission that the Department staff cannot begin processing (e.g., it is missing major components of the application, such as written supervisory procedures or a business plan), the Department staff may reject the application.").

17. The concept of "meaningful review" is not new. See Notice to Members 00-73 (October 2000) (providing, "if an application is so deficient upon initial submission that the staff cannot begin conducting a meaningful review, then the staff may reject the application and deem it to not have been filed."). See also What to Expect After you Apply as a New Broker-Dealer Firm (stating, "[a]n application is considered substantially complete if it provides sufficient information allowing the staff to conduct a meaningful review.").

18. See NASD Rules 1014(c)(3) and 1017(h)(3).

19. For example, an applicant may add a business line or change key personnel as the review period is well underway or approaching completion.

20. See The Membership Interview.

21. FINRA is proposing to delete subparagraphs (b)(5), (b)(6) and (b)(7) under NASD Rule 1013, which address topics pertaining to financial condition, the standards for admissions and other information, as these provisions would be addressed in the proposed supplementary material.

22. Rule 1210.01, which becomes effective on October 1, 2018, is the successor to NASD Rule 1021(e). See Securities Exchange Act Release No. 81098 (July 7, 2017), 82 FR 32419 (July 13, 2017) (Order Approving File No. SR-FINRA-2017-007). NASD Rule 1021(e)(1) currently requires that a member (new or existing), except a sole proprietorship, have a minimum of two registered principals with respect to each aspect of the member's investment banking and securities business pursuant to the applicable provisions of NASD Rule 1022. NASD Rule 1021(e)(2) provides that, pursuant to the Rule 9600 Series, FINRA may waive the two-principal requirement in situations that indicate conclusively that only one person associated with an applicant for membership should be required to register as a principal. NASD Rule 1021(e) (3) provides that an applicant for membership, if the nature of its business so requires, must also have a Financial and Operations Principal (or an Introducing Broker-Dealer Financial and Operations Principal) and a Registered Options Principal.

23. See Standard 2 in Forms NMA and CMA.

24. See supra note 22. The Rule 9600 Series (Procedures for Exemptions) sets forth the procedures under which a member and its associated person(s) may seek exemptive relief from the rules enumerated in Rule 9610(a). Among those rules is NASD Rule 1021, which governs qualification examinations and waiver of requirements. Under Rule 9610, a member seeking relief from NASD Rule 1021 (or Rule 1210, effective on October 1, 2018) outside of the new or continuing membership process, is required to file a written application with the appropriate department or staff of FINRA. Such application must contain the information specified under Rule 9610(b).

25. Forms NMA and CMA direct the applicant to provide a detailed explanation that demonstrates the reason(s)for the exemption and a contingency plan for situations where the sole General Securities Principal becomes unavailable to carry out his or her responsibilities. The Forms include a place for an applicant to indicate whether it is seeking a waiver or seeking to maintain a waiver already in place of the two-principal requirement under NASD Rule 1021, the predecessor to Rule 1210.01.

26. The proposed rule would retain the language specifying that NYSE and NYSE American member organizations would be subject to the FINRA By-Laws and Schedules to the By-Laws, including Schedule A, the consolidated FINRA rules and the NYSE rules incorporated by FINRA, provided that their respective securities businesses are limited to floor-based activities, or routing away to other markets orders that were ancillary to their core NYSE or NYSE American floor business under NYSE Rule 70.40 or NYSE American Equities Rule 70.40, as applicable.

27. This proposed amendment remains substantively unchanged from the language presented in Notice 13-29 for public comment.

28. NASD Rule 1013(a)(1) sets forth a detailed list of items that must be submitted with an NMA. These items include: Form NMA; Form BD; a fingerprint card; a new member assessment report; a business plan; list of Associated Persons; documentation of disciplinary history and certain regulatory, civil, and criminal actions, arbitrations, and customer complaints for the applicant and its Associated Persons; a description of remedial action or heightened supervision imposed on an Associated Person by a state or federal authority or SRO; a written acknowledgment that heightened supervisory procedures may be required for Associated Persons whose records reflect disciplinary actions or sales practice events; a copy of proposed or final contracts with banks, clearing entities, and service bureaus; a description of the nature and source of the applicant's capital; a description of financial controls; a description of the applicant's supervisory system; a description of the number, experience, and qualifications of supervisory personnel; a description of the proposed recordkeeping system; a copy of the applicant's written training plan; and FINRA entitlement forms. Many of these items are duplicated, in varying degrees, in the standards themselves or are referenced in the NMA (or Form NMA) itself.

29. The actions specified in proposed Rule 1123(a) are also set forth in guidance posted on FINRA. org. As set forth on the website, these actions are subject to review and processing by FINRA's Registration and Disclosure Department. See How to Apply as a New Broker-Dealer Firm.

30. The proposal to delete the specific items to accompany an application is not without precedent. During the effort to adopt Form CMA, the SEC approved amendments to NASD Rule 1017(b) to delete references to the specific items to accompany a CMA. See Securities Exchange Act Release No. 67082 (May 31, 2012), 77 FR 33539 (June 6, 2012) (Notice of Filing of Amendment No. 1 and Order Approving File No. SR-FINRA-2012-018) (deleting references to a business plan, pro forma financials, organization chart and written supervisory procedures as they would be included as part of Form CMA).

31. See, e.g., Rule 1017(b)(2)(A) (providing that an application for approval of a change in ownership or control must include "the names of the new owners, their percentage of ownership, and the sources of their funding for the purchase and recapitalization of the member.").

32. This proposed amendment remains substantively unchanged from the language presented in Notices 10-01 and 13-29 for public comment.

33. As a result of this integration, NASD Rule 1017(b) would be deleted in its entirety. FINRA intends to amend Form CMA to conform to the requirements specified under this provision.

34. See paragraphs (a)(1) through (a)(5), paragraphs (b)(2)(B) and (C), and paragraph (k) of NASD Rule 1017.

35. FINRA is also proposing to adjust the unit of measure used to review an acquisition, and divestiture or transfer from a rolling 36-month basis to a three-year period immediate preceding the event.

36. This proposed amendment remains substantively unchanged from the language presented in Notices 10-01 and 13-29 for public comment.

37. This proposed provision remains substantively unchanged from the language presented in Notice 13-29 for public comment.

38. In Notice 10-01, FINRA had proposed supplementing the term, "material change in business operations," to include "settling or clearing transactions for the Applicant's own business for the first time, settling or clearing transactions for other broker-dealers forthe first time, carrying accounts of customers for the first time, or any change in exemptive status claimed under paragraph (k) of SEA Rule 15c3-3." In Notice 13-29, FINRA had proposed supplementing this term to also include variable life settlement sales to retail customers and retail foreign currency exchange activities consistent with existing guidance. See Regulatory Notice 09-42 (July 2009) (stating, "firms should be aware that expansion into business activities related to variable life settlements constitutes a material change in business operations under NASD Rule 1011(k). Therefore, before engaging in variable life settlements, a firm must first file a [CMA] and receive approval of this change in business operations under NASD Rule 1017."); and Regulatory Notice 08-66 (November 2008) (stating, "firms should also be aware that expansion into retail forex constitutes a material change in business operations under NASD Rule [1011(k)]. Therefore, before engaging in over-the-counter forex business, a firm must first file for and receive approval of change in business operations under NASD Rule 1017."). However, FINRA believes that these activities, among others, would be better addressed in the materiality consultation process described below.

39. FINRA is proposing to delete NASD Rule 3140 in its entirety.

40. The removal or modification of a membership agreement restriction is also addressed in other paragraphs under NASD Rule 1017. FINRA is proposing to integrate these provisions under proposed Rule 1131(b). See NASD Rule 1017(b) (2)(B) (indicating that an application requesting the removal or modification of a membership agreement restriction must present facts showing that the circumstances that gave rise to the restriction have changed and state with specificity why the restriction should be modified or removed in light of the standards set forth in NASD Rule 1014 and the articulated rationale for the imposition of the restriction); NASD Rule 1017(c)(2) (providing, in part, that "[a] member may file an application to remove or modify a membership agreement restriction at any time."); and NASD Rule 1017(k) (permitting the Department to modify or remove a restriction on its own initiative).

41. The concept of waiving the CMA filing requirement was presented in Notice 10-01 for public comment. In response to comments, FINRA made some adjustments to the original proposal, which were presented in Notice 13-29. Among the changes was to add another circumstance that may qualify for a waiver of the CMA filing requirement. Upon the member's written request, the Department would consider waiving the CMA filing requirement for a member that was proposing a change in the "percentage of ownership interest, [limited liability company] membership interest, or partnership capital of an Applicant's existing owners or partners resulting in an existing owner or partner owning or controlling 25 percent or more of the ownership interest or partnership and that owner or partner [had] no disclosure or disciplinary issues in the preceding five years." After further consideration, FINRA has found that in practice, this circumstance would require a CMA because such change has raised issues concerning, for example, registration and qualification of that existing owner or partner now owning or controlling 25 percent or more of the ownership interest.

42. As described below, FINRA is proposing to delete Sections 4(i)(3)(A)(i) and (ii) of Schedule A to the FINRA By-Laws.

43. See Overview of Materiality Consultation Process. See also Notice to Members 00-73 (October 2000) (stating, in the context of determining whether, based upon all the facts and circumstances, a change that falls outside of the safe harbor limits is material, "[a] member may, but is not required to, contact the District Office to obtain guidance on this issue.") and NASD IM-1011 (stating, "[f]or any expansion beyond these [safe harbor] limits, a member should contact its district office prior to implementing the change to determine whether the proposed expansion requires an application under Rule 1017.").

44. In separate proposals, FINRA is proposing to mandate materiality consultations under additional circumstances. See Regulatory Notice 18-06 (February 8, 2018) (requesting comment on proposed amendments to the MAP rules to incentivize payment of arbitration awards); and Regulatory Notice 18-16 (April 30, 2018) (requesting comment on proposed rule amendments relating to high-risk brokers and the firms that employ them).

45. See supra note 38.

46. NASD IM-1011-1 defines "Associated Persons involved in sales" to include all associated persons, "whether or not registered, who are involved in sales activities with public customers, including sales assistants and cold callers, but excludes clerical, back office, and trading personnel who are not involved in sales activities." FINRA is proposing to redesignate this defined term, with non-substantive changes, to proposed Rule 1111.

47. For purposes of NASD IM-1011-1, "disciplinary history" means "a finding of a violation by the member or a principal of the member in the past five years by the Securities and Exchange Commission, a self-regulatory organization, or a foreign financial regulatory authority of one or more of the following provisions (or a comparable foreign provision) or rules or regulations thereunder: violations of the types enumerated in Section 15(b)(4)(E) of the Securities Exchange Act of 1934; Section 15(c) of the Securities Exchange Act of 1934; Section 17(a) of the Securities Act of 1933; SEC Rules 10b-5 and 15g-1 through 15g-9; NASD Rules 2110 (only if the finding of a violation is for unauthorized trading, churning, conversion, material misrepresentations or omissions to a customer, front-running, trading ahead of research reports or excessive markups), 2120, 2310, 2330, 2440, 3010 (failure to supervise only), 3310, and 3330; and MSRB Rules G-19, G-30, and G-37(b) & (c)."

48. The term "disciplinary history" would undergo technical changes to update rule cross-references.

49. This proposed amendment to the unit of measure would align with the methodology under NASD Rule 1017(b)(2)(C) (providing, "[i]f the application requests approval of an increase in Associated Persons involved in sales, offices, or markets made, the application shall set forth the increases in such areas during the preceding 12 months.").

50. This proposed amendment remains substantively unchanged from the language presented in Notice 13-29 for public comment.

51. See NASD Rules 1014(a) and 1017(h).

52. The concept underlying the proposed amendment was presented in Notices 10-01 and 13-29 for public comment.

53. This proposed amendment remains unchanged from the language presented in Notices 10-01 and 13-29 for public comment.

54. The proposed amendment concerning fees remains unchanged from the language presented in Notices 10-01 and 13-29 for public comment.

55. This proposed amendment remains substantively unchanged from the language presented in Notices 10-01 and 13-29 for public comment.

56. This proposed amendment remains substantively unchanged from the language presented in Notices 10-01 and 13-29 for public comment.

57. In Notices 10-01 and 13-29, FINRA proposed to delete Standard 9.

58. This proposed amendment remains unchanged from the language presented in Notice 13-29 for public comment.

59. See Regulatory Notice 18-15 (Guidance on Implementing Effective Heightened Supervisory Procedures for Associated Persons with a History of Past Misconduct) (April 30, 2018).

60. This proposed new standard was previously presented in Notices 10-01 and 13-29 for public comment. The proposed new standard was presented in Notice 13-29 as "[t]he Applicant has fully disclosed and established through documentation satisfactory to FINRA all direct and indirect sources of its funding, and FINRA has determined that such sources of funding are otherwise consistent with the standards set forth in this Rule." The proposed language herein is consistent with Funding Portal Rule 110(a)(10)(D) (providing, "[t]he FP Applicant has fully disclosed and established through documentation all direct and indirect sources of funding.").

61. See NASD Rule 1014(a)(3)(A), (C), (D) and (E).

62. In a separate proposal, FINRA is proposing to amend NASD Rules 1014(a) and (b) to specify that a presumption of denial would exist if a new member applicant or its Associated Persons are subject to pending arbitration claims. This presumption of denial for pending arbitration claims would not apply to a continuing membership applicant. See Regulatory Notice 18-06 (February 8, 2018) (requesting comment on proposed amendments to the MAP rules to incentivize payment of arbitration awards).

63. Currently, this obligation is set forth under NASD Rules 1014(c)(1) and 1017(h)(2).

64. Most notably, FINRA is proposing to replace "review" with "appeal" to more accurately align with that term as it is used in the Rule 9300 Series (Review of Disciplinary Proceeding by National Adjudicatory Council and FINRA Board; Application for SEC Review). FINRA is also proposing to delete NASD Rule 1015(c), which pertains to the use of a membership application docket because the Department no longer maintains such a docket.

65. These proposed provisions are derived, in part, from paragraphs (a), (b), and (f) of Rule 9311 (Appeal by Any Party; Cross-Appeal), which pertain to the time to file a notice of appeal, the effect of an appeal, and the withdrawal of a notice of appeal.

66. These proposed provisions are derived, in part, from paragraph (a) of Rule 9235 (Hearing Officer Authority) and paragraph (a) of Rule 9322 (Extensions of Time, Postponements, Adjournments).

67. This provision is akin to paragraphs (a) and (b) under Rule 9160 (Recusal or Disqualification).

68. These proposed provisions are derived, in part, from paragraphs (a) and (b) under Rule 9233 (Hearing Panel or Extended Hearing Panel: Recusal and Disqualification of Hearing Officers), which sets forth the process for a party to move for disqualification of a hearing officer.

69. NASD Rule 1015(f)(3) also expressly provides that the formal rules of evidence do not apply to MAP appeals. As described below, FINRA is proposing to redesignate the reference to the applicability of the formal rules of evidence to proposed Rule 1165 (Hearing).

70. The extended timeframe is derived from paragraph (d) under Rule 9251 (Inspection and Copying of Documents in Possession of Staff), which requires production of documentation to occur not later than 21 days after service of a respondent's answer to a complaint filed by FINRA in connection with a disciplinary proceeding. This 21-day timeframe relating to the production of documents is also present under other rules within the Rule 9000 Series such as Rules 9252 (Requests for Information), 9264 (Motion for Summary Disposition), and 9347 (Filing of Papers in National Adjudicatory Council Proceedings).

71. This provision is derived from subparagraph (a)(5) of Rule 9242 (Pre-hearing Submission).

72. The proposed criteria are derived from Rule 9263 (Evidence: Admissibility).

73. The proposed provision is derived from Rule 9262 (Testimony).

74. FINRA is proposing to redesignate paragraphs (j)(1), (j)(3), and (j)(4) under NASD Rule 1015 to proposed Rule 1166 with no material changes.

75. The proposed change would also align with Rule 9349 (National Adjudicatory Council Formal Consideration; Decision).

76. A small firm has at least one and no more than 150 registered persons; a mid-size firm has at least 151 and no more than 499 registered persons; and a large firm has 500 or more registered persons. See Article I of the FINRA By-Laws (defining the terms, "Small Firm," "Mid-Size Firm," and "Large Firm").

77. See Retrospective Rule Review Report—Membership Application Rules and Processes (March 2016).

78. See supra note 43 and the accompanying text.

79. See supra notes 38 and 44, and the accompanying text.

80. The term "control" is also defined in other FINRA rules. See, e.g., Rules 2360 (Options), 5121 (Public Offerings of Securities with Conflicts of Interest), 5122 (Private Placements of Securities Issued by Members), and 6710 (Definitions).

81. See supra notes 18 and 19, and the accompanying text.

82. The conditions would include that all Associated Persons must acquire their required licenses and registrations within 90 days of the date of approval of the CMA; the applicant promptly notifies the Department when such licenses and registrations are acquired; the applicant does not engage in business activities that require a license or registration that has not been acquired; and if all required licenses and registrations are not acquired within the 90-day timeframe, the applicant must cease business operations until all such licenses and registrations have been acquired.

83. This proposed provision would not apply to an applicant for new membership.

84. FINRA had also previously proposed defining "affiliate," in slightly different terms, in Notice 10-01.

85. See Regulatory Notice 18-06 (February 8, 2018) (requesting comment on proposed amendments to the MAP rules to incentivize payment of arbitration awards), and Regulatory Notice 18-16 (April 30, 2018) (requesting comment on proposed rule amendments relating to high-risk brokers and the firms that employ them).


Attachment A

The chart below compares the existing NASD rule numbers against the proposed FINRA rule numbering convention for the MAP rules.

Current NASD Rules Proposed FINRA Rules
1000. MEMBERSHIP AND REGISTRATION RULES
1000. MEMBER APPLICATION AND ASSOCIATED PERSON REGISTRATION
   
 
1100. NEW AND CONTINUING MEMBERSHIP
   
1010. MEMBERSHIP PROCEEDINGS
1110. GENERAL PROVISIONS
 
1011. Definitions
1111. Definitions
1011(a) "Applicant" 1111(a) "Applicant"
1011(b) "Associated Person" 1111(b) "Application"
1011(c) "Department" 1111(c) "Associated Person"
1011(d) "Director" 1111(d) "Associated Person Involved in Sales"
1011e) "district" 1111(e) "Control"
1011(f) "district office" 1111(f) "Day"
1011(g) "FINRA Board" 1111(g) "Department"
1011(h) "FINRA Regulation Board" 1111(h) "Director"
1011(i) "Governor" 1111(i) "Disciplinary History"
1011(j) "Interested FINRA Staff" 1111(j) "District"
1011(k) "material change in business operations" 1111(k) "District Office"
1011(l) "principal place of business" 1111(l) "FINRA Board"
1011(m) "sales practice event" 1111(m) "FINRA Regulation Board"
1011(n) "Subcommittee" 1111(n) "Governor"
  1111(o) "Interested FINRA Staff"
  1111(p) "Principal Place of Business"
  1111(q) "Sales Practice Event"
  1111(r) "Subcommittee"
   
IM-1011-1. Safe Harbor for Business Expansions  
   
1012. General Provisions
1112. General Procedures
1012(a) Filing by Applicant or Service by FINRA 1112(a) Filing and Service; Timing
1012(b) Lapse of Application 1112(b) Rejection of Application Following Department's Initial Assessment
1012(c) Ex Parte Communications 1112(c) Request for Additional Documents or Information
1012(d) Recusal or Disqualification 1112(d) Lapse of Application
1012(e) Computation of Time 1112(e) Withdrawal of Application
1012(e)(1) Calendar Day 1112(f) Membership Interview
1012(e)(2) Formula 1112(f)(1) New Membership Interview Mandatory
  1112(f)(2) Continuing Membership Interview Discretionary
  1112(f)(3) Service of Notice of Membership Interview; Where Held
  1112(f)(3)(A) Service of Notice of Membership Interview
  1112(f)(3)(B) Where Held
  • • • Supplementary Material:------------------
•   1112.01. Initial Assessment by Department
•   1112.02. Department Decision to Expedite Review
•   1112.03. Membership Interview
•   1112.04. Waiver of Two-Principal Requirement
(a) Department Review
(b) Department Decision
   
 
1113. Restrictions Pertaining to New Member Applications1
   
 
1114. Filing of Misleading Information as to Membership or Registration2
   
 
1120. NEW MEMBERSHIP3
   
IM-1013-1. Membership Waive-In Process for Certain New York Stock Exchange Member Organizations

IM-1013-2. Membership Waive-In Process for Certain NYSE Alternext US LLC Member Organizations
1121. Membership Waive-In
   
1090. Foreign Members
1122. Foreign Members
   
1013. New Member Application and Interview
1123. New Membership Application Process
1013(a) Filing of Application 1123(a) General
1013(a)(1) How to File 1123(b) New Membership Application (Form NMA)
1013(a)(2) Uniform Registration Forms  
1013(a)(3) Rejection of Application That Is Not Substantially Complete  
1013(a)(4) Request For Additional Documents or Information  
1013(a)(5) Withdrawal of Application  
1013(b) Membership Interview  
1013(b)(1) Requirement for Interview  
1013(b)(2) Service of Notice  
1013(b)(3) Time  
1013(b)(4) Place  
1013(b)(5) Updated Financial Documents  
1013(b)(6) Review Standards for Admission  
1013(b)(7) Information from Other Sources  
   
 
1130. CONTINUING MEMBERSHIP
   
1017. Application for Approval of Change in Ownership, Control, or Business Operations
1131. Continuing Membership Application Process
1017(a) Events Requiring Application 1131(a) Continuing Membership Application (Form CMA)
1017(a)(1)—merger 1131(b) Events Requiring Form CMA and Department Approval
1017(a)(2)—acquisition 1131(b)(1) Merger
1017(a)(3)—acquisition or transfer of 25% or more 1131(b)(2) Acquisition
1017(a)(4)—change in equity ownership or partnership capital 1131(b)(3) Divestiture or Transfer
1017(a)(5)—material change in business operations 1131(b)(4) Change in Capital Structure
1017(b) Filing and Content of Application 1131(b)(5) Change in Control Person
1017(c) Effecting Change and Imposition of Interim Restrictions 1131(b)(6) Business Expansion
1017(d) Rejection of Application That Is Not Substantially Complete 1131(b)(7) Material Change in Business Operations
1017(e) Request for Additional Documents and Information 1131(b)(8) Removal or Modification of Restriction in Membership Agreement
1017(f) Withdrawal of Application 1131(b)(8)(A) Applicant's Initiative
1017(g) Membership Interview 1131(b)(8)(B) Department's Initiative
1017(h) Department Decision  
1017(i) Service and Effectiveness of Decision  
1017(j) Request for Review; Final Action  
1017(k) Removal or Modification of Restriction on Department's Initiative  
1017(l) Lapse or Denial of Application for Approval of Change in Ownership  
  • • • Supplementary Material:------------------
•   1131.01. Permissible Events for Form CMA Waiver
   
 
1132. Materiality Consultation
  1132(a) When Required
  1132(b) Content of Request for Materiality Consultation
  1132(c) Department Review
   
 
1133. Safe Harbor from the CMA Process
  1133(a) General
  1133(b) Permissible Events for Safe Harbor
  1133(b)(1) Number of Associated Persons Involved in Sales
  1133(b)(2) Number of Offices or Locations (Registered or Unregistered)
  1133(b)(3) Number of Markets Made
  1133(c) Exclusions from Safe Harbor
   
 
1140. STANDARDS FOR APPROVAL OF APPLICATION
 
 
1141. General Provisions
   
1014(a) Standards for Admission
1142. Standards
1014(a)(1)—complete and accurate application [or overview of applicant] 1142(a) Complete and Accurate Application
1014(a)(2)—licenses and registrations 1142(b) Licenses and Registrations, and Continuing Education
- 1142(c) Source of Funding
1014(a)(3)—compliance with securities laws, and just and equitable principles of trade 1142(d) Compliance with Securities Laws, and Just and Equitable Principles of Trade
1014(a)(4)—contractual and business relationships 1142(e) Contractual and Business Relationships
1014(a)(5)—facilities -
1014(a)(6)—communications and operational systems 1142(f) Communications and Operational Systems
1014(a)(7)—net capital 1142(g) Financial and Operational Controls; Capital
1014(a)(8)—financial controls -
1014(a)(9)—control mechanisms consistent with industry practices -
1014(a)(10)—supervisory system 1142(h) Supervisory System
1014(a)(11)—recordkeeping system 1142(i) Recordkeeping System
1014(a)(12)—continuing education -
1014(a)(13)—other information possessed by FINRA 1142(j) Other Information Possessed by FINRA
1014(a)(14)—consistency with federal securities laws -
  • • • Supplementary Material:------------------
•   1142.01. Pending Qualifications for Associated Persons
   
1014. Department Decision
1150. DEPARTMENT DECISION
1014(a) Standards for Admission
1151. Timing of Decision
1014(b) Granting or Denying Application
1152. Department Decision on the Application
1014(c) Decision 1152(a) Granting or Denying the Application
1014(c)(1) Time 1152(b) Effectiveness of Restriction
1014(c)(2) Content 1152(c) Presumption to Deny the Application
1014(c)(3) Failure to Serve Decision
1153. Content of Decision
1014(d) Submission of Membership Agreement
1154. Submission of Executed Written Membership Agreement
1014(e) Service and Effectiveness of Decision
1155. Service and Effectiveness of Decision; Final Action
1014(f) Effectiveness of Restriction 1155(a) Service and Effectiveness of Decision
1014(g) Final Action 1155(b) Final Action
   
 
1160. REVIEW OF DEPARTMENT DECISION
   
 
1161. Ex Parte Communications
  1161(a) Prohibited Communications
  1161(b) Disclosure of Prohibited Communications
   
1015. Review by National Adjudicatory Council
1162. Appeal to the National Adjudicatory Council
1015(a) Initiation of Review by Applicant 1162(a) Time to File Notice of Appeal
1015(b) Transmission of Documents 1162(b) Where to File Notice of Appeal; Methods of Service
1015(c) Membership Application Docket 1162(c) Effect
1015(d) Appointment of Subcommittee 1162(d) Content of Notice of Appeal
1015(e) Powers of Subcommittee 1162(e) Withdrawal of Notice of Appeal
1015(f) Hearing 1162(f) Abandonment of Appeal
1015(f)(1) Notice  
1015(f)(2) Counsel  
1015(f)(3) Evidence  
1015(f)(4) Transcript  
1015(g) Additional Information, Briefs  
1015(h) Abandonment of Request for Review  
1015(i) Subcommittee Recommendation  
1015(j) Decision  
1015(j)(1) Proposed Written Decision  
1015(j)(2) Contents  
1015(j)(3) Issuance of Decision After Expiration of Call for Review Periods  
1015(j)(4) Failure to Issue Decision  
   
 
1163. Appointment and Powers of Subcommittee; Recusal and Disqualification, or Withdrawal
  1163(a) Appointment of Subcommittee by National Adjudicatory Council
  1163(b) Powers of Subcommittee
  1163(b)(1) General
  1163(b)(2) Scheduling Conference
  1163(b)(3) Function
  1163(b)(4) Additional Information, Briefs
  1163(c) Recusal and Disqualification, or Withdrawal
  1163(c)(1) Recusal and Disqualification
  1163(c)(1)(A) FINRA Board
  1163(c)(1)(B) National Adjudicatory Council
  1163(c)(1)(C) Motion for Disqualification
  1163(c)(2) Withdrawal
   
 
1164. Transmission of Record, Exhibit and Witness Lists; Withheld Documents
  1164(a) Transmission of Record
  1164(b) Exhibit and Witness Lists
  1164(c) Withheld Documents
  1164(d) Withheld Document List
   
 
1165. Hearing
  1165(a) When Held; Notice
  1165(b) Counsel
  1165(c) Evidence
  1165(d) Testimony
  1165(e) Transcript
   
 
1166. Recommended Decision of Subcommittee and Decision of National Adjudicatory Council
  1166(a) Recommended Decision of Subcommittee
  1166(b) Decision of National Adjudicatory Council
  1166(b)(1) Decision
  1166(b)(2) Contents of Decision
  1166(b)(3) Issuance of Decision After Expiration of Call for Review Period
  1166(b)(4) Failure to Issue Decision
   
1016. Discretionary Review by FINRA Board
1167. Discretionary Review by FINRA Board
1016(a) Call For Review By Governor 1167(a) Call for Review by Governor
1016(b) 15 Day Period; Waiver 1167(b) 15-Day Period; Waiver
1016(c) Review At Next Meeting 1167(c) Review at Next Meeting
1016(d) Decision of FINRA Board, Including Remand 1167(d) Decision of FINRA Board, Including Remand
1016(e) Issuance of Decision 1167(e) Issuance of Decision
   
1019. Application to Commission for Review
1168. Application to SEC for Review
   

1 Not yet effective.

2 Current FINRA rule number is 1122.

3 Current FINRA rule title is Member Application Process.


Attachment B

Below is the text of the proposed rule change. Proposed new language is underlined; proposed deletions are in brackets.

* * * * *

Text of Proposed FINRA Rules

(Marked to Show Changes from NASD Rules 1011, IM-1011-1, 1012, 1013, IM-1013-1, IM-1013-2, 1014, 1015, 1016, 1017, 1019, 1090; NASD Rules 1011, IM-1011-1, 1012, 1013, IM-1013-1, IM-1013-2, 1014, 1015, 1016, 1017, 1019, 1090 to be Deleted in their Entirety from the Transitional Rulebook

* * * * *

1000. MEMBER APPLICATION AND ASSOCIATED PERSON REGISTRATION

* * * * *

1100. NEW AND CONTINUING MEMBERSHIP [APPLICATION]

* * * * *

1110. General Provisions

* * * * *

[1010. Membership Proceedings]

* * * * *

[1011]1111. Definitions

Unless otherwise provided, terms used in the Rule [10101]1100 Series shall have the meaning as defined in Rules [0120]0160 and 9120. References within the Rule 1100 Series to FINRA offices or departments refer to offices so designated by FINRA or FINRA Regulation.
(a) "Applicant"

The term "Applicant" means a person that applies for approval of new FINRA membership [in FINRA] under Rule [1013]1123 or a member that [fileslapplies for approval of a[n] continuing membership application [for approval of a change in ownership, control, or business operations] under Rule [1017]1131. An Applicant may also be referred to as a "member" in the context of the Rule 1100 Series.
(b) "Application"

The term "Application" means a new membership application (or Form NMA) filed under Rule 1123, or a continuing membership application (or Form CM A) filed under the Rule 1130 Series, as applicable, including all information and documents reguested therein and as otherwise specified in the Rule 1100 Series.
[(b)](c) "Associated Person"
(1) The term "Associated Person" means:
[(1)](A) a natural person registered under [NASD]FINRA [R]rules; [or]
[(2)](B) a sole proprietor, [or any] partner, officer, member of a limited liability company, director, or branch manager of the Applicant, or any person occupying a similar status or performing similar functions;
(C) any employee of the Applicant, except any person whose functions are solely clerical or ministerial;
[(3)](D) any company, government or political subdivision or agency or instrumentality of a government controlling or controlled by [or controlling] the Applicant;
[(4) any employee of the Applicant, except any person whose functions are solely clerical or ministerial;]
[(5)](E) any person directly or indirectly controlling the Applicant whether or not such person is registered or exempt from registration under the FINRA By-Laws or [NASD]FINRA [R]rules;
[(6)](F) any person engaged in investment banking or securities business controlled directly or indirectly by the Applicant whether such person is registered or exempt from registration under the FINRA By-Laws or [NASD1FINRA [R]rules; or
[(7)](G) any person who will be or is anticipated to be a person described in subparagraphs (A) through (F) above.
(2) The term "Associated Person" in this paragraph excludes any person with a de minimis ownership interest of less than 10 percent in a partnership, corporation, association or other legal entity, unless that person is entitled under the legal entity's constituent documents to 10 percent or more of the legal entity's profits or distributions or otherwise controls the Applicant.
[IM-1011-1](d) "Associated Person Involved in Sales"

The term "Associated Person involved in sales" includes [all]any Associated Person[s], [whether or not] registered or unregistered, who [are]is involved in sales activities with public customers, including functioning as a sales assistants] and cold caller[s], but [excludeslexcluding an Associated Person whose function is solely clerical [back office,] or ministerial, and [trading] other personnel who are not involved in sales activities.
(e) "Control"
(1) The term "control" (including the terms "controlling" or "controlled by") means the possession, direct or indirect, of the power or ability to direct or cause the direction of the management or policies of a person, whether through ownership of voting securities, by contract, or otherwise.
(2) A person shall be presumed to control another person if such person, directly or indirectly (ownership interest of less than 25 percent will not preclude aggregation):
(A) is a director, general partner, managing member, officer or principal exercising executive responsibility (or person occupying a similar status or performing similar functions) of the other person;
(B) has the right to vote 25 percent or more of a class of voting securities;
(C) has the power to sell or direct the sale of 25 percent or more of a class of voting securities;
(D) is entitled to receive 25 percent or more of the profits; or
(E) in the case of a partnership or limited liability company, has the right to receive upon dissolution, or has contributed, 25 percent or more of the capital.
(3) Control, presumed by one or more of the above powers, abilities or circumstances may be rebutted by proving that the factor does not exist or by showing other factors that negate the presumption of control. The presumption of control shall not apply where such person holds voting securities of the Applicant, in good faith, as an agent, bank, broker, nominee, custodian or trustee for one or more owners who do not individually or as a group have control of such entity.
[1012(e)](f) [Computation of Time]"Day"
[(1) Calendar Day]

[In the Rule 1010 Series,]The term "day" means calendar day.
[(2) Formula]

In [computing] calculating a period of time under the Rule [1010]1100 Series, the day of the act[,] [event, default, or lapse] from which the period of time designated begins to run shall not be included[.]; provided, however, that where [T]the last day of the period so [computed]calculated [shall be included unless it] is a Saturday, Sunday[,] or [Federal holiday, in which event the period runs until the end of the next day that is not a Saturday, Sunday, or Federal holiday. Intermediate Saturdays, Sundays, and Federal holidays shall be excluded from the computation when the period prescribed is ten days or less]a day on which FINRA is otherwise closed, the period shall run until the end of the next business day.
[(c)](g) "Department"

The term "Department" means the Department of Member Regulation of FINRA.
[(d)](h) "Director"

The term "Director" means a member of the FINRA Regulation Board.
(i) "Disciplinary History"

The [safe harbor is not available to any member that has disciplinary history. For purposes of this Interpretation,] term "disciplinary history" means a finding of a violation by the member or a principal of the member with in the past five years by the [Securities and Exchange Commission]SEC, a self-regulatory organization, or a foreign financial regulatory authority [of] involving one or more of the following provisions (or [a] comparable foreign provisions) or rules or regulations thereunder:
(1) [v]Violations of the types enumerated in; Sections 15(b)(4)(E) and [Section] 15(c) of the [Securities] Exchange Act [of 1934]; Section 17(a) of the Securities Act [of 1933]; SE[C]A Rules 10b-5 and 15g-1 through 15g-9;
(2) Violations of the following [NASD]FINRA [R]rules and all predecessor NASD rules to such FINRA rules:
(A) Rule [2110]2010 (Standards of Commercial Honor and Principles of Trade) (only if the finding of a violation is for unauthorized trading, churning, conversion, material misrepresentations or omissions to a customer, front[-] running, trading ahead of research reports or excessive markups)[,];
(B) Rule [2120]2020 (Use of Manipulative, Deceptive or Other Fraudulent Devices)[,1;
(C) Rule [2310]2110 (Suitability)[,];
(D) Rule 2121 (Fair Prices and Commissions);
(E) Rules [2330]2150 (Improper Use of Customers' Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts) and 4330 (Customer Protection—Permissible Use of Customers' Securities)[,] [2440,];
(F) Rule [3010]3110 (Supervision) (only if the finding of a violation is for failure to supervise [only])[,];
(G) Rule [3310]5210 (Publication of Transactions and Quotations)[,]; [and]
(H) Rule [3330]5230 (Payments Involving Publications that Influence the Market Price of a Security);
(I) Rule 5280 (Trading Ahead of Research Reports); and
(3) Violations of MSRB Rules G-19 (Suitability of Recommendations and Transactions), G-30 (Prices and Commissions), and paragraphs (b) and (c) under G-37[(b)] (Political Contributions and Prohibitions on Municipal Securities Business and Municipal Advisory Business) [&(c)].
[(e)](j) "[d]District"

The term "district" means a district established by the FINRA Regulation Board.
[(f)](k) "[d]District [o]Office"

The term "district office" means an office of FINRA located in a district.
[(g)](l) "FINRA Board"

The term "FINRA Board" means the Board of Governors of FINRA.
[(h)](m) "FINRA Regulation Board"

The term "FINRA Regulation Board" means the Board of Directors of FINRA Regulation.
[(i)](n) "Governor"

The term "Governor" means a member of the FINRA Board.
[(j)](o) "Interested FINRA Staff"

The term "Interested FINRA Staff" means
(1) The Executive Vice President of the Department;
(2) [a]An employee of the Department who directly participates in a decision under the Rule [1014 or 101711150 Series[,];
(3) [a]An employee of the Department who directly supervises an employee with respect to such decision[,];
(4) [a]An employee of the Department who conducted an examination or investigation [or examination of a member that files an application under Rule 1017,]of an Applicant; and
(5) [t]The District Director for the relevant district [,] [and the head of the Department].
[(k) "material change in business operations" redesignated to paragraph (b) under proposed Rule 1131]
[(l)](p ) "[p]Principal [p]Place of [b]Business"

The term "principal place of business" means the executive office from which the sole proprietor or the officers, partners, managing members, or other managers of the Applicant direct, control, and coordinate the activities of the Applicant, unless the Department determines that the principal place of business is where:
(1) the largest number of Associated Persons of the Applicant are located; or
(2) the books and records necessary to provide information and data to operate the business and comply with applicable rules are located.
[(m)](q) "[s]Sales [p]Practice [e]Event"

The term "sales practice event" means any customer complaint, arbitration, "statutory disgualification" as defined in Section 3(a)(39) of the Exchange Act, or civil litigation that has been reported to the Central Registration Depository, currently is required to be reported to the Central Registration Depository, or otherwise has been reported to FINRA.
[(n)](r) "Subcommittee"

The term "Subcommittee" means [a subcommittee of]an Adjudicator (as that term is defined in Rule 9120) that is appointed by the National Adjudicatory Council [that is constituted pursuant to Rule 1015] to [conduct]participate in [a review]an appeal of a Department decision issued under the Rule [1010]1100 Series. A Subcommittee shall be composed of two or more persons who shall be current or former members of the National Adjudicatory Council or former Directors or Governors.

* * * * *

[IM-1011-1. Safe Harbor for Business Expansions]

[This interpretive material concerns the types of business expansions that will not require a member to submit a Rule 1017 application to obtain FINRA's approval of the expansion. This safe harbor applies to: (1) firms that do not have a membership agreement, and (2) firms that have a membership agreement that does not contain a restriction on the factors listed below.]

[The safe harbor is not available to a member that has a membership agreement that contains a specific restriction as to one or more of the factors listed below. In that case, the agreement takes precedence because FINRA has determined that a particular restriction should apply as to one or more of the factors, and FINRA has issued a decision with a rationale for that restriction. Similarly, the safe harbor also does not apply if the member has a membership agreement that permits expansion beyond the limits set forth below (e.g., an Applicant requests and obtains approval for ten registered representatives in the first six months with an additional ten registered representatives in the next year); in such case, FINRA has specifically considered the firm's expansion plans and approved them.]

[The term "disciplinary history" redesignated as paragraph (i) under proposed Rule 1111]

[For those firms to which the safe harbor is available, the following types of expansions are presumed not to be a material change in business operations and therefore do not require a Rule 1017 application. For any expansion beyond these limits, a member should contact its district office prior to implementing the change to determine whether the proposed expansion requires an application under Rule 1017. Expansions in each area are measured on a rolling 12-month basis; members are required to keep records of increases in personnel, offices, and markets to determine whether they are within the safe harbor.]

[The term "Associated Persons involved in sales" redesignated as paragraph (d) under proposed Rule 1111]

[

Number of Associated Persons Involved in Safe Sales Harbor—Increase Permitted Within One Year Period Without Rule 1017 Application
1–10 10 persons
11 or more 10 persons or a 30 percent increase, whichever is greater
   
Number of Offices (registered or unregistered)  
1–5 3 offices
6 or more 3 offices or a 30 percent increase, whichever is greater
   
Number of Markets Made  
1–10 10 markets
11 or more 10 markets or a 30 percent increase, whichever is greater

]

* * * * *

[1012]1112. General [Provisions]Procedures
[(a) Filing by Applicant or Service by FINRA]
[(1) An Applicant for membership shall file an application in the manner prescribed in Rule 1013, including the timely submission of an application fee pursuant to Schedule A to the FINRA By-Laws.]
[(2) An Applicant seeking approval of a change of ownership, control, or business operations shall file an application in the manner prescribed in Rule 1017, including the timely submission of an application fee pursuant to Schedule A to the FINRA By-Laws.]
[(3) Except where FINRA has otherwise prescribed an electronic or alternative filing process, an Applicant may file an application or any document or information requested under the Rule 1010 Series by first-class mail, overnight courier, or hand delivery. If the Department and the Applicant agree, the Applicant also may file a requested document or information by facsimile.]
[(4) FINRA shall serve a notice or decision issued under the Rule 1010 Series by first-class mail on the Applicant or its counsel, unless a Rule specifies a different method of service.]
[(5) For purposes of the Rule 1010 Series, service by FINRA or filing by an Applicant shall be deemed complete as follows:]
[(A) Service or filing by first-class mail shall be deemed complete on the date of postmark;]
[(B) Service or filing by overnight courier shall be deemed complete on the date of delivery to the overnight courier as specified in the airbill;]
[(C) Service or filing by hand delivery shall be deemed complete on the date of receipt as evidenced by a date stamp;]
[(D) Service or filing by facsimile shall be deemed complete on the date specified in the document and on the written confirmation of transmission; and]
[(E) Filing by an electronic system shall be deemed complete on the date specified on the confirmation page generated by the electronic filing system.]
(a) Filing and Service; Timing
(1) An Applicant shall file an Application and submit any other correspondence with the Department via electronic process or such other process as FINRA may prescribe. FINRA shall serve a notice or decision, or any other correspondence, by electronic delivery. For purposes of the Rule 1100 Series, filing by an Applicant or service by FINRA shall be deemed complete on the date recorded by FINRA's electronic systems for electronic communications or such other process as FINRA may prescribe.
(2) The date on which the Department decision is due under the Rule 1150 Series shall be calculated from the date the Department accepts the Application. An Application will be accepted and deemed filed for purposes of calculating the date on which the Department decision is due under the Rule 1150 Series when the Department provides written notification to the Applicant that the Department has completed the initial assessment of the Application and determined that the Application includes the documents or information necessary for the Department to commence a meaningful review ("Application Filed Date"). The date on which the Application is submitted in accordance with this paragraph ("Application Submission Date") shall not be used to calculate the date on which the Department decision is due under the Rule 1150 Series.
(3) The timeframes specified in the Rule 1100 Series may be extended or shortened upon the mutual written consent of the Department and the Applicant.
(b) Rejection of Application Following Department's Initial Assessment
(1) Within 15 days of the Application Submission Date, the Department shall conduct an initial assessment to determine whether it includes the documents or information necessary for the Department to commence a meaningful review. Where the Department has completed its initial assessment of the Application and determined that the Application omits the documents or information necessary to commence a meaningful review, the Department shall notify the Applicant, in writing, that such Application is incomplete and describe the deficiency. The Applicant shall have five business days after the date on which the Department has issued the written notification of deficiency to cure the deficiency described therein. Upon the Applicant's failure to timely cure the deficiency, the Department shall reject the Application. FINRA shall refund the Application fee, less $500, which FINRA shall retain as a processing fee. An Application that has been rejected does not constitute final action by FINRA for purposes of the Rule 1160 Series.
(2) If the Applicant determines again to apply for approval of a new or continuing membership application subseguent to its rejection, the Applicant shall submit a new Application, including the timely submission of the appropriate fee pursuant to Schedule A to the FINRA By-Laws.
[1017(e)](c) Request for Additional Documents [and]or Information

Within 30 days after the [filing of an applicationlApplication Filed Date, the Department shall serve an initial reguest for any additional documents or information [or documents] necessary to render a decision on the [alApplication, and the Applicant shall file any additional information or documents with the Department within 30 days after service of the Department's initial reguest. The Department may also reguest additional documents or information [or documents] at any time during the [a]Application review process. [Unless otherwise agreed to by the Department and the Applicant,] [t]The Applicant shall file such additional documents or information [or documents] with the Department within [30]15 days after the Department's reguest, or within such other time period agreed to by the Department and the Applicant.
[1012(b)][d] Lapse of Application
(1) Absent a showing of good cause, an [a]Application [filed under Rule 1013 or 1017] shall lapse if an Applicant fails to:
(A) respond fully within [60]30 days after service of any initial written request for information or documents under paragraph (c) of this Rule [1013, within 30 days after service of an initial written request for information or documents under Rule 1017], within [30]15 days after service of any [subsequent]additional written request for information or documents under paragraph (c) of this Rule [1013 or 1017], or within such other time period agreed to by the Department and the Applicant;
(B) appear at or otherwise participate in a scheduled membership interview [pursuant to Rule 1013(b) or 1017(f)]; or
(C) file an executed membership agreement under Rule [1014(d) or Rule 1017(g)(4) within [25]15 days after service of the agreement, or within such other period agreed to by the Department and the Applicant]1154.
(2) The Department may, in its discretion, lapse the Application if the Applicant makes substantial changes to the Application that materially impacts the Department's review of the Application. Where the Department has determined that the Application has materially changed from the initial submission, the Department shall notify the Applicant, in writing, that such Application may lapse and describe the reasons therefor. The Applicant shall have five business days after the date on which the Department has issued the written notification of the pending lapse to remedy the Application. Failure to timely remedy the Application shall result in its lapse.
[(2)](3) If an Application has lapsed within 30 days after the Application Filed Date, FINRA shall refund the Application fee, less $500, which FINRA shall retain as a processing fee. If an Applicant [wishes to continue]determines again to [seek]apply for approval of a new or continuing membership [or approval of a change in ownership, control, or business operations]application subseguent to its lapse, [then] the Applicant shall [be required to] submit a new [a]Application [in the manner prescribed in Rule 1013 or 1017, respectively], including the timely submission of [an application]the appropriate fee pursuant to Schedule A to the FINRA By-Laws. FINRA shall not refund [any]the Application fee for an Application that has lapsed [application] after 30 days of the Application Filed Date. An Application that has lapsed does not constitute final action by FINRA for purposes of the Rule 1160 Series.
[(c) Ex Parte Communications redesignated as proposed Rule 1161]
[(d) Recusal or Disqualification redesignated as paragraph (c) under proposed Rule 1163]
[(e) Computation of Time redesignated as paragraph (f) under proposed Rule 1111]
[1013(a)(5)](e) Withdrawal of Application

If an Applicant withdraws [an]the [a]Application after the Application Submission Date, but not later than [within] 30 days after [filing the applicationlthe Application Filed Date, FINRA shall refund the [a]Application fee, less $500, which FINRA shall [be] retain[ed by FINRA] as a processing fee. If the Applicant determines to again [to seek]apply for approval of a new or continuing membership application subseguent to the withdrawal, the Applicant shall submit a new [a]Application [under this Rule and], including the timely submission of the appropriate fee pursuant to Schedule A to the FINRA By-Laws. FINRA shall not refund the fee for an Application that the Applicant has withdrawn under this subparagraph after 30 days of the Application Filed Date. An Application that has been withdrawn under this paragraph does not constitute final action by FINRA for purposes of the Rule 1160 Series.
[1013(b)](f) Membership Interview
[1013(b)(1)](1) [Requirement for]New Membership Interview Mandatory

Before the Department serves its decision pursuant to the Rule 1150 Series on [an application for new membership in FINRA] a Form NMA, the Department shall conduct [a]one or more membership interviews at any time during the new membership application review process with a representative or representatives of the Applicant.
[1017(g)](2) Continuing Membership Interview Discretionary
[(1)] Before [T]the Department serves its decision pursuant to the Rule 1150 Series on a Form CMA, the Department may, in its discretion, [require the Applicant to participate inlconduct [a]one or more continuing membership interviews [within 30 days after the filing of the application, or if the Department requests additional information or documents, within 30 days after the filing of the additional information or documents by the Applicant]at any time during the continuing membership application review process with a representative or representatives of the Applicant.
[(2) At least seven days before the membership interview, the Department shall serve on the Applicant a written notice that specifies the date and time of the interview and persons who are required to participate in the interview. The Department shall serve the notice by facsimile or overnight courier. The Applicant and the Department may agree to a shorter or longer period for notice or a different method of service.]
[(3) Unless the Department and the Applicant otherwise agree, the membership interview shall be conducted in the district office for the district in which the Applicant has its principal place of business.]
[(4) During the membership interview, the Department shall review the application and the considerations for the Department's decision set forth in paragraph (g)(1) with the Applicant's representative or representatives. The Department shall provide to the Applicant's representative or representatives any information or document that the Department has obtained from the Central Registration Depository or a source other than the Applicant and upon which the Department intends to base its decision under paragraph (g). If the Department receives such information or document after the membership interview or decides to base its decision on such information after the membership interview, the Department shall promptly serve the information or document and an explanation thereof on the Applicant]
[1013(b)(2)](3) Service of Notice of Membership Interview; Where Held
(A) Service of Notice of Membership Interview

At least seven days before [the]a scheduled membership interview, the Department shall serve on the Applicant a written notice that specifies the date and time of the interview and the representative(s) [or representatives] of the Applicant who are required to participate in the interview. The Department shall serve the notice [by facsimile or overnight courier]in a manner consistent with Rule 1112. The Applicant and the Department may agree to a [shorter or longer]different period for notice or [a different]method of service under this [sub]paragraph.
(B) Where Held

The membership interview(s) shall be conducted in the district office for the district in which the Applicant has its principal place of business or at an agreed upon location provided, however, that the Department and the Applicant may agree to conduct the membership interview by video conference or by other means.

•••Supplementary Material:------------------

.01 Initial Assessment by Department. Under Rule 1112(a), the Department shall conduct an initial assessment of an Application to determine, at a minimum, whether the documents or information included with the Application are correctly identified and contain the information they purport to address and whether the Application may be eligible for expedited review. As part of the initial assessment, the Department may also review several aspects of the Application including, but not limited to, the disciplinary history of the Applicant and its Associated Persons, and scale and scope of the proposed activities of the Applicant, the history of sales practice events, disciplinary history, licenses and registrations, and experience of the relevant principals and registered persons of the Applicant, and the written supervisory procedures.
.02 Department Decision to Expedite Review. As a part of the initial assessment, the Department may, in its discretion, determine that the Application is eligible for expedited review and shall notify the Applicant of such eligibility.
.03 Membership Interview. A membership interview is a meeting between the Department (and may include other Interested FINRA Staff), and the Applicant's counsel or representative(s), including the persons who own, control, or manage the Applicant. The Applicant and its counsel or representative(s) must be prepared to discuss topics that may include, among others, the nature and scope of the business, the Applicant's ability to satisfy the standards set forth in Rule 1142 that are applicable to such Applicant in accordance with Rule 1141, the rules applicable to the Applicant's intended business, financial condition, source of funds, the supervisory structure, the background and experience of the Applicant's principals and representative(s), documents or information that the Department obtained from CRD or a source other than the applicant and upon which the Department intends to based its decision, and plans for future direction and business expansion.
.04 Waiver of Two-Principal Requirement. An Applicant may apply, in the manner prescribed in Rule 9610, and Form NMA or Form CMA, as applicable, for a waiver of the two-principal reguirement of Rule 1210.01 based on the Applicant's limited scope of activities or the Applicant having only one person associated with the Applicant.

The Applicant shall submit, in writing, the basis on which the Applicant believes it has demonstrated that only one person associated with the Applicant should be reguired to be registered as a principal, along with any supporting documentation for the waiver reguest to the Department as part of the Application.
(a) Department Review

The Department shall assess factors that include, but are not limited to:
(1) the regulatory history of the Applicant and its Associated Persons;
(2) the type of business the Applicant conducts or for which it is approved to conduct; and
(3) the number, location and experience of Associated Persons, and their designated offices and locations.
(b) Department Decision

The decision to grant a reguest for a waiver rests solely with the Department. Where a waiver reguest is granted, FINRA may reguire the registration of the specified number of principals at some future date if changes occur that alter the factors on which the waiver decision was based. Where a reguest for a waiver is denied prior to the issuance of a Department decision under the Rule 1150 Series, the Applicant may file an appeal pursuant to the Rule 9600 Series. The Application review process may be held in abeyance pending the outcome of the appeal.

* * * * *

1113. Restriction Pertaining to New Member Applications

No Change.

* * * * *

[1122]1114. Filing of Misleading Information as to Membership or Registration

No Change.

* * * * *

1115. Reserved

* * * * *

1116. Reserved

* * * * *

1117. Reserved

* * * * *

1118. Reserved

* * * * *

1119. Reserved

* * * * *

1120. NEW MEMBERSHIP [APPLICATION PROCESS]

* * * * *

1121. Membership Waive-In

FINRA previously permitted, through an application process, a waive-in to FINRA membership for certain New York Stock Exchange ("NYSE") and NYSE American LLC ("NYSE American") member organizations. The period for seeking such a waive-in has expired.

NYSE member organizations that were admitted pursuant to the waive-in process are subject to the FINRA By-Laws and Schedules to By-Laws, including Schedule A, the consolidated FINRA rules and the NYSE rules incorporated by FINRA, provided that their securities business is limited to floor brokerage on the NYSE, or routing away to other markets orders that are ancillary to their core floor business under NYSE Rule 70.40 ("permitted floor activities"). If an NYSE-only member organization admitted pursuant to the waive-in process seeks to expand its business operations to include any activities other than the permitted floor activities or makes changes to its securities business that would otherwise reguire FINRA membership, such firm shall execute a membership agreement prior to expanding its business operations. If such business expansion would be considered a material change in business operations, as that term is described in Rule 1131(b), such firm also shall apply for and must receive approval prior to engaging in such business activity pursuant to Rule 1131. Upon approval of such business expansion, the firm shall be subject to all NASD rules, in addition to the consolidated FINRA rules and those NYSE rules incorporated by FINRA.

NYSE American member organizations that were admitted pursuant to the waive-in process are member organizations of both NYSE and NYSE American and as such are subject to the FINRA By-Laws and Schedules to By-Laws, including Schedule A, the consolidated FINRA rules and the NYSE rules incorporated by FINRA, provided that their NYSE or NYSE American securities business is limited to floor-based activities in either NYSE-traded or NYSE American-traded securities, or routing away to other markets orders that are ancillary to their core NYSE or NYSE MKT floor business under NYSE Rule 70.40 or NYSE American Eguities Rule 70.40 ("permitted floor activities"). If a firm admitted pursuant to the waive-in process seeks to expand its business operations to include any activities other than the permitted floor activities or makes changes to its securities business that would otherwise reguire FINRA membership, such firm shall execute a membership agreement prior to expanding its business operations. If such business expansion would be considered a material change in business operations, as that term is described in Rule 1131(b), such firm also shall apply for and must receive approval prior to engaging in such business activity pursuant to Rule 1131. Upon approval of such business expansion, the firm shall be subject to all NASD rules, in addition to the consolidated FINRA rules and those NYSE rules incorporated by FINRA.

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[1090]1122. Foreign Members

A member [which]that does not maintain an office in the United States responsible for preparing and maintaining financial and other reports required to be filed with the [Commission]SEC and [the AssociationlFINRA must:
(a) prepare all such reports, and maintain a general ledger chart of account and any description thereof, in English and U.S. dollars;
(b) reimburse [the Association]FINRA for any expenses incurred in connection with examinations of the member to the extent that such expenses exceed the cost of examining a member located within the continental United States in the geographic location most distant from the [D]district [O]office of appropriate jurisdiction; and
(c) ensure the availability of an individual fluent in English and knowledgeable in securities and financial matters to assist representatives of [the AssociationlFINRA during examinations.[; and]
[(d) utilize, either directly or indirectly, the services of a broker/dealer registered with the Commission, a bank or a clearing agency registered with the Commission located in the United States in clearing all transactions involving members of the Association, except where both parties to a transaction agree otherwise.]

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[1013]1123. New Membership Application [and Interview]Process
(a) [Filing of Application]General

Before applying for new FINRA membership, a prospective Applicant must undertake, as FINRA may prescribe, reguisite actions which include, but are not limited to filing Form BD with the SEC pursuant to Section 15(b) of the Exchange Act, reserving a firm name in accordance with Article IV, Section 2 of the FINRA By-Laws, completing the necessary forms to access FINRA systems, submitting fingerprints for each Associated Person, and paying the appropriate fee pursuant to Schedule A to the FINRA By-Laws.
[(1)](b) [How to File]New Membership Application (Form NMA)

A[n] prospective Applicant for new FINRA membership shall [file its application in the manner prescribed by FINRAlfile Form NMA, including all documents and information reguested therein, with the Department [of Member Regulation ("the Department")]in accordance with Rule 1112, and submit the appropriate fee pursuant to Schedule A to the FINRA By-Laws. [An Applicant shall submit an application that includes:]
[(A) Form NMA;]
[(B) an original signed and notarized paper Form BD, with applicable schedules;]
[(C) an original FINRA-approved fingerprint card for each Associated Person who will be subject to SEC Rule 17f-2;]
[(D) a new member assessment report;]
[(E) a detailed business plan that adeguately and comprehensively describes all material aspects of the business that will be, or are reasonably anticipated to be, performed at and after the initiation of business operations, including future business expansion plans, if any, and includes:]
[(i) a trial balance, balance sheet, supporting schedules, and computation of net capital, each of which has been prepared as of a date that is within 30 days before the filing date of the application;]
[(ii) a monthly projection of income and expenses, with a supporting rationale, for the first twelve months of operations;]
[(iii) an organizational chart;]
[(iv) the intended location of the Applicant's principal place of business and all other offices, if any, whether or not such offices would be required to be registered under NASD Rules, and the names of the persons who will be in charge of each office;]
[(v)] a list of the types of securities to be offered and sold and the types of retail or institutional customers to be solicited;]
[(vi) a description of the methods and media to be employed to develop a customer base and to offer and sell products and services to customers, including the use of the Internet, telephone solicitations, seminars, or mailings;]
[(vii) a description of the business facilities and a copy of any proposed or final lease;]
[(viii) the number of markets to be made, if any, the type and volatility of the products, and the anticipated maximum inventory positions;]
[(ix) any plan to enter into contractual commitments, such as underwritings or other securities-related activities;]
[(x) any plan to distribute or maintain securities products in proprietary positions, and the risks, volatility, degree of liquidity, and speculative nature of the products;]
[(xi) any other activity that the Applicant may engage in that reasonably could have a material impact on net capital within the first twelve months of business operations; and]
[(xii) a description of the communications and operational systems the Applicant will employ to conduct business with customers or other members and the plans and procedures the Applicant will employ to ensure business continuity, including: system capacity to handle the anticipated level of usage; contingency plans in the event of systems or other technological or communications problems or failures that may impede customer usage or firm order entry or execution; system redundancies; disaster recovery plans; system security; disclosures to be made to potential and existing customers who may use such systems; and supervisory or customer protection measures that may apply to customer use of, or access to, such systems;]
[(F) a copy of any decision or order by a federal or state authority or self-regulatory organization taking permanent or temporary adverse action with respect to a registration or licensing determination regarding the Applicant or an Associated Person;]
[(G) a list of all Associated Persons;]
[(H) documentation of any of the following events, unless the event has been reported to the Central Registration Depository:]
[(i) a regulatory action against or investigation of the Applicant or an Associated Person by the Commission, the Commodity Futures Trading Commission, a federal, state, or foreign regulatory agency, or a self-regulatory organization that is pending, adjudicated, or settled;]
[(ii) an investment-related civil action for damages or an injunction against the Applicant or an Associated Person that is pending, adjudicated, or settled;]
[(iii) an investment-related customer complaint or arbitration that is required to be reported on Form U4;]
[(iv) a criminal action (other than a minor traffic violation) against the Applicant or an Associated Person that is pending, adjudicated, or that has resulted in a guilty or no contest plea; and]
[(v) a copy of any document evidencing a termination for cause or a permitted resignation after investigation of an alleged violation of a federal or state securities law, a rule or regulation thereunder, a self-regulatory organization rule, or an industry standard of conduct;]
[(I) a description of any remedial action, such as special training, continuing education requirements, or heightened supervision, imposed on an Associated Person by a state or federal authority or self-regulatory organization;]
[(J) a written acknowledgment that heightened supervisory procedures and special educational programs may be required [pursuant to Notice to Members 97-19 for an Associated Person whose record reflects disciplinary actions or sales practice events;]
[(K) a copy of final or proposed contracts with banks, clearing entities, or service bureaus, and a general description of any other final or proposed contracts;]
[(L) a description of the nature and source of Applicant's capital with supporting documentation, including a list of all persons or entities that have contributed or plan to contribute financing to the Applicant's business, the terms and conditions of such financing arrangements, the risk to net capital presented by the Applicant's proposed business activities, and any arrangement for additional capital should a business need arise;]
[(M) a description of the financial controls to be employed by the Applicant;]
[(N) a description of the Applicant's supervisory system and a copy of its written supervisory procedures, internal operating procedures (including operational and internal controls), internal inspections plan, written approval process, and qualifications investigations required by Rule 3010;]
[(O) a description of the number, experience, and qualifications of supervisors and principals and the number, experience, and qualifications of persons to be supervised by such personnel, the other responsibilities of the supervisors and principals with the Applicant, their full-time or part-time status, any business activities that the supervisors or principals may engage in outside of their association with the Applicant, the hours per week devoted to such activities, and an explanation of how a part-time supervisor or principal will be able to discharge his or her designated functions on a part-time basis;]
[(P) a description of Applicant's proposed recordkeeping system;]
[(Q) a copy of the Applicant's written training plan to comply with Firm Element continuing education requirements described in Rule 1120(b), including the name of the Associated Person responsible for implementation; and]
[(R) a FINRA Entitlement Program Agreement and Terms of Use and a FINRA Member Firm Account Administrator Entitlement Form.]
[(2) Uniform Registration Forms]

[Upon approval of the Applicant's FINRA Member Firm Account Administrator Entitlement Form, the Applicant shall submit its Forms U4 for each Associated Person who is required to be registered under NASD Rules, any amendments to its Forms BD or U4, and any Form U5 electronically via Web CRD.]
[(3) Rejection of Application that is Not Substantially Complete]

[If the Department determines within 30 days after the filing of an application that the application is not substantially complete, the Department may reject the application and deem it not to have been filed. In such case, within the 30 day period, the Department shall serve a written notice on the Applicant of the Department's determination and the reasons therefor. FINRA shall refund the application fee, less $500, which shall be retained by FINRA as a processing fee. If the Applicant determines to continue to seek membership, the Applicant shall submit a new application under this Rule and fee pursuant to Schedule A to the FINRA By-Laws.]
[(4) Request For Additional Documents Or Information]

[Within 30 days after the filing of an application, the Department shall serve an initial request for any additional information or documents necessary to render a decision on the application. The Department may serve subsequent requests for additional information or documents at any time during the membership application process.]

[Unless otherwise agreed by the Department and the Applicant, the Applicant shall file any additional information and documents with the Department within 60 days after service of the Department's initial request and 30 days after service of any subsequent request.]
[(5) Withdrawal of Application redesignated as paragraph (e) under proposed Rule 1112]
[(b) Membership Interview redesignated as paragraph (f) under proposed Rule 1112]
[(1) Requirement for Interview redesignated as paragraph (f) under proposed Rule 1112]
[(2) Service of Notice redesignated as paragraph (f) under proposed Rule 1112]
[(3) Time]

[Unless the Department directs otherwise for good cause shown, a membership interview shall be scheduled to occur within 90 days after the filing of an application or within 60 days after the filing of all additional information or documents requested, whichever is later.]
[(4) Place]

[Unless the Department and the Applicant otherwise agree, the membership interview shall be conducted in the district office for the district in which the Applicant has or intends to have its principal place of business.]
[(5) Updated Financial Documents]

[On or before the date of the membership interview, the Applicant shall file an updated trial balance, balance sheet, supporting schedules, and computation of net capital. The Applicant shall prepare such documents as of a date that is within 45 days before the date of the membership interview, unless the Applicant and the Department agree on a longer period. The Applicant shall promptly notify the Department in writing of any material adverse change in its financial condition that occurs before a decision constituting final action of FINRA is served on the Applicant]
[(6) Review of Standards for Admission]

[During the membership interview, the Department shall review the application and the standards for admission to membership with the Applicant's representative or representatives.]
[(7) Information From Other Sources]

[During the membership interview, the Department shall provide to the Applicant's representative or representatives any information or document that the Department has obtained from the Central Registration Depository or a source other than the Applicant and upon which the Department intends to base its decision under Rule 1014. If the Department receives such information or document after the membership interview or decides to base its decision on such information after the membership interview, the Department shall promptly serve the information or document and an explanation thereof on the Applicant]

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1124. Reserved

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1125. Reserved

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1126. Reserved

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1127. Reserved

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1128. Reserved

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1129. Reserved

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[IM-1013-1. Membership Waive-In Process for Certain New York Stock Exchange Member Organizations]

[This Interpretive Material sets forth a membership waive-in process for certain New York Stock Exchange ("NYSE") member organizations to become members of FINRA as part of the consolidation of the member firm regulatory functions of NASD and NYSE Regulation, Inc. ("NYSE Regulation"). It applies to firms that, as of July 25, 2007, (1) are approved NYSE member organizations or (2) have submitted an application to become an NYSE member organization and are subsequently approved for NYSE membership (together "NYSE-only member organizations"), provided that such firms were not also NASD members as of July 30, 2007. Such firms are eligible to automatically become FINRA members and to automatically register all associated persons whose registrations are approved with NYSE in registration categories recognized by FINRA upon submission to FINRA's Member Regulation Department ("the Department") of a signed waive-in membership application ("Waive-In Application") with the following information:]

[(1) General company information, including Central Registration Depository (CRD®) Number and contact person.]
[(2) An attestation that all information on the applicant's CRD form, as of the date of submission of the Waive-In Application is accurate and complete and fully reflects all aspects of the applicant's current business, including, but not limited to, ownership structure, management, product lines and disclosures.]
[(3) The identity of the firm's Executive Representative.]
[(4) Completed and signed Entitlement Forms.]
[(5) A signed FINRA Membership Agreement.]
[(6) Representations that the NYSE applicant's Uniform Application for Broker-Dealer Registration (Form BD) will be amended as needed to keep current and accurate; that all individual and entity registrations with FINRA will be kept current; and that all information and statements contained in the Waive-In Application are current, true and complete.]

[The Department shall review the Waive-In Application within three (3) business days of receipt and, if complete, issue a letter notifying the applicant that it has been approved for membership. The Membership Agreement shall become effective on the date of such notification letter.]

[Firms admitted pursuant to this Interpretive Material shall be subject to the FINRA By-Laws and Schedules to By-Laws, including Schedule A, the consolidated FINRA rules and the NYSE rules incorporated by FINRA, provided that their securities business is limited to floor brokerage on the NYSE, or routing away to other markets orders that are ancillary to their core floor business under NYSE Rule 70.40 ("permitted floor activities"). If an NYSE-only member organization admitted pursuant to this Interpretive Material seeks to expand its business operations to include any activities other than the permitted floor activities, such firm must apply for and receive approval to engage in such business activity pursuant to NASD Rule 1017. Upon approval of such business expansion, the firm shall be subject to all NASD rules, in addition to the consolidated FINRA rules and those NYSE rules incorporated by FINRA.]

[Pursuant to IM-Section 4(b)(1) and (e) to Schedule A of the FINRA By-Laws, a firm applying to waive in for membership pursuant to this Interpretive Material shall not be assessed certain registration and application fees set forth in Sections 4(b)(1) and (e) to Schedule A of the FINRA By-Laws.]

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[IM-1013-2. Membership Waive-In Process for Certain NYSE Alternext US LLC Member Organizations]

[This Interpretive Material sets forth a membership waive-in process for certain NYSE Alternext US LLC ("NYSE Alternext") member organizations to become members of FINRA as part of the acquisition by NYSE Euronext of the Amex Membership Corporation. It applies to any NYSE Alternext member organization that (i) holds a valid 86 Trinity Permit as of the date such firm transfers its equities operations to the NYSE Alternext Trading Systems and (ii) is not currently a FINRA member. Such firms are eligible to automatically become FINRA members and to automatically register all associated persons whose registrations are approved with NYSE Alternext in registration categories recognized by FINRA upon submission to FINRA's Member Regulation Department ("the Department") of a signed waive-in membership application ("Waive-In Application") with the following information:]

[(1) General company information, including Central Registration Depository (CRD®) Number and contact person;]
[(2) An attestation that all information on the applicant's form, as of the date of submission of the Waive-In Application, is accurate and complete and fully reflects all aspects of the applicant's current business, including, but not limited to, ownership structure, management, product lines and disclosures;]
[(3) The identity of the firm's Executive Representative;]
[(4) Completed and signed Entitlement Forms (unless previously submitted);]
[(5) A signed FINRA Membership Agreement; and]
[(6) Representations that the NYSE Alternext applicant's Uniform Application for Broker-Dealer Registration (Form BD) will be amended as needed to keep current and accurate; that all individual and entity registrations with FINRA will be kept current; and that all information and statements contained in the Waive-In Application are current, true and complete.]

[The Department shall review the Waive-In Application within three (3) business days of receipt and, if complete, issue a letter notifying the applicant that it has been approved for membership. The Membership Agreement shall become effective on the date of such notification letter.]

[Firms admitted pursuant to this Interpretive Material shall be member organizations of both NYSE and NYSE Alternext and as such are subject to the consolidated FINRA rules (provided that firms admitted to FINRA membership under IM-1013-1 also are subject to the consolidated FINRA rules), the NYSE rules incorporated by FINRA, the FINRA By-Laws and Schedules to By-Laws, including Schedule A, and the NASD Rule 8000 and Rule 9000 Series, provided that their NYSE or NYSE Alternext securities business is limited to floor-based activities in either NYSE-traded or NYSE Alternext-traded securities, or routing away to other markets orders that are ancillary to their core NYSE or NYSE Alternext floor business under NYSE Rule 70.40 or NYSE Alternext Equities Rule 70.40 ("permitted floor activities"). If a firm admitted pursuant to this Interpretive Material seeks to expand its business operations to include any activities other than the permitted floor activities or makes changes to its securities business that would otherwise require FINRA membership, such firm must apply for and receive approval to engage in such business activity pursuant to NASD Rule 1017. Upon approval of such business expansion, the firm shall be subject to all NASD rules, in addition to the consolidated FINRA rules and those NYSE rules incorporated by FINRA.]

[Pursuant to IM-Section 4(b)(1) and (e) to Schedule A of the FINRA By-Laws, a firm applying to waive in for membership pursuant to this Interpretive Material shall not be assessed certain registration and application fees set forth in Sections 4(b)(1) and (e) to Schedule A of the FINRA By-Laws.]

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[1014. Department Decision redesignated to proposed Rule 1150]
[(a) Standards for Admission redesignated to proposed Rule 1142]
[(b) Granting or Denying Application redesignated as paragraphs (a) and (c) under proposed Rule 1152]
[(c) Decision redesignated as proposed Rules 1151 and 1153]
[(1) Time]

[The Department shall serve a written decision on the membership application within 30 days after the conclusion of the membership interview or after the filing of additional information or documents, whichever is later.]
[(2) Content redesignated as paragraphs (b) and (c) under proposed Rule 1153]
[(3) Failure to Serve Decision redesignated as paragraph (a) under proposed Rule 1151]
[(d) Submission of Membership Agreement redesignated as proposed Rule 1154]
[(e) Service and Effectiveness of Decision as paragraph (a) under proposed Rule 1155]
[(f) Effectiveness of Restriction redesignated as paragraph (b) under proposed Rule 1152]
[(g) Final Action redesignated as paragraph (b) under proposed Rule 1155]

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[1015. Review by National Adjudicatory Council redesignated to the proposed Rule 1160 Series]

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[1016. Discretionary Review by FINRA Board redesignated as proposed Rule 1167]

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1130. CONTINUING MEMBERSHIP

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[1017]1131. [Application for Approval of Change in Ownership, Control, or Business Operations]Continuing Membership Application Process
(a) Continuing Membership Application (Form CMA)
(1) An Applicant for continuing FINRA membership shall file Form CMA, including all documents and information reguested therein and as otherwise specified in this Rule, with the Department in accordance with Rule 1112, and submit the appropriate fee pursuant to Schedule A to the FINRA By-Laws.
(2) The circumstances of a particular transaction or event that would reguire the filing by two or more members, of an application under paragraph (a) of this Rule may, at the discretion of the Department, be satisfied through the filing of an Application by one of the parties involved in the transaction so designated by the Department for that purpose, or by one filing that is adopted by all parties to the transaction.
[a](b) Events Requiring [Application]Form CMA and Department Approval

Prior to effectuating any change set forth in this Rule, [A member] an Applicant shall file [an application]Form CMA [for] and obtain approval [of any of the following changes to its ownership, control, or business operationslthereon from the Department:
(1) Merger

[a]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.lbroker-dealer, whether or not such broker-dealer is a member of FINRA;
(2) Acquisition
(A) a member's direct or indirect acquisition [by the member] of another [member, unless the acquiring member is a member of the New York Stock Exchange, Inc.]broker-dealer, whether or not such broker-dealer is a member of FINRA;
(B) a direct or indirect acquisition of 25 percent or more in the aggregate of the member's assets or any asset, business, or line of business that generates revenues composing 25 percent or more in the aggregate of the member's earnings measured on a calendar-year basis for the three years immediately preceding the proposed event;
(3) Divestiture or Transfer

[a]A direct or indirect [acquisitions] divestiture or transfers] of 25[%] percent or more in the aggregate of the member's assets or any asset, business, or line of [operation]business that generates revenues [comprising]composing 25[%] percent or more in the aggregate of the member's earnings measured on a [rolling 36-month]calendar-year basis for the three years immediately preceding the proposed event[, unless both the seller and acquirer are members of the New York Stock Exchange, Inc.];
(4) Change in Capital Structure

[a]A change in the [equity ownership or partnership] capital structure 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]member (or holding a presently exercisable option to own or control the member).

[(5) a material change in business operations as defined in Rule 1011(k).]
(5) Change in Control Person

A direct or indirect change of the member's control person(s), other than the appointment or election of a natural person as a partner, officer, director, principal of the member, or any person occupying a similar status or performing similar function, in the normal course of business and regardless of paragraph (b)(4).
[1017(b)(2)(C)](6) Business Expansion

[If the application reguests approval of an increase inlExcept as provided in Rule 1133, a member that seeks to expand its business by increasing the number of: (A) Associated Persons involved in sales[,1; (B) offices (registered or unregistered)[,1; or (C) markets made[, the application shall set forth the increases in such areas during the preceding 12 months].
(7) Material Change in Business Operations

[The term]A ["]material change in business operations["] includes, but is not limited to, a member:
[(1) removing or modifying a membership agreement restriction;]
[(2)](A) engaging, for the first time, in:
(i) market making[,];
(ii) underwriting[,]; [or]
(iii) acting as a dealer [for the first time]; [and]
(iv) settling or clearing transactions for the member's own business;
(v) settling or clearing transactions for other broker-dealers; or
(vi) carrying accounts of customers;
[(3)](B) adding business activities that reguire a higher minimum net capital under SE[C]A Rule 15c3-1; or
(C) changing an exemptive status claimed under SEA Rule 15c3-3(k).
(8) Removal or Modification of Restriction in Membership Agreement
[1017(b)(2)(B)] (A) Applicant's Initiative

[If the application requests the removal]A member that seeks to remove or [modification ofjmodify any restriction in its membership agreement [restriction, the application also] shall include with Form CMA, and all information and supporting documents requested therein, a detailed description of[:]
[(i)] [present facts showing that]the circumstances that [gave rise tolobviate the restriction's) [have changed;] and
[(ii)] [state with specificity why]the rationale for removing or modifying the restriction(s) [should be modified or removed in light of the standards set forth in Rule 1014 and the articulated rationale for the imposition of the restriction].
[1017(k)](B) [Removal or Modification of Restriction on]

Department's Initiative

The Department shall modify or remove an existing restriction on its own initiative if the Department determines such action is appropriate in light of [the considerations set forth in paragraph (g)(1)]Form CMA and Rule 1142, and any information elicited during a membership interview, if held. The Department shall notify the member in writing of the Department's determination and inform the member that it may apply for further modification or removal of a restriction by filing an application [under paragraph (a)] in the manner prescribed in this Rule.
[(b) Filing and Content of Application]
[(1) The member shall file the application in the manner prescribed by FINRA with the Department of Member Regulation ("the Department").]
[(2) An applicant shall submit an application that includes a Form CMA including a detailed description of the change in ownership, control, or business operations.]
[(A) If the application requests approval of a change in ownership or control, the application also shall include the names of the new owners, their percentage of ownership, and the sources of their funding for the purchase and recapitalization of the member.]
[(B) redesignated to paragraph (b) under proposed Rule 1131]
[(C) redesignated to paragraph (b) under proposed Rule 1131]
[(c) Effecting Change and Imposition of Interim Restrictions]
[(1) A member shall file an application for approval of a change in ownership or control at least 30 days prior to such change. A member may effect a change in ownership or control prior to the conclusion of the proceeding, but the Department may place new interim restrictions on the member based on the standards in Rule 1014, pending final Department action.]
[(2) A member may file an application to remove or modify a membership agreement restriction at any time. An existing restriction shall remain in effect during the pendency of the proceeding.]
[(3) A member may file an application for approval of a material change in business operations, other than the modification or removal of a restriction, at any time, but the member may not effect such change until the conclusion of the proceeding, unless the Department and the member otherwise agree.]
[(d) Rejection Of Application That Is Not Substantially Complete]

[If the Department determines within 30 days after the filing of an application that the application is not substantially complete, the Department shall reject the application and deem it not to have been filed. In such case, within the 30 day period, the Department shall serve a written notice on the Applicant of the Department's determination and the reasons therefor. FINRA shall refund the application fee, less $500, which shall be retained by FINRA as a processing fee. If the Applicant determines to continue to apply for approval of a change in ownership, control, or business operations, the Applicant shall submit a new application under this Rule and fee pursuant to Schedule A to the FINRA By-Laws.]
[(e) Request for Additional Documents and Information redesignated as paragraph (c) under proposed Rule 1112]
[(f) Withdrawal of Application]

[If an Applicant withdraws an application within 30 days after filing the application, FINRA shall refund the application fee, less $500, which shall be retained by FINRA as a processing fee. If the Applicant determines to again apply for approval of a change in ownership, control, or business operations, the Applicant shall submit a new application under this Rule and fee pursuant to Schedule A to the FINRA By-Laws.]
[(g) Membership Interview redesignated as paragraph (f) under proposed Rule 1112]
[(h) Department Decision]
[(1) The Department shall consider the application, the membership interview, other information and documents provided by the Applicant or obtained by the Department, the public interest, and the protection of investors. In rendering a decision on an application submitted under Rule 1017(a), the Department shall consider whether the Applicant and its Associated Persons meet each of the standards in Rule 1014(a). Where the Department determines that the Applicant or its Associated Person are the subject of any of the events set forth in Rule 1014(a)(3)(A) and (C) through (E), a presumption exists that the application should be denied. The Applicant may overcome the presumption by demonstrating that it can meet each of the standards in Rule 1014 (a), notwithstanding the existence of any of the events set forth in Rule 1014(a)(3)(A) and (C) through (E).]
[(A) In rendering a decision on an application for approval of a change in ownership or control, or an application for approval of a material change in business operations that does not involve modification or removal of a membership agreement restriction, the Department shall determine if the Applicant would continue to meet the standards in Rule 1014(a) upon approval of the application.]
[(B) In rendering a decision on an application requesting the modification or removal of a membership agreement restriction, the Department shall consider whether maintenance of the restriction is appropriate in light of:]
[(i) the standards set forth in Rule 1014;]
[(ii) the circumstances that gave rise to the imposition of the restriction;]
[(iii) the Applicant's operations since the restriction was imposed;]
[(iv) any change in ownership or control or supervisors and principals; and]
[(v) any new evidence submitted in connection with the application.]
[(2) The Department shall serve a written decision on the application within 30 days after the conclusion of the membership interview or the filing of additional information or documents, whichever is later. If the Department does not require the Applicant to participate in a membership interview or request additional information or documents, the Department shall serve a written decision within 45 days after the filing of the application under paragraph (a). The decision shall state whether the application is granted or denied in whole or in part, and shall provide a rationale for the Department's decision, referencing the applicable standard in Rule 1014.]
[(3) If the Department fails to serve a decision within 180 days after filing of an application or such later date as the Department and the Applicant have agreed in writing, the Applicant may file a written request with the FINRA Board requesting that the FINRA Board direct the Department to issue a decision. Within seven days after the filing of such a request, the FINRA Board shall direct the Department to issue a written decision immediately or to show good cause for an extension of time. If the Department shows good cause for an extension of time, the FINRA Board may extend the time limit for issuing a decision by not more than 30 days.]
[(4) If the Department approves an application under this Rule in whole or part, the Department may require an Applicant to file an executed membership agreement.]
[(i) Service and Effectiveness of Decision]

[The Department shall serve its decision on the Applicant in accordance with Rule 1012. The decision shall become effective upon service and shall remain in effect during the pendency of any review until a decision constituting final action of FINRA is issued under Rule 1015 or 1016, unless otherwise directed by the National Adjudicatory Council, the FINRA Board, or the Commission.]
[(j) Request for Review; Final Action]

[An Applicant may file a written request for review of the Department's decision with the National Adjudicatory Council pursuant to Rule 1015. The procedures set forth in Rule 1015 shall apply to such review, and the National Adjudicatory Council's decision shall be subject to discretionary review by the FINRA Board pursuant to Rule 1016. If the Applicant does not file a request for a review, the Department's decision shall constitute final action by FINRA.]
[(k) Removal or Modification of Restriction on Department's Initiative redesignated to paragraph (b) under proposed Rule 1131]
[(l) Lapse or Denial of Application for Approval of Change in Ownership]

[If an application for approval of a change in ownership lapses, or is denied and all appeals are exhausted or waived, the member shall, no more than 60 days after the lapse or exhaustion or waiver of appeal:]
[(1) submit a new application under this Rule and fee pursuant to Schedule A to the FINRA By-Laws;]
[(2) unwind the transaction; or]
[(3) file a Form BDW.]
[For the protection of investors, the Department may shorten the 60-day period. For good cause shown by the member, the Department may lengthen the 60-day period. The Department shall serve written notice on the Applicant of any change in the 60-day period and the reasons therefor. During the 60-day or other imposed period, the Department may continue to place interim restrictions on the member for the protection of investors.]

* * * * *

••• Supplementary Material:..............

.01 Permissible Events for Form CMA Waiver. A member may seek, in the manner prescribed by Rule 1132, a waiver of the reguirement to file Form CMA in the following circumstances:
(a) Under Rule 1131(b)(2)(B) and Rule 1131(b)(3) where:
(1) the member is ceasing operations as a broker-dealer:
(2) the member is filing a Form BDWwith the SEC: and
(3) neither the member nor any of its Associated Persons is the subject of any claim (including, but not limited to, arbitration awards, or pending or settled arbitration claims, or litigation actions) that could be disadvantaged by the proposed transaction. In any instance where a claim against a member or any of its Associated Persons is awarded or settled, such claim will not be deemed satisfied for purposes of this Rule until all payments are satisfied in full, including any payments to be made on behalf of the member by a third party, pursuant to an agreement among the parties.
(b) Under Rule 1131(b)(4) or Rule 1131(b)(5) where:
(1) the events described therein do not make any material changes in the Applicant's business activities, management, supervision, assets, or liabilities: and
(2) the Applicant is proposing a change only in the:
(i) member's legal structure (e.g., changing from a corporation to an limited liability company): or
(ii) eguity ownership, partnership capital, or other ownership interest in an Applicant held by a corporate legal structure that is due solely to a reorganization of ownership or control of the Applicant within the corporate legal structure (e.g., reorganizing only to add a holding company to the corporate legal structure's ownership or control chain of the Applicant).

* * * * *

1132. Materiality Consultation
(a) When Voluntary

A member may seek guidance from the Department to determine whether the member's contemplated change in business operations or activities would reguire the submission of a Form CMA by submitting a written letter to the Department in accordance with Rule 1112.
(b) When Mandatory

A materiality consultation is mandatory under the following circumstances:
(1) When an applicant seeks a waiver of filing Form CMA for contemplated events described under Rule 1131.01; or
(2) When an applicant seeks to engage in, for the first time:
(A) retail foreign currency exchange activities:
(B) variable life settlement sales to retail customers:
(C) options activities: or
(D) municipal securities activities.
(c) Content of Request for Materiality Consultation

There is no fee associated with a materiality consultation. A member's written reguest for a materiality consultation for a contemplated change in business operations or activities must include a detailed description of:
(1) The nature and scope of the contemplated activity;
(2) The member's rationale for determining that the contemplated change in activity, business operations or product is similar in scope or nature to its existing business;
(3) The anticipated impact the contemplated change will have to the member's supervisory structure;
(4) Any impact the contemplated change will have to the member's capital or liquidity;
(5) The nature and scope of updates required to the member's written supervisory procedures, systems and operations;
(6) Any recent disciplinary matters that relate to the proposed activities;
(7) How the member's overall regulatory history may impact the ability of the member to effectively conduct the activity; and
(8) Any other relevant documentation or information to support the contemplated change.
(d) Department Review
(1) The Department shall assess factors that include, but are not limited to:
(A) the nature and scope of the contemplated activity;
(B) the history of sales practice events and disciplinary history of the member and its Associated Persons, if applicable; and
(C) the impact of the contemplated activity on the member's supervisory and compliance structure, personnel, and finances; and
(D) any other impact on investor protection raised by the contemplated activity.
(2) The Department shall consider the letter and other documents or information, and determine in the public interest and the protection of investors that either (A) the member is not required to file Form CMA in accordance with Rule 1131 and may effect the contemplated activity; or (B) the member is required to file Form CMA in accordance with Rule 1131 and the member may not effect the contemplated activity, unless the Department approves Form CMA. Upon completion of the review of the materiality consultation, the Department shall provide the member a written response as to the materiality of the contemplated activity. If the Department determines that the member's contemplated activity would be subject to Rule 1131, the member must submit Form CMA, and all the information and supporting documents requested therein, before the member effects such change. If, however, the Department deems that the contemplated change is not material in nature that would reguire the submission of Form CMA, the member may implement such change without having to engage in the CMA process under Rule 1131.

* * * * *

[IM-1011-1]1133. Safe Harbor from the CMA Process
(a) General

For the types of events listed in this Rule, a member will not be reguired to submit Form CMA and obtain Department approval of the change before effecting such change. An expansion in each enumerated category as set forth in paragraph (b) below shall be measured on a 12-month period preceding the event. A member that elects to avail itself of the Safe Harbor shall make and preserve the records reflecting the underlying rationale for the business expansion made for any of the events listed herein.
(b) Permissible Events for Safe Harbor

A member that seeks to expand in the categories listed herein are presumed not to constitute a type of event that would reguire such member to submit Form CMA. The safe harbor is available to a member that seeks to expand in the following categories:
(1) Number of Associated Persons Involved in Sales
(A) A member with up to 10 Associated Persons involved in sales, and adds not more than 10 Associated Persons involved in sales; or
(B) A member with 11 or more Associated Persons involved in sales, and adds the greater of 10 Associated Persons or 30 percent;
(2) Number of Offices or Locations (Registered or Unregistered)
(A) A member maintains up to five offices or locations, and adds not more three offices or locations; or
(B) A member maintains six or more offices or locations, and adds the greater of three offices or locations, or 30 percent.
(3) Number of Markets Made
(A) A member makes up to 10 markets, and adds not more than 10 markets; or
(B) A member makes 11 or more markets, and adds the greater of 10 markets or the number of markets that reflects a 30 percent increase.
(c) Exclusions from Safe Harbor

The safe harbor is not available to a member under the following circumstances:
(1) A member is subject to a membership agreement that contains a restriction directly related to one or more of the enumerated categories listed in paragraph (b) of this Rule; or
(2) A member has disciplinary history.

* * * * *

1134. Reserved

* * * * *

1135. Reserved

* * * * *

1136. Reserved

* * * * *

1137. Reserved

* * * * *

1138. Reserved

* * * * *

1139. Reserved

* * * * *

[1018. Reserved]

* * * * *

[1019. Application to Commission for Review redesignated as proposed Rule 1168]

* * * * *

[1014]1140. [Department Decision]STANDARDS FOR APPROVAL OF APPLICATION

* * * * *

1141. General Provisions
(a) An Applicant that seeks approval of an Application shall satisfy the standards set forth in Rule 1142 subject to paragraph (b) below.
(b) An Applicant may identify any standard that it believes is not applicable to the Department's review of the Application by providing a detailed written description of its rationale to the Department in the manner prescribed in Rule 1112. The Department shall make the final determination of the applicability of any standard, and the Applicant shall comply with the Department's determination. Such determination does not represent final action on the Application for purposes of the Rule 1160 Series.

* * * * *

[1014(a)]1142. Standards [for Admission]

After considering the [a]Application, the membership interview, if held, other information and documents provided by the Applicant, other documents and information [and documents] obtained by the Department and the public interest and the protection of investors, the Department shall determine whether the Applicant [meets]satisfies each of the following standards that are applicable to such Applicant in accordance with Rule 1141:
[(1)](a) Complete and Accurate Application

The [a]Application and all supporting documents and information requested therein are complete, [and] accurate, and consistent with applicable securities laws and regulations, and with applicable FINRA rules.
[(2)](b) Licenses and Registrations, and Continuing Education
(1) The Applicant and its Associated Persons have all licenses and registrations required by state and federal authorities and self-regulatory organizations and have paid all applicable feesf[.]; and
(2) The Applicant has completed a training needs evaluation and has a written training plan that complies with the continuing education requirements imposed by applicable securities laws and regulations, and with applicable FINRA rules.
(c) Source of Funding

The Applicant has fully disclosed and established through documentation all direct and indirect sources of funding.
[(3)](d) Compliance with Securities Laws, and Just and Eguitable Principles of Trade

The Applicant and its Associated Persons are capable of complying with [the federal]applicable securities laws[, the rules] and regulations [thereunder], and with applicable [NASD]FINRA [R]rules, including observing high standards of commercial honor and just and equitable principles of trade. In determining whether this standard is met, the Department shall take into consideration all documents and information in its possession, including whether:
[(A)](1) a state or federal authority or self-regulatory organization has taken permanent or temporary adverse action with respect to a registration or licensing determination regarding the Applicant or an Associated Person;
[(B)](2) an Applicant's or Associated Person's record reflects a sales practice event, a pending arbitration, or a pending private civil action;
[(C)](3) [an]the Applicant or an Associated Person is the subject of.
(A) a pending, adjudicated, or settled regulatory action or investigation by the [Commission]SEC, the Commodity Futures Trading Commission, a federal[,] or state regulatory agency, [or]a foreign financial regulatory [agency]authorjty, or a self-regulatory organization;
(B) an adjudicated[,] or settled investment-related private civil action for damages^ or an injunction; or
(C) a criminal action (other than a minor traffic violation) that is pending, adjudicated, or that has resulted in a guilty or no contest plea; [or]
(4) an Applicant, its control persons, principals, registered representatives, other Associated Persons, any lender of 5[%]percent or more of the Applicant's net capital, and any other member with respect to which these persons were a control person or a 5F%lpercent lender of its net capital is subject to unpaid arbitration awards, other adjudicated customer awards, or unpaid arbitration settlements;
[(D)](5) an Associated Person was terminated for cause or permitted to resign after an investigation of an alleged violation of a federal or state securities law, a rule or regulation thereunder, a self-regulatory organization rule, or industry standard of conduct;
[(E)](6) a state or federal authority or self-regulatory organization has imposed a remedial action, such as special training, continuing education requirements, or heightened supervision, on an Associated Person; and
[(F)](7) a state or federal authority or self-regulatory organization has provided information indicating that the Applicant, [or] an Associated Person otherwise poses a threat to public investors.
[(4)](e) Contractual and Business Relationships

The Applicant has established all contractual or other arrangements and business relationships with banks, other brokers or dealers, clearing corporations, service bureaus, or others necessary to[:]
[(A)] initiate the operations described in the Applicant's [business plan]Application, considering the nature and scope of operations and the number of personnel[; and].
[(B) comply with the federal securities laws, the rules and regulations thereunder, and NASD Rules.]
[(5) The Applicant has or has adequate plans to obtain facilities that are sufficient to:]
[(A) initiate the operations described in the Applicant's business plan, considering the nature and scope of operations and the number of personnel; and]
[(B) comply with the federal securities laws, the rules and regulations thereunder, and NASD Rules.]
[(6)](f) Communications and Operational Systems

The communications and operational systems that the Applicant intends to employ for the purpose of conducting business with customers and other members are adequate and provide reasonably for business continuity pursuant to Rule 4370 [in each area set forth in Rule 1013(a)(2)(E)(xii);].
[(7)](g) Financial and Operational Controls; Capital
(1) The Applicant has adequate financial and operational controls to comply with SEA Rules 15c3-1 and 15c3-3 and is capable of maintaining a level of net capital in excess of the minimum net capital requirements set forth in SE[C]A Rule 15c3-1 and Rule 4110, as applicable, and adequate to support the Applicant's intended business operations on a continuing basis[, based on information filed under Rule 1013(b)(5)].
(2) The Department may impose a reasonably determined higher [net] capital requirement for the initiation of operations after considering:
(A) the amount of net capital sufficient to avoid early warning level reporting requirements, such as SE[C]A Rule 17a-11 and Rule 4120, as applicable;
(B) the amount of capital necessary to meet expenses [net of revenues] for at least [twelve]12 months, based on reliable projections of revenue agreed to by the Applicant and the Department;
(C) any planned market making activities, the number of markets to be made, the type and volatility of products, and the anticipated maximum inventory positions;
(D) any plan to enter into other contractual commitments, such as underwritings or other securities-related activities;
(E) any plan to distribute or maintain securities products in proprietary positions, and the risks, volatility, degree of liquidity, and speculative nature of the products; and
(F) any other activity that the Applicant will engage in that reasonably could have a material impact on the Applicant's net capital within the first [twelve]12 months of business operations.
[(8) The Applicant has financial controls to ensure compliance with the federal securities laws, the rules and regulations thereunder, and NASD Rules.]
[(9) The Applicant has compliance, supervisory, operational, and internal control practices and standards that are consistent with practices and standards regularly employed in the investment banking or securities business, taking into account the nature and scope of Applicant's proposed business.]
[(10)](h) Supervisory System

The Applicant has a supervisory system, including written supervisory procedures, internal operating procedures (including operational and internal controls), and compliance procedures to supervise the activities of each Associated Person that is reasonably designed to [prevent and detect, to the extent practicable, violations of the]achieve compliance with applicable [federal] securities laws[, the rules] and regulations [thereunder], and with applicable [NASD]FINRA [R]rules. In evaluating the adequacy of a supervisory system, the Department shall consider the overall nature and scope of the Applicant's intended business operations and shall consider [whether]:
[(A)](1) the adequacy of the number, location, experience, and qualifications of supervisory personnel [are adequate] in light of the number, location, experience, and qualifications of persons to be supervised;
(2) the Central Registration Depository record or other disciplinary history of supervisory personnel and persons to be supervised; [and]
(3) the number and locations of the offices that the Applicant intends to open and the nature and scope of business to be conducted at each office;
[(B)](4) the Applicant^ [has identifiedlidentification of specific Associated Persons to:
(A) supervise and discharge each of the functions specified in the Applicant's [business plan]Application[,]; and
(B) [to] supervise each of the Applicant's intended offices and locations, whether or not such offices or locations are required to be registered under [NASD]FINRA [R]rules;
[(C)](5) the Applicant's [has identified]identification of the functions to be performed by each Associated Person and [has adopted]adoption of procedures to assure the registration with FINRA and applicable states of all persons whose functions are subject to such registration requirements;
[(D)](6) the Applicant's identification of each Associated Person [identified] in the [business plan]Application to discharge a supervisory function [has at least one year of direct experience or two years of related experience in the subject area to be supervised]is qualified, either by virtue of experience or training, to carry out his or her assigned responsibilities;
[(E)](7) whether the Applicant will solicit retail or institutional business;
[(F)](8) whether the Applicant will recommend transactions or investment strategies involving a security or securities to customers;
[(G)](9) whether the location or part-time status of a supervisor or principal will affect such person's ability to be an effective supervisor;
[(H)](10) whether the Applicant [should be required to place one or morelwill implement heightened supervisory procedures on any Associated Person[s] [under heightened supervision pursuant to Notice to Members 97-19]whose record reflects a history of industry or regulatory-related incidents, including one or more disciplinary actions or sales practice events;
[(i)](11) any remedial action, such as special training or continuing education requirements or heightened supervision, that has heretofore been imposed on an Associated Person by a state or federal authority or self-regulatory organization; and
[(J)](12) any other condition that is identified that [will]may have a material impact on the Applicant's ability to detect and prevent violations of [the federal]applicable securities laws[, the rules] and regulations [thereunder], and applicable [NASD]FINRA [R]rules.
[(11)](i) Recordkeeping System

The Applicant has a recordkeeping system that enables the Applicant to comply with applicable federal, state, and self-regulatory organization recordkeeping requirements and a staff that is sufficient in qualifications and number to prepare and preserve required records.
[(12) The Applicant has completed a training needs assessment and has a written training plan that complies with the continuing education requirements imposed by the federal securities laws, the rules and regulations thereunder, and NASD Rules.]
[(13)](j) Other Information Possessed by FINRA

FINRA does not possess any information indicating that the Applicant may circumvent, evade, or otherwise avoid compliance with [the federal]applicable securities laws[, the rules] and regulations [thereunder], or with applicable [NASD]FINRA [R]rules.
[(14) The application and all supporting documents otherwise are consistent with the federal securities laws, the rules and regulations thereunder, and NASD Rules.]

• • • Supplementary Material:..................

.01 Pending Qualifications for Associated Persons. The Department may, in its discretion, approve an application for continuing membership where one or more of the Applicant's Associated Persons have applied for, but not acquired, all licenses and registrations required by federal and state authorities, and self-regulatory organizations, subject to the following conditions:
(a) All Associated Persons must acguire all reguired licenses and registrations within 90 days of the date of the approval of the application;
(b) The Applicant shall promptly notify the Department when such licenses and registrations are acguired;
(c) The Applicant shall not engage in business activities that reguire a license or registration that has not been acguired; and
(d) If all reguired licenses and registrations are not acguired within 90 days of the date of approval of the application, the Applicant must cease business operations until all such licenses and registrations have been acguired.

* * * * *

1143. Reserved

* * * * *

1144. Reserved

* * * * *

1145. Reserved

* * * * *

1146. Reserved

* * * * *

1147. Reserved

* * * * *

1148. Reserved

* * * * *

1149. Reserved

* * * * *

[1014]1150. DEPARTMENT DECISION

* * * * *

[1014(c)(3)]1151. [Failure to Serve] Timing of Decision
(a) [If t]The Department [fails to]shall serve a written decision on the Applicant within [180]150 days [after]of the [filing of an applicationlApplication Filed Date or such [later]other date as the Department and the Applicant have agreed to in writing[,]. The Department shall serve its decision on the Applicant in accordance with Rule 1112.
(b) If the Department fails to serve a written decision within the requisite timeframe under paragraph (a), the Applicant may file a written request with the FINRA Board requesting that the FINRA Board direct the Department to serve a decision. Within seven days after the filing of such a request, the FINRA Board shall direct the Department to serve its written decision immediately or to show good cause for an extension of time. If the Department shows good cause for an extension of time, the FINRA Board may extend the [180 day] time [limit]within which the Department must issue a decision by not more than 90 days from the FINRA Board's good cause determination.

* * * * *

[1014(b)]1152. [Granting or Denying] Department Decision on the Application
[(1)] In reviewing [an]the [a]Application [for membership], the Department shall consider whether the Applicant and its Associated Persons [meet each ofsatisfy the standards in [paragraph (a)]Rule 1142 that are applicable to such Applicant in accordance with Rule 1141. [Where the Department determines that the Applicant or its Associated Persons are the subject of any of the events set forth in Rule 1014(a)(3)(A) and (C) through (E), a presumption exists that the application should be denied. The Applicant may overcome the presumption by demonstrating that it can meet each of the standards in paragraph (a), notwithstanding the existence of any of the events set forth in Rule 1014(a)(3)(A) and (C) through (E)].
[(2)]
(a) Granting or Denying the Application
(1) If the Department determines that the Applicant [meets each oflsatisfies the applicable standards [in paragraph (a)]set forth under Rule 1142, the Department shall grant the [a]Application [for membership].
[(3)](2) If the Department determines that the Applicant does not [meet]satisfy one or more of the applicable standards [in paragraph (a)]set forth under Rule 1142 in whole or in part, the Department shall:
(A) grant the application subject to one or more restrictions reasonably designed to address a specific financial, operational, supervisory, disciplinary, investor protection, or other regulatory concern based on the applicable standards [for admission in]under Rule [1014(a)]1142; or
(B)deny the application.
(3) Contingent upon Rule 1154, the decision shall become effective upon service and shall remain in effect during the pendency of any review pursuant to the Rule 1160 Series until a decision constituting final action of FINRA is issued under the Rule 1160 Series unless otherwise directed by the National Adjudicatory Council, the FINRA Board or the SEC.
[1014(f)](b) Effectiveness of Restriction

A restriction imposed under this Rule shall remain in effect and bind the Applicant and all successors to the ownership or control of the Applicant unless[:]
[(1)] it is is removed or modified by a decision constituting final action of FINRA issued under this Rule or Rules [1015]1166, [1016]1167, or [1017;]
[(2)] stayed by the National Adjudicatory Council, the FINRA Board, or the [Commission]SEC.
[1014(b)(1)](c) Presumption to Deny the Application

[In reviewing an application for membership, the Department shall consider whether the Applicant and its Associated Persons meet each of the standards in paragraph (a). Where the Department determines that the Applicant or its Associated Persons are the subject of any of the events set forth in Rule 1014(a)(3)(A) and (C) through (E),] [a]A presumption exists that the [a]Application should be denied if the Applicant or its Associated Persons are the subject of any of the events set forth in Rule 1142(d)(1), and Rule 1142(d)(3) through (d)(6). The Applicant may overcome the presumption to deny the Application by demonstrating that it can [meet]satisfy [each of] the applicable standards in [paragraph (a)]Rule 1142, notwithstanding the existence of any of the events set forth in [Rule 1014(a)(3)(A) and (C) through E]the aforementioned subparagraphs of Rule 1142(d).

* * * * *

[1014(c)]1153. Content of Decision
(a) If the Department grants the Application, the Department shall provide written notification to the Applicant.
[1014(c)(2)](b) [If the Department denies the application, the decision shall explain in detail the reason for denial, referencing the applicable standard or standards in paragraph (a).] If the Department grants the [a]Application subject to one or more restrictions under this paragraph, the written decision shall explain, in detail, the reason for each restriction, referencing the applicable standard(s) [or standards] in [paragraph (a)]Rule 1142 upon which the restriction is based, and identify the specific financial, operational, supervisory, disciplinary, investor protection, or other regulatory concern that the restriction is designed to address and the manner in which the restriction is reasonably designed to address the concern.
[1014(c)(2)](c) If the Department denies the [a]Application, the written decision shall explain, in detail, the reason for denial, referencing the applicable standard [or standards] in [paragraph (a)]Rule 1142 upon which the denial is based. [If the Department grants the application subject to restrictions, the decision shall explain in detail the reason for each restriction, referencing the applicable standard or standards in paragraph (a) upon which the restriction is based and identify the specific financial, operational, supervisory, disciplinary, investor protection, or other regulatory concern that the restriction is designed to address and the manner in which the restriction is reasonably designed to address the concern.]

* * * * *

[1014(d)]1154. Submission of Executed Written Membership Agreement

[If the Department grants an application, with or without restriction, the Applicant's approval for membership shall be contingent upon the Applicant's filing of an executed written membership agreement, satisfactory to the Department, undertaking to:]
(a) The Department's grant of the Application under Rule 1152 shall be contingent upon the Applicant's submission of an executed written membership agreement to the Department. Within 15 days after the Department's service of the membership agreement on the Applicant or within such other period agreed to by the Department and the Applicant, the Applicant shall submit an executed written membership agreement to the Department in the manner consistent with Rule 1112. The terms of such agreement shall reflect that, at a minimum, the Applicant agrees to:
(1) abide by all provisions of the membership agreement, including any restriction(s) specified in the Department's decision; and
(2)[obtain the Department's approval of a change in ownership, control, or business operations pursuant to Rule 1017, including the modification or removal of a membership agreement restriction]comply with the Rule 1130 Series.
(b) Upon submission of the membership agreement, the Applicant may begin operating subject to the terms of such agreement. The Applicant shall not waive the right to file a written [request for review]notice of appeal under Rule [1015]1162 by executing a written membership agreement under this paragraph.

* * * * *

[1014(e)] 1155. Service and Effectiveness of Decision; Final Action
(a) Service and Effectiveness of Decision

The Department shall serve its decision [and the membership agreement] on the Applicant in accordance with Rule [1012]1112. The decision shall become effective upon service and shall remain in effect during the pendency of any review until a decision constituting final action of FINRA is issued under the Rule [1015 or 1016]1160 Series, unless otherwise directed by the National Adjudicatory Council, the FINRA Board, or the [Commission]SEC.
[1014(g)](b) Final Action

[Unless the]An Applicant may file[s] a written [request for a review]notice of appeal of the Department's decision with the National Adjudicatory Council [under]pursuant to Rule [1015]1162[,]. The procedures set forth in the Rule [1015]1160 Series shall apply to such review, and the National Adjudicatory Council's decision shall be subject to discretionary review by the FINRA Board pursuant to Rule [1016]1167. If the Applicant does not file a [request for a review]notice of appeal, the Department's decision shall constitute final action by FINRA for purposes of SEA Rule 19d-3.

* * * * *

1156. Reserved

* * * * *

1157. Reserved

* * * * *

1158. Reserved

* * * * *

1159. Reserved
1160. REVIEW OF DEPARTMENT DECISION

* * * * *

[1012(c)]1161. Ex Parte Communications
[(1)] The prohibitions against ex parte communications shall become effective when FINRA staff has knowledge that an Applicant intends to file a written [request for review by] notice of appeal with the National Adjudicatory Council under Rule [1015]1162.
(a) Prohibited Communications
[(2)] Unless on notice and opportunity for an Applicant and Interested FINRA Staff to participate, or to the extent required for the disposition of ex parte matters as authorized by [NASD1FINRA [R]rules:
[(A)](1) No [an] Applicant, [a]or counsel to or representative of an Applicant, or [an] Interested FINRA Staff shall [not] make or knowingly cause to be made an ex parte communication relevant to the merits of a membership proceeding under the Rule [1010]1100 Series to a Governor, a member of the National Adjudicatory Council or a Subcommittee thereof, or a FINRA employee who is participating or advising in a decision of such a person with respect to that proceeding; and
[(B)](2) No [a] Governor, [a] member of the National Adjudicatory Council or a Subcommittee thereof, or [a] FINRA employee who is participating or advising in the decision of such a person with respect to a membership proceeding shall [not] make or knowingly cause to be made to an Applicant, [a] counsel to or representative of the Applicant, or [an] Interested FINRA Staff an ex parte communication relevant to the merits of that proceeding.
(b) Disclosure of Prohibited Communications
[(3)] A Governor, a member of the National Adjudicatory Council or a Subcommittee thereof, or a FINRA employee participating or advising in the decision of such a person, who receives, makes, or knowingly causes to be made a communication prohibited by this [paragraph]Rule shall place in the record of the membership proceeding:
[(A)](1) [a]AII such written communications;
[(B)](2) [m]Memoranda stating the substance of all such oral communications and
[(C)](3) [a]All written responses and memoranda stating the substance of all oral responses to all such communications.

* * * * *

[1015]1162. [Review by] Appeal to the National Adjudicatory Council
(a) [Initiation of Review by ApplicantlTime to File Notice of Appeal

An Applicant may file a written notice of appeal with the National Adjudicatory Council [Wjwithin 25 days after service of a decision issued under the Rule [1014 or 101711150 Seriesf, an Applicant may file a written request for review with the National Adjudicatory Council. A request for review shall state with specificity why the Applicant believes that the Department's decision is inconsistent with the membership standards set forth in Rule 1014, or otherwise should be set aside, and state whether a hearing is requested. The Applicant simultaneously shall file by first-class mail a copy of the request to the district office where the Applicant filed its application].
[(b) Transmission of Documents redesignated as paragraph (a) under proposed Rule 1164]
(b) Where to File Notice of Appeal; Methods of Service

The Applicant shall file the notice of appeal with FINRA's Office of General Counsel and simultaneously shall serve a copy of the notice of appeal with the Department. The Applicant is permitted to file and serve the notice of appeal by personal service, by first class mail, first class certified mail, first class registered mail, or express mail through the U.S. Postal Service, by courier, or via electronic process or such other process as FINRA may prescribe.

Filing or service by personal service or courier are complete upon delivery. Filing or service by mail is complete upon mailing. Filing or service is complete on the date recorded by FINRA's electronic systems for electronic communications or such other process as FINRA may prescribe.
[(c) Membership Application Docket]

[The Department shall promptly record in FINRA's membership application docket each request for review filed with the National Adjudicatory Council under this Rule and each material subsequent event, filing, and change in the status of a membership proceeding.]
(c) Effect

An appeal to the National Adjudicatory Council of a Department decision issued under the Rule 1150 Series shall not operate as a stay of that decision pending a decision from the National Adjudicatory Council issued under Rule 1166(b).
[(d) Appointment of Subcommittee redesignated as paragraph (a) under proposed Rule 1163]
[1015(a)](d) [Initiation of Review by Applicant]Content of Notice of Appeal

[Within 25 days after service of a decision under Rule 1014 or 1017, an Applicant may file a written reguest for review with the National Adjudicatory Council. A reguest for review shalllThe notice of appeal must:
(1) Be accompanied by the Department's written decision issued under the Rule 1150 Series;
(2) [s]State with specificity why the Applicant believes that the Department's decision is inconsistent with the [membership]applicable standards set forth in Rule [1014]1142, or otherwise should be set aside[,]; and
(3) [s]State whether a hearing is reguested. [The Applicant simultaneously shall file by first-class mail a copy of the reguest to the district office where the Applicant filed its application.]
[(e) Powers of Subcommittee redesignated as paragraph (b) under proposed Rule 1163]
(e) Withdrawal of Notice of Appeal

An Applicant may withdraw its notice of appeal at any time by filing a written notice of withdrawal of appeal with the National Adjudicatory Council and serving notice thereof on the Department.
[(f) Hearing redesignated as proposed Rule 1165]
[(1) Notice redesignated as paragraph (a) under proposed Rule 1165]
[(2) Counsel redesignated as paragraph (b) under proposed Rule 1165]
[(3) Evidence redesignated in part as paragraph (b) under proposed Rule 1164 and paragraph (c) under proposed Rule 1165]
[(4) Transcript redesignated as paragraph (e) under proposed Rule 1165]
[(g) Additional Information, Briefs redesignated as paragraph (b) under proposed Rule 1163]
[(h)](f) Abandonment of [Request for Review]Appeal

The National Adjudicatory Council or Subcommittee may dismiss the appeal as abandoned, and the decision of the Department shall become the final action of FINRA under any of the following circumstances:
(1) [If]When an Applicant fails to:
(A) [fails to] specify the grounds for its [request for review]appeal under this Rule [1015(a)(1),];
(B) appear at a hearing for which it has notice[,]; or
(C) file information or briefs as [directed,lordered; or
(2) When an Applicant:
(A) files Form BDW;
(B) becomes expelled from FINRA membership: or
(C) enters into liquidation proceedings under the Securities Investor Protection Act of 1970.
[the National Adjudicatory Council or the Review Subcommittee may dismiss the request for review as abandoned, and the decision of the Department shall become the final action of FINRA.] Upon a showing of good cause, the National Adjudicatory Council or [the Review] Subcommittee may withdraw a dismissal entered pursuant to this paragraph.
[(i) Subcommittee Recommendation redesignated as paragraph (a) under proposed Rule 1166]
[(j) Decision redesignated as paragraph (b) under proposed Rule 1166]

* * * * *

1163. Appointment and Powers of Subcommittee; Recusal and Disqualification, or Withdrawal
[1015(d)](a) Appointment of Subcommittee by National Adjudicatory Council

Following the filing of a notice of appeal pursuant to Rule 1162, [T]the National Adjudicatory Council or the Review Subcommittee (as defined in Rule 9120} shall appoint a Subcommittee to participate in the [reviewlappeal. [The Subcommittee shall be composed of two or more persons who shall be current or past members of the National Adjudicatory Council or former Directors or Governors.]
[1015(e)](b) Powers of Subcommittee
(1) General
(A) For good cause shown, or with the consent of all of the parties to a proceeding, the Subcommittee may extend or shorten any time limits set forth in the Rule 1160 Series.
(B) The Subcommittee shall have the authority to do all things necessary and appropriate to regulate the course of a proceeding under the Rule 1160 Series, including but not limited to, resolving any and all procedural and evidentiary matters.
(2) Scheduling Conference

Within 10 days following the filing of a written notice of appeal or within such other time prescribed by the Subcommittee, the Applicant and the Department shall participate in a scheduling conference. Subject to approval from the Subcommittee, the Applicant and the Department may agree to a hearing date and the date for the Subcommittee to present a recommended decision to the National Adjudicatory Council.
(3) Function
(A) If the Applicant reguests a hearing [is reguested], the Subcommittee shall conduct the hearing. If the Applicant does not reguest a hearing [is not requested], the Subcommittee may [serve a notice directing]order that a hearing be held.
(B) If the Applicant does not request a hearing [is not requested] or [directed]the Subcommittee does not order that a hearing be held, the Subcommittee shall conduct its review of the appeal on the basis of the record developed before the Department and any written submissions made by the Applicant or the Department in connection with the [request for review]appeal.
(C) The Subcommittee may cancel in writing a previously scheduled hearing for good cause shown due to abandonment or other similar unreasonable availability of the Applicant.
[1015(g)](4) Additional Information, Briefs

At any time during its consideration, the Subcommittee or the National Adjudicatory Council may [direct]order the Applicant or the Department to file additional information or briefs. Any additional information or brief filed shall be provided to all parties before the National Adjudicatory Council renders its decision.
[1012(d)](c) Recusal [or]and Disqualification, or Withdrawal
(1) Recusal and Disqualification

No [A] Governor,, [or a] member of the National Adjudicatory Council or a Subcommittee thereof shall [not] participate in a matter governed by the Rule [1010]1100 Series as to which that person has a conflict of interest or bias, or [if] circumstances otherwise exist where his or her fairness might reasonably be questioned. In any such [a] case, the person shall recuse himself or herself or shall be disqualified as follows:
(A) FINRA Board
[(1)] The Chair of the FINRA Board shall have authority to [direct]order the disqualification of a Governor, and a majority of [the Governors of] the FINRA Board excluding the Chair of the FINRA Board, shall have authority to [direct]order the disqualification of the Chair of the FINRA Board.
(B) National Adjudicatory Council
[(2)] The Chair of the National Adjudicatory Council shall have authority to [direct]order the disqualification of a member of the National Adjudicatory Council or a [member of a] Subcommittee thereof appointed pursuant to this Rule [1015], and the Vice Chair of the National Adjudicatory Council shall have authority to [direct]order the disqualification of the Chair of the National Adjudicatory Council. and decide on a motion for disqualification. If a member of a Subcommittee is disqualified, the Chair or the Vice Chair of the National Adjudicatory Council shall appoint a replacement of such member.
(C) Motion for Disqualification

An Applicant or the Department may move for the disqualification of a member of the National Adjudicatory Council or a Subcommittee thereof appointed pursuant to this Rule. A motion shall be based upon a reasonable, good faith belief that a conflict of interest or bias exists or circumstances otherwise exist where the fairness of the member of the National Adjudicatory Council or a Subcommittee thereof might reasonably be Questioned, and shall be accompanied by an affidavit setting forth in detail the facts alleged to constitute grounds for disgualification, and the dates on which the Applicant or Department learned of those facts. Such motion shall be filed not later than 15 days after the later of:
(i) when the Applicant or Department learned of the facts believed to constitute the disgualification; or
(ii) when the Applicant or Department was notified of the assignment of the members of the Subcommittee.
(2) Withdrawal

If at any time a member of the National Adjudicatory Council or a Subcommittee thereof has a conflict of interest or bias or circumstances otherwise exist where the fairness of the member of the National Adjudicatory Council or a Subcommittee thereof might reasonably be guestioned, such member shall notify the Chair or the Vice Chair of the National Adjudicatory Council, and the Chair or the Vice Chair of the National Adjudicatory Council shall issue and serve on the Applicant and Department a notice stating that the member of the National Adjudicatory Council or a Subcommittee thereof has withdrawn from the matter. In the event that such member withdraws, is incapacitated, or is otherwise unable to continue service after a hearing has been convened, the Chair or Vice Chair of the National Adjudicatory Council shall appoint a replacement member.

* * * * *

1164. Transmission of Record, Exhibit and Witness Lists; Withheld Documents
[1015(b)](a) Transmission of [Documents]Record

Except as provided in paragraph (c) of this Rule, [W]within [ten]21 days after the filing of a [request for review]written notice of appeal or at such other time as the Subcommittee or National Adjudicatory Council may designate, the Department shall:
(1) Assemble and prepare an index of the documents that were considered in connection with the Department's decision;
[(1)](2) [t]Transmit the documents and index to [the National Adjudicatory Council] FINRA's Office of General Counsel [copies of all documents that were considered in connection with the Department's decision and an index to the documents]; [and]
[(2)](3) [s]Serve on the Applicant a copy of such documents (other than those documents originally submitted by Applicant) and a copy of the indexf.l; and
(4) Serve the record on the Applicant electronically or in any other manner FINRA may prescribe.
[1015(f)(3)](b) [Evidence]Exhibit and Witness Lists
(1) [Formal rules of evidence shall not apply to a hearing under this Rule.] Not later than [five]21 days before the hearing, the Applicant and the Department shall exchange copies of their proposed hearing exhibits and witness lists^ and provide copies of the same to the Subcommittee or National Adjudicatory Council. If the Applicant or the Department fails to provide copies of its proposed hearing exhibits or witness list within such time, the Subcommittee or National Adjudicatory Council shall exclude the evidence or witnesses from the proceeding, unless the Subcommittee or National Adjudicatory Council determines that good cause is shown for failure to comply with the production date set forth in this [subparagraph]Rule.
(2) At any time prior to the hearing, the Subcommittee or National Adjudicatory Council, in the exercise of its discretion, may order the Applicant and Department to disclose any expert witness and information related to the expert, including a statement of the expert's gualifications, a listing of other proceedings in which the expert has given expert testimony, a list of the expert's publications, and copies of those publications.
(c) Withheld Documents
(1) The Department may withhold a document if:
(A) the document is privileged or constitutes attorney work product;
(B) the document is an examination or investigative report, an internal memorandum, or other note or writing prepared by a FINRA employee that shall not be offered in evidence;
(C) the document would disclose:
(i) an examination, investigatory or enforcement technigue or guideline of FINRA, a federal, state, or foreign regulatory authority, or a self-regulatory organization;
(ii) the identity of a source, including a federal, state, or foreign regulatory authority or a self-regulatory organization that furnished information or was furnished information on a confidential basis regarding an investigation, an examination, an enforcement proceeding, or any other type of civil or criminal enforcement action; or
(iii) an examination, an investigation, an enforcement proceeding, or any other type of civil or criminal enforcement action under consideration by, or initiated by, FINRA, a federal, state, or foreign regulatory authority, or a self-regulatory organization; or
(D) the Subcommittee or National Adjudicatory Council grants leave to withhold a document or category of documents as not relevant to the subject matter of the proceeding, or for other good cause shown.
(2) The Department shall withhold a document if the document is prohibited from disclosure by federal law.
(3) Nothing in paragraph (c)(1) authorizes the Department to withhold a document, or a part thereof, that contains material exculpatory evidence.
(d) Withheld Document List

The Subcommittee or National Adjudicatory Council may reguire the Department to submit to the Subcommittee or National Adjudicatory Council a list of documents withheld pursuant to paragraph (c) or to submit to the Subcommittee or National Adjudicatory Council any document withheld. Upon review, the Subcommittee or National Adjudicatory Council may order the Department to make the list or any document withheld available to the other parties for inspection and copying unless federal law prohibits disclosure of the document or its existence. A motion to reguire the Department to produce a list of documents withheld pursuant to paragraph (c) shall be based upon some reason to believe that a document is being withheld in violation of this Rule.

* * * * *

[1015(f)]1165. Hearing
[1015(f)(1)](a) When Held; Notice

If a hearing is requested by the Applicant or [directed]ordered by the Subcommittee or National Adjudicatory Council, the hearing shall be held within [45190 days after the filing of the [request]notice of appeal with the National Adjudicatory Council or service of the notice by the Subcommittee or National Adjudicatory Council. Not later than 14 days before the hearing, [T]the Subcommittee or National Adjudicatory Council shall serve written notice of the date and time of the hearing to the Applicant [by facsimile or overnight courier] electronically or in any other manner FINRA may prescribe [not later than 14 days before the hearing].
[1015(f)(2)](b) Counsel

The Applicant and the Department may be represented by counsel at a hearing conducted pursuant to this Rule.
[1015(f)(3)](c) Evidence

The [F]formal rules of evidence shall not apply to a hearing under this Rule Series. [Not later than five days before the hearing, the Applicant and the Department shall exchange copies of their proposed hearing exhibits and witness lists and provide copies of the same to the National Adjudicatory Council. If the Applicant or the Department fails to provide copies of its proposed hearing exhibits or witness list within such time, the Subcommittee shall exclude the evidence or witnesses from the proceeding, unless the Subcommittee determines that good cause is shown for failure to comply with the production date set forth in this subparagraph.] The Subcommittee or National Adjudicatory Council may exclude all evidence that is irrelevant, immaterial, unduly repetitious or prejudicial.
(1) The review of the Subcommittee or the National Adjudicatory Council shall be limited to consideration of:
(A) all documents and information the Department considered in connection with the Department's decision under the Rule 1150 Series;
(B) admitted exhibits submitted by the Department or the Applicant in accordance with Rule 1164;
(C) witness testimony; and
(D) any additional information or briefs the Department or Applicant has filed in accordance with Rule 1163(b)(4).
(2) Other than the information specified in paragraph (c)(1) of this Rule, any other evidence is presumptively irrelevant. Upon a showing of good cause by the parties to the appeal, the Subcommittee or National Adjudicatory Council may admit other evidence presented by the parties to the appeal.
(d) Testimony

The Applicant and its representative, and any other person who are subject to the jurisdiction of FINRA shall testify under oath or affirmation. The oath or affirmation shall be administered by a court reporter or a notary public.
[1015(f)(4)](e) Transcript

The hearing shall be recorded and a transcript prepared by a court reporter. A transcript of the hearing shall be available for purchase from the court reporter at prescribed rates. The Applicant, the Department, or a witness may seek to correct the transcript. A proposed correction of the transcript shall be submitted to the Subcommittee or National Adjudicatory Council within a reasonable period of time prescribed by the Subcommittee or National Adjudicatory Council. Upon notice to the Applicant and the Department, the Subcommittee or National Adjudicatory Council may [direct]order the correction to the transcript as requested or sua sponte.

* * * * *

1166. Recommended Decision of Subcommittee and Decision of National Adjudicatory Council
[1015(i)](a) Recommended Decision of Subcommittee [Recommendation]

The Subcommittee shall present [a]its written recommended decision [in writing] to the National Adjudicatory Council within [60]75 days after the [date]conclusion of the hearing held pursuant to [paragraph (f)]Rule 1165, and not later than seven days before the meeting of the National Adjudicatory Council at which the membership proceeding shall be considered.
[1015(j)](b) Decision of the National Adjudicatory Council
(1) [Proposed Written] Decision

After considering all matters presented [in the review]on appeal and the Subcommittee's written recommended [written] decision, the National Adjudicatory Council may affirm, modify, or reverse the Department's decision or remand the membership proceeding with instructions. The National Adjudicatory Council shall prepare a proposed written decision pursuant to [sub]paragraph (b)(2) of this Rule.
(2) Contents of Decision

The decision shall include:
(A) a description of the Department's decision, including its rationale;
(B) a description of the principal issues raised in the [review]proceeding;
(C) a summary of the evidence on each issue; and
(D) a statement whether the Department's decision is affirmed, modified, [or] reversed, or remanded, and a rationale therefor that references the applicable standards in Rule [1014]1142.
(3) Issuance of Decision After Expiration of Call for Review Period[s]

The National Adjudicatory Council shall provide its proposed written decision to the FINRA Board. The FINRA Board may call the membership proceeding for review pursuant to Rule [1016]1167. If the FINRA Board does not call the membership proceeding for review, the proposed written decision of the National Adjudicatory Council shall become final. [The National Adjudicatory Council shall serve the Applicant with a written notice specifying the date on which the call for review period expired and stating that the final written decision will be served within 15 days after such date.] The National Adjudicatory Council shall serve its final written decision within 15 days after the date on which the call for review period expired. The written decision shall constitute the final action of FINRA for purposes of SE[C]A Rule 19d-3, unless the National Adjudicatory Council remands the membership proceeding.
(4) Failure to Issue Decision

If the National Adjudicatory Council fails to serve its final written decision within the time prescribed in [sub]paragraph (b)(3) of this Rule, the Applicant may file a written request with the FINRA Board requesting that the FINRA Board direct the National Adjudicatory Council to serve its decision immediately or to show good cause for an extension of time. Within seven days after the filing of such a request, the FINRA Board shall direct the National Adjudicatory Council to serve its written decision immediately or to show good cause for an extension of time. If the National Adjudicatory Council shows good cause for an extension of time, the FINRA Board may extend the 152day time limit by not more than 15 days.

* * * * *

* * * * *

[1016]1167. Discretionary Review by FINRA Board
(a) Call [F]for Review [B]by Governor

A Governor may call a membership proceeding for review by the FINRA Board if the call for review is made within the period prescribed in paragraph (b) of this Rule.
(b) 15-Day Period; Waiver
(1) A Governor shall make his or her call for review at the next meeting of the FINRA Board that is at least 15 days after the date on which the FINRA Board receives the proposed written decision of the National Adjudicatory Council.
(2) By unanimous vote of the FINRA Board, the FINRA Board may shorten the period to less than 15 days. By an affirmative vote of the majority of the FINRA Board then in office, the FINRA Board may, during the 15zday period, vote to extend the period to more than 15 days.
(c) Review [A]at Next Meeting

If a Governor calls a membership proceeding for review within the time prescribed in paragraph (b), the FINRA Board shall review the membership proceeding not later than the next meeting of the FINRA Board. The FINRA Board may order the Applicant and the Department to file briefs in connection with review proceedings pursuant to this [paragraphjrule.
(d) Decision of FINRA Board, Including Remand

After review, the FINRA Board may affirm, modify, or reverse the proposed written decision of the National Adjudicatory Council. Alternatively, the FINRA Board may remand the membership proceeding with instructions. The FINRA Board shall prepare a written decision that includes all of the elements described in Rule [1015]1166(b).
(e) Issuance of Decision

The FINRA Board shall serve its written decision on the Applicant within 15 days after the meeting at which it conducted its review. The decision shall constitute the final action of FINRA for purposes of SE[C]A Rule 19d-3, unless the FINRA Board remands the [membership] proceeding.

* * * * *

[1019]1168. Application to the [Commission]SEC for Review

A person aggrieved by final action of FINRA under the Rule [1010]1100 Series may apply for review by the [Commission]SEC pursuant to Section 19(d)(2) of the Exchange Act. The filing with the SEC of an application for review [by the SEC] shall not stay the effectiveness of a decision constituting final action of FINRA, unless the [Commission]SEC orders otherwise [orders].

* * * * *

1169. Reserved

* * * * *

Text of Proposed Changes to Section 4 of Schedule A to the FINRA By-Laws

* * * * *

SCHEDULE A TO THE BY-LAWS OF THE CORPORATION

* * * * *

Section 4—Fees

(a) through (h) No Change.
(i)
(1) through (2) No Change.
[(3) FINRA shall waive the fee assessed pursuant to paragraph (i)(1) for a continuing membership application where FINRA determines that such application is proposing less significant changes that do not require substantial staff review. For example, a continuing membership application may qualify for a fee waiver under this paragraph (i)(3) where the proposed change:]
[(A) does not make any day-to-day changes in the applicant's business activities, management, supervision, assets, or liabilities, and the applicant is only proposing a change in the:]
[(i) applicant's legal structure (e.g., changing from a corporation to an LLC);]
[(ii) equity ownership, partnership capital, or other ownership interest in an applicant held by a corporate legal structure that is due solely to a reorganization of ownership or control of the applicant within the corporate legal structure (e.g., reorganizing only to add a holding company to the corporate legal structure's ownership or control chain of the applicant); or]
[(iii) percentage of ownership interest or partnership capital of an applicant's existing owners or partners resulting in an owner or partner owning or controlling 25 percent or more of the ownership interest or partnership and that owner or partner has no disclosure or disciplinary issues in the preceding five years; or]
[(B) is filed in connection with a direct or indirect acquisition or transfer of 25 percent or more in the aggregate of the applicant's assets or any asset, business, or line of operation that generates revenues composing 25 percent or more in the aggregate of the applicant's earnings, measured on a rolling 36-month basis, where the applicant also is ceasing operations as a broker or dealer (including filing a Form BDWwith the SEC); and there are either:]
[(i) no pending or unpaid settled customer related claims (including, but not limited to, pending or unpaid settled arbitration or litigation actions) against the applicant or any of its associated persons; or]
[(ii) pending or unpaid settled customer related claims (including, but not limited to, pending or unpaid settled arbitration or litigation actions) against the applicant or its associated persons, but the applicant demonstrates in the continuing membership application its ability to satisfy in full any unpaid customer related claim (e.g., sufficient capital or escrow funds, proof of adequate insurance for customer related claims).]

* * * * *

Text of NASD Rules, Incorporated NYSE Rules and Incorporated NYSE Rule
Interpretations to be Deleted in their Entirety from the Transitional Rulebook

* * * * *

NASD Rules

* * * * *

[3140. Approval of Change in Exempt Status Under SEC Rule 15c3-3]

Entire text deleted.

* * * * *

Incorporated NYSE Rules

* * * * *

[Rule 311. Formation and Approval of Member Organizations]

Entire text deleted.

* * * * *

[Rule 312. Changes Within Member Organizations]

Entire text deleted.

* * * * *

[Rule 313. Submission of Partnership Articles—Submission of Corporate Documents]

Entire text deleted.

* * * * *

[Rule 321. Formation or Acquisition of Subsidiaries]

Entire text deleted.

* * * * *

Incorporated NYSE Rule Interpretations

* * * * *

[Rule 311 Formation and Approval of Member Organizations]1

[(b)]
[(5) OFFICERS]
[/01 Reserved.]
[/02 Reserved.]
[/03 Reserved.]
[/06 Limitations on Principal Executives]

[Principal Executives may be part-time employees, subject to the prior approval of the member organization pursuant to Rule 346(e).]
[(f) PRINCIPAL PLACE OF BUSINESS]
[/01 Criteria]

[In order to satisfy the rule's requirement that a member organization's principal place of business be maintained within the U.S., at least the following must be located within the U.S., at a definite and manned physical location which is adequate to serve as the site for Exchange inspection of the organization:]
[a) Assets of customers who are citizens or residents of the U.S. and assets associated with transactions effected in the U.S., except for:
(1) funds which are ordinarily held in branch offices or in transit, and
(2) securities which are held as provided for in SEA Rule 15c3-3(c).] [To the extent that the broker-dealer introduces customer accounts on a fully disclosed basis to a carrying firm which is located in the U. S., such customer assets may be located at the carrying firm.]
[b) Books and records customarily maintained by brokers and dealers at their principal place of business and sufficient to permit the Exchange to conduct its inspection of the member organization.]

[The utilization of a clearing broker, a bank, or a service bureau which prepares or maintains the member organizations' books and records in accordance with SEA Rules 17a-3 and 17a-4 would satisfy thi criterion if such broker, bank or bureau is located in the U.S., and the records would be readily accessible to the Exchange.]
[c) Member organization capital sufficient to meet applicable capital requirements.]
[d) All allied members, qualified and authorized to perform Rule 342 functions.]
[e) Clearance, settlement and securities handling operations which pertain to securities transactions effected in the U.S., to the extent that such operations are maintained by the broker-dealer.]
[f) Operations pertaining to foreign securities transactions effected on behalf of customers who are citizens or residents of the U.S., to the extent that such operations are customarily maintained by a broker-dealer at a principal place of business.]
[(g) MINIMUM OF ACTIVE PARTNERS IN MEMBER ORGANIZATIONS—USE OF MEMBER ORGANIZATION NAME]
[/01 Reserved.]
[/02 Divisions of Member Organizations—Names]

[Divisions that are not separate legal entities may not be identified by the use of such words as "Company", "Corporation" or "Incorporation", which connote separate entities. Persons staffing such divisions should not have the title of "President", which indicates a separate entity. The titles, "Vice President" or "Assistant Vice President" are satisfactory when used in a context which does not convey the existence of authority on behalf of the member organization not, in fact, possessed by that individual.]

1 This version also reflects changes that becomes effective on October 1, 2018. See Securities Exchange Act Release No. 81098 (July 7, 2017), 82 FR 32419 (July 13, 2017) (Order Approving File No. SR-FINRA 2017-007).


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