Mitch Atkins FINRA NMA Expert

FINRA General Securities Principal Registration for NMAs

More studying? Are you kidding? Often this is the question that FirstMark Regulatory Solutions gets when discussing the FINRA general securities principal registration requirements with clients who have already taken the Series 7 and 63 exams.

The question of who is required to have a FINRA general securities principal registration can get complicated. In a FINRA new member application (also called an NMA), the requirements are relatively simple. If you supervise the business or other persons doing the business, you must be registered as a principal. But it never is that simple. So the following discussion touches on some of the common FINRA general securities principal registration requirements that are encountered during a FINRA NMA. The FINRA general securities principal examination is called the Series 24 exam. This is most frequently an issue when a new member applicant’s owners or key players have not previously been registered in the securities industry. And in many cases, the issue is that these individuals are already sitting for the Series 7 and 63 examinations, so studying for a third examination isn’t exactly a pleasing idea. Whatever the case, there is a clear answer to this question.

FINRA will require that anyone who is “actively engaged in the management of the member’s investment banking or securities business, including supervision, solicitation, conduct of business or the training of persons associated with a member for any of these functions are designated as principals” take and pass the Series 24 (FINRA General Securities Principal) examination. FINRA also requires that persons holding the following positions take and pass the Series 24 examination: sole proprietors, officers, partners, managers of offices of supervisory jurisdiction (OSJs), and corporate directors (in most instances).

Often in a FINRA NMA, the issue arises as to the circumstances under which owners or directors may avoid principal registration altogether. The answer is that generally that they cannot. However, FINRA has outlined limited circumstances in which this may be permitted. For example, directors who are considered “outside directors” meaning that the director will not be employed by the broker-dealer and will serve only in a passive role (not engaged in decision-making on day-to-day operational issues). However, directors who are registered in any capacity with the broker-dealer cannot avoid principal registration. This is because any registration with the broker-dealer makes them actively involved – FINRA has no provision for “inactive” registrations.

Specific activities that generally have been viewed as moving someone across the line into the principal registration requirement include: hiring and firing, setting or implementing policy, negotiating or executing agreements, directing other employees’ actions, participation in management or executive committee meetings, and holding oneself out as a person with authority to make decisions.

The advice I usually give to owners and shareholders, or anyone who will be involved in the decision-making process, is that they get the license. This will save untold headaches down the road. And FINRA has made this a bit easier by allowing persons who are already registered to be elevated to principal status with a 90 day period to complete the examination. So during this “grace” period the registered person is permitted to act as a principal without actually having passed the examination. Be careful, however, as this requires very specific steps to be effective.

Caution! The FINRA General Securities Principal Registration Exam is not easy!

And a gentle word of warning – some say that the Series 24 is a harder examination to pass than the others, even the Series 7. So take a little extra time to study for the Series 24. This is important because a non-passing score will require that you sit out for 30 days before attempting to re-take the examination. In the context of a FINRA NMA, this can cause a fairly substantial delay. And FINRA could lapse the application if the examination failure is near the end of the 180 days permitted by the NASD Membership and Registration Rules for the FINRA NMA.

If you have questions about FINRA’s new member application process or desire to file a FINRA NMA, seek the services of FINRA NMA expert. Mitch Atkins, FINRA’s former South Region Director, has 21 years of experience with FINRA NMAs. For immediate help with your FINRA NMA, contact Mitch Atkins, Principal of FirstMark Regulatory Solutions at 561-948-6511.

The FINRA New Member Application – How Long Does it Take

Prospective consulting clients often ask the question, “How quickly can I get my FINRA New Member Application approved?” And unfortunately, the answer always seems to be the same, “Well that depends.” And it really does depend.

Factors that Slow the FINRA New Member Application Process

A FINRA New Member Application, or NMA, is subject to a process that can be onerous and confusing, but the good news is that it has been streamlined over the last few years. What used to be a decentralized process that was subject to quite a bit of variation among offices, is now a centralized process in FINRA’s New York offices. And believe it or not, the reasons for delays often have more to do with the content and quality of the application than delays by FINRA. One of the most frequent reasons for a delay in the FINRA new member application process is that the applicant has submitted an incomplete or inaccurate application. Substantial delays can occur as a result of a failure to complete the required licensing examinations, submission of incomplete documentation or an inadequate business plan. Getting the application filed in good order is a critical part of the process. FINRA actually has the ability to reject and application as substantially incomplete because its rules provide that applications, when filed, should be substantially complete. This requirement places the burden almost entirely on the applicant to produce what FINRA wants to see. However, in practice, FINRA rarely rejects new member applications as substantially incomplete and in fact often helps applicants in areas where the application is deficient.

Other factors that may impact the time required to complete the FINRA new member application process include: 1) complexity of the business or ownership structure being proposed, 2) background of the proposed owners/principals, 3) experience of the proposed principals (FINRA Rules require one year of direct experience or two years of indirect experience), and 4) nature of client base. To the extent that the application is on the simpler side of these factors (e.g. limited business, experienced principals, no disclosure history and institutional or sophisticated clients), the process may be shorter. To the extent the application is on the more complex side of these factors, it may take a bit longer. Either way, having a consultant who is well versed in the FINRA new membership application process and requirements can significantly shorten the time period of your FINRA NMA. If you are interested, check out the rules applicable to a FINRA new member application.

FINRA NMA expert, Mitch Atkins, FINRA’s former Regional Director for the South Region, has extensive experience working with the FINRA new member application, or NMA process. Contact Mitch Atkins, Principal, FirstMark Regulatory Solutions for more information on how you can shorten your FINRA membership application process. 561-948-6511.

FINRA BD Startup Cost

“What is the FINRA BD Startup Cost?” That is a question frequently fielded by FirstMark Regulatory Solutions, a broker-dealer consulting firm which helps individuals form new FINRA broker-dealers. And, when providing the answer to this question it is often complex and variable, depending on the nature and size of the planned business. So let’s walk through an some of the fees.

The first step in the journey to owning a new broker-dealer is the filing of a FINRA New Member Application (or NMA). Consultants like FirstMark often charge a flat fee for their services in handling the application from the start all the way through the FINRA approval. While using a consultant can add to the FINRA BD startup cost, it can save quite a bit of time if you hire a FINRA NMA expert. This process is complex and can take 6 months or longer. FINRA’s rules permit it 180 days from receipt of an application to issue a decision. And fees that consultants charge range “all over the map.” It is important to understand the experience and qualifications of the consultant who will actually be handling the application. That can also factor into the price. A consultant will quote a fee after understanding the nature of the business to be conducted and after estimating the amount of time required to complete the process. Most consultants will quote a fee that includes everything needed to satisfy FINRA’s application process (e. g. written supervisory procedures, business continuity plans, anti-money laundering compliance program, Regulation SP compliance program, Regulation S-ID compliance program, etc.).

After settling on a fee with your consultant, there are other fees that will be required. First, FINRA requires a fee. FINRA NMA fees, which can be found on page 8, vary based on the proposed size of the broker-dealer. And here size means number of registered persons proposed at the start of the application. So for a broker-dealer with fewer than 10 registered persons, the FINRA fee is $7,500. That fee ranges all the way up to $55,000 for members with over 5,000 registered persons. But the reality is that the vast majority of the applications are for those with 10 or fewer persons.

The Small Fees Can Add Up in Calculating FINRA BD Startup Cost

In addition to the FINRA fee, an applicant will be required to pay registration fees for branch offices it desires to maintain ($75 / branch), disclosure processing fees for any disclosures required to be reported on Form U4 ($95 / each), fingerprint fees ($30 / each), principal and representative application fees ($85 / person), exam fees (varies depending on exam – $290 for the Series 7), registered representative state registration fees (varies depending on state – $60 in New Jersey), broker-dealer registration fees (varies depending on state – $525 in Pennsylvania), and the MSRB fee if applicable ($600). There are other FINRA BD startup cost items, including the legal fees that relate to filing the corporation which vary. FINRA will require that a broker-dealer maintain minimum net capital (which again varies depending on the manner in which the business is run, but the minimum is $5,000). And FINRA requires that broker-dealers keep 120% of their minimum net capital requirement in the broker-dealer – $6,000 therefore is the minimum. FINRA will ask that the broker-dealer demonstrate assets and revenues sufficient to cover 12 months of initial estimated fixed operating expenses, obtain a broker-dealer fidelity bond, and contract for an annual certified audit by a CPA (which has gotten very expensive in recent years). Although not required by FINRA, a broker-dealer will want to obtain E&O insurance. On an ongoing basis, SIPC charges a fee of .0025 of Net Operating Revenues. If the broker-dealer will be opening accounts for customers other than on a direct basis with mutual fund, annuity and other similar product providers (or simply selling private placements), it will need to obtain a clearing agreement. The clearing firm will require a deposit, generally ranging from $10,000 – $100,000 again depending on the business to be conducted by the broker-dealer.

So as you are probably beginning to see, the FINRA BD startup cost can quickly add up. Clearly, registering a broker-dealer is not an inexpensive proposition. But the rewards can also be substantial. The list above is certainly not all inclusive, but designed to give an idea of the fees and capital required. A rule of thumb is that for a small broker-dealer, a minimum initial capital investment of between $75,000 and $150,000 is required. Because the costs vary substantially depending on the nature of the business and many other factors, this figure is also subject to variation.

If you have questions about becoming a FINRA member, or about the FINRA BD startup cost, seek the services of a FINRA NMA expert. Mitch Atkins, FINRA’s former South Region Director, has extensive experience with FINRA new member applications, having previously overseen the membership application function at the regional level. If you have questions about a FINRA CMA or NMA, contact Mitch Atkins, Principal of FirstMark Regulatory Solutions at 561-948-6511.

Qualifications to Start a FINRA BD

FirstMark Regulatory Solutions is a broker-dealer compliance consulting firm that offers a wide range of services including the filing of a FINRA new member application or “NMA” as it is referred to in the industry. The NMA filing is a substantial undertaking and FirstMark often receives inquiries about what FINRA expects of applicants – specifically, what are the qualifications to start a FINRA BD?

There are numerous requirements for membership in FINRA, all of which are spelled out at a high level in the Membership and Registration Rules. Specifically, NASD Rule 1014 specifies the fourteen standards of membership.

Here, we will focus on the fourth of the ten requirements that make up the tenth standard. That’s right, there are ten requirements in the tenth standard! This is NASD Rule 1014(a)(10)(D). For the most part, this section of the Rule addresses the adequacy of the applicant’s supervisory system and written procedures. But part of any supervisory system is the requirement to have qualified supervisors designated for each area of a broker-dealer’s business. Let’s break down what FINRA means by qualified.

First, there is qualification by examination. That means that each person to be associated with a broker-dealer who is to function in a managerial capacity (and FINRA requires at least two – more on that later) must be qualified by examination. And in this case, FINRA means the appropriate principal licensing examination. In a broker-dealer there are typically, there are sales persons who are registered representatives, and their managers/supervisors who are principals. There are various categories of representative and principal licenses. The representative license that affords the most flexibility is the Series 7. And that examination covers the sale of a broad range of products. Supervisors of Series 7 licensed employees generally must have a Series 24. These two licenses are referred to as the general securities representative and general securities principal examinations. There are also limited categories of registration, for example a firm selling only mutual funds and variable annuities may have its representatives pass the Series 6 examination and its principals pass the Series 26 examination. So as you can see, qualifications to start a FINRA BD are numerous.

There are also limited registration categories for the sale of private placements and other products as well as financial principal examinations. Also, if you plan on selling options or municipal securities, there are special principal examinations for each of those business lines. So clearly, the first thing that will need to happen is that the proposed supervisors, if they don’t have the licenses already, will need to take and pass the appropriate exams. And this should not be undertaken lightly. FINRA reports that one of the most common reasons for delays in processing applicatio qualifications to start a FINRA BD ns is the failure of the proposed principals to take and pass their qualification examinations. Finally, although there is no way to take licensing examinations unless you are sponsored by a broker-dealer, you may use your new member application as a sponsor. In other words, the new member applicant itself my sponsor you to take your examinations immediately upon filing with FINRA. FINRA allows a 90 day window to pass the examinations after filing the application. There are various work-arounds if the 90 day period does not work for a particular individual.

It is important to note that FINRA will not simply require that you pass the qualification examination. Instead, we go back to Rule 1014(a)(10)(D). It states that applicants who are charged with supervisory responsibilities must have one year of direct or two years of related experience in the subject area they are responsible for supervising. This generally means that a principal must have a year of experience as a principal in the area that is being supervised, or must have worked in a similar function for two years (perhaps under the supervision of a principal in the same function). There is some leeway here, and there are numerous ways to work around the requirement that will be acceptable to FINRA.

If you are seeking the answer to the question, “what are the qualifications to start a FINRA BD,” seek the services of an experienced FINRA NMA expert. Mitch Atkins, FINRA’s former South Region Director, has 21 years of experience with FINRA NMAs. While at FINRA he oversaw the membership application function for FINRA’s entire South Region. For immediate help with your NMA, contact Mitch Atkins, Principal of FirstMark Regulatory Solutions at 561-948-6511.

Starting a Broker Dealer – Email Retention Requirement

starting a broker dealer email retention requirement If you a thinking about starting a broker dealer make sure you consider the email retention requirement early in the process to ensure time to set up archiving as required by SEC Rules. A common finding of examinations and inspections relates to the failure to maintain electronic communications. And when starting a broker dealer this is probably one of the last things that is considered by many, given the complexities of the FINRA NMA application process.

FINRA broker-dealers are subject to SEC Rules (along with numerous other requirements). One of those requirements that frequently gets overlooked is the requirement to archive electronic communications. FINRA has historically been fairly aggressive with its enforcement fines when there are failures in the area of electronic communications retention. Clearly, one reason for this is that FINRA has published plenty of guidance on the topic, which frankly is not new. FINRA Rule 4511(a) basically requires FINRA members to preserve books and records as required under its rules as well as the rules and requirements of the Securities Exchange Act of 1934. And specifically, Rule 4511(c) requires that the records maintained shall comply with SEA Rule 17a-4.

The rule pertaining the preservation of electronic communications is SEA Rule 17a-4(f). Prospective broker-dealers should understand that every communication that relates to its “business as such” must be maintained pursuant to SEA Rule 17a-4(b) for a period for not less than three years, the first two of which in a readily accessible place. And yes, this applies to social media communications. SEA Rule 17a-4(b)(4) specifically requires broker-dealers to maintain, “originals of all communications received and copies of all communications sent (and any approvals thereof) by the member, broker or dealer (including inter-office memoranda and communications) relating to its business as such, including all communications which are subject to rules of a self-regulatory organization of which the member, broker or dealer is a member regarding communications with the public.” And the storage requirements for electronic recordkeeping get fairly complex, particularly in terms of complying with the indexing and archiving requirements of Rule 17a-4(f).

One only need to look back at historical FINRA enforcement fines to know that they are quite serious about compliance with this rule. It is not unusual for non-compliance to yield fines of $10,000 to $50,000. And the head of FINRA Enforcement has publicly stated that he believes the cost of non-compliance should exceed the cost of compliance – and that is part of FINRA’s enforcement policy.

Email Retention – FINRA Provides an Answer For Those Starting a Broker Dealer

So what does it take to comply? Frankly, a good service provider. And FINRA has negotiated a special price for small firms (less than 150 employees). Global Relay offers a full service package to FINRA firms at the discounted price of $6 per user per month (with a minimum charge of $30). This is an amazing deal, and will facilitate compliance with not only the recordkeeping requirements of the rule, but also with the supervisory requirements related to electronic communications. There are other service providers out there, but none that are part of the FINRA Compliance Resource Provider program. For more information, visit FINRA’s Compliance Resource Providers site here. (Full disclosure – FirstMark is not affiliated with Global Relay and receives no compensation of any kind for referrals to them.)

If you have questions about becoming a FINRA member, or about electronic communications compliance, seek the services of a FINRA NMA expert. Mitch Atkins, FINRA’s former South Region Director, has extensive experience with FINRA new member applications, having previously overseen the membership application function at the regional level. Contact Mitch Atkins, Principal of FirstMark Regulatory Solutions at 561-948-6511.

Why Does FINRA Lapse NMA and CMA Applications?

FINRA’s New Member Application (or “NMA”) process is often viewed as complex and time-consuming. And as a pra FINRA lapse ctical matter, that is generally the case. FINRA’s NMA rules as they currently exist were written with a presumption that the prospective broker-dealer must supply a complete and comprehensive application. The rules provide that FINRA may reject an application that is not substantially complete. A failure to meet the standards in NASD Rule 1014 may result in a denial of the application.

There are also very specific time limits that are spelled out in the Membership and Registration Rules. For example, the rules grant FINRA a period of 180 days from the date of the application filing to issue a decision on the application. There are also interim time periods in which certain actions must be taken. For example, FINRA has 60 days after the filing of an application to issue a decision if it does not request additional information. If it does request additional information, it must do so within 30 days of receipt of the application. And an applicant must respond to FINRA’s inquiries within 60 days of the initial request and within 30 days of any subsequent request. FINRA must issue a membership decision 30 days after the membership interview is conducted, or after additional information that has been requested is filed.

There are quite a few dates to be aware of in this process. And FINRA has the authority (under Rule 1012(b)) to lapse an application if an applicant: a) does not fully respond to its written requests (within 60 days for an initial request and 30 days for a subsequent request), b) does not appear at a membership interview, or c) does not timely return its membership agreement (within 25 days after service of the agreement).

An application that is subject to a FINRA lapse requires the applicant to completely re-file the application (along with the full membership application fee) if it desires to continue the process. For this reason, a lapse is a significant event that can be quite costly.

It is important that a prospective FINRA member seek the services of an experienced FINRA NMA expert for help with the membership application process. Mitch Atkins, FINRA’s former South Region Director, has extensive experience with FINRA new member applications, having previously overseen the membership application function at the regional level. If you have questions about a FINRA CMA or NMA, contact Mitch Atkins, Principal of FirstMark Regulatory Solutions at 561-948-6511.

The FINRA Membership Interview

One of the very important steps in FINRA’s new member application process (also referred to as the “NMA” process) is the FINRA membership interview. The FINRA membership interview is required by NASD Rule 1013(b)(1). A FINRA membership interview must occur with the prospective applicant prior to the issuance of a decision on any FINRA membership application. Rule 1013(b)(2) requires that FINRA provide the applicant with at least seven (7) days advance notice of a membership interview (in writing), unless the applicant and FINRA agree otherwise. The FINRA membership interview is required by Rule 1013(b)(3) to be scheduled no later than 90 days after the filing of the NMA application or 60 days after the last information request from FINRA has been satisfied, whichever comes later. Generally, the membership interviews are conducted at the FINRA district office in which the home office of the proposed broker-dealer is based.

What is the Purpose of the FINRA Membership Interview?

There are several purposes of the FINRA membership interview. Perhaps one of the most important is that it gives FINRA an opportunity for a face-to-face meeting with the applicant’s key players. FINRA may inquire of attendees about any topic related to the application or the operation of the proposed broker-dealer so it is important that the applicant be well prepared for the new member interview. It gives FINRA staff an opportunity to assess the readiness of these staff to run the broker-dealer. It also gives FINRA an opportunity to lay out its expectations for the principals of the firm. If there were any concerns with the information FINRA obtained as part of the application and it intends to base a membership decision on this information it is required, according to Rule 1013(b)(7), to provide this information to the applicant. Another important purpose of the interview is that it gives the prospective principals of the new broker-dealer an opportunity to discuss any issues, questions or concerns they have, or simply to ask any unresolved questions.

The membership interview is often conducted near the end of the application process. So it is important that any loose ends are tied up before this meeting.

Mitch Atkins, FINRA’s former South Region Director, has extensive experience with FINRA new member applications and is a FINRA NMA expert. If you have questions about a FINRA NMA, contact Mitch Atkins, Principal of FirstMark Regulatory Solutions at 561-948-6511.

The FINRA Rebuttable Presumption of Denial

FINRA’s new member application process (also referred to as the “NMA” process) is a complex and time consuming process. The goal of the process is to obtain FINRA’s approval of a new broker-dealer. However, getting to that goal involves a significant commitment of time and resources. So before making this investment, it is important to be aware of a provision of the FINRA membership rules – Rule 1014(b)(1) to be exact – that establishes the presumption that an application for membership will be denied under certain circumstances (the FINRA rebuttable presumption of denial).

FINRA rebuttable presumption of denial

Those circumstances are enumerated in Rule 1014(a)(3)(A) and (C) through (E) and, they are essentially the following:

A regulatory or licensing action;
A regulatory action, a private civil action that is investment related, a criminal action, or in certain cases, is subject to unpaid arbitration awards or settlements;
A termination for cause (or having been permitted to resign) for violating rules related to the securities industry;
Being subject to heightened supervision or having otherwise been the subject of special supervisory requirements; and
If FINRA has been given information indicating that an associated person or applicant poses a threat to investors.

The fact that there is a presumption of denial written into the rule does not necessarily mean that the application will be denied if these factors exist. In fact, The issue of the FINRA rebuttable presumption of denial may not be raised by staffers if they are not concerned about the issue. However, any of these factors that exist should be thoughtfully addressed in the FINRA NMA. Rule 1014(b) provides that these presumptions may be overcome (the applicant may rebut the presumption of denial). Overcoming this situation requires careful consideration of the reason(s) the FINRA rebuttable presumption of denial exists and many other factors. Sometimes the presumption can be overcome simply by explaining the circumstances that gave rise to the issue. Other times, more in-depth work is required such as a change to the structure of the application, the firm, or its employee list. Either way, it is important to understand what the issues are that triggered the FINRA rebuttable presumption of denial .

Mitch Atkins, FINRA’s former South Region Director, is a FINRA NMA expert. If you have questions about a FINRA NMA, contact Mitch Atkins, Principal of FirstMark Regulatory Solutions at 561-948-6511.

FINRA Membership Application Insights

The FINRA Membership Application takes several forms, and frankly has received a fair amount of criticism over the years. The primary concerns that broker-dealers have voiced over the years are that the application process takes too long and is too complicated. FINRA has addressed these concerns in recent years by creating a centralized group based in New York (also called the “MAP” group) that exclusively deals with membership applications. This created areas of specialty expertise for these staffers and results in better processing effectiveness. In the past, the local FINRA district handled MAP applications. Now, the local offices assist the New York MAP Group in processing applications, but the New York MAP Group primarily carries the ball.

There are two primary types of FINRA membership applications. The first is the CMA or Continuation of Membership Application and the second is the NMA or the New Member Application. The NMA is what is filed by a firm desiring to create a new FINRA broker-dealer or to register an existing company as a FINRA broker-dealer. This means the applicant is usually entering the FINRA space for the first time, and FINRA wants to get to know the applicant. The NMA process involves a significant amount of work on the part of the applicant because applications must include all information required to run a broker-dealer in a compliant manner. For example, an applicant must submit a full set of written supervisory policies and procedures which cover every aspect of their business and are reasonably designed to achieve compliance with applicable rules and regulations. An applicant must also submit a full business continuity plan and an anti-money laundering compliance program. These programs must be tailored to the individual circumstances of the applicant.

The CMA is filed when an existing FINRA member desires to make a material change to its business, or when it is being acquired or it is acquiring a material amount of assets or new business lines. FINRA Rules outline what constitutes a material change and how much of a broker-dealer can be acquired before an application is required. A broker-dealer being acquired by new owners must essentially go through the same FINRA membership application process as a new applicant. FINRA will conduct the same background checks on the purchaser of an existing broker-dealer as it will conduct on a new member. Some will say that it is easier to acquire an existing broker-dealer than it is to file a new FINRA membership application. Experience has shown that this is often untrue. There are many potential pitfalls with acquiring an existing broker-dealer, or even acquiring just its assets. Each situation must be evaluated on its own merits.

A Pass on a FINRA Membership Application?

If in doubt about what might be considered a material change under FINRA rules, there is a process to formally ask FINRA that question. This is called the Materiality Consultation, or MATCON. If a broker-dealer is considering a change that it believes is not material, but wants to get a formal, written opinion from FINRA on the issue, it may file a MATCON with FINRA which details the proposed change. FINRA will then provide a written response (often within 30 days) indicating its view on whether the proposed change would be considered material under its rules, and thus would require a FINRA membership application filing.

Finally, FINRA has recently implemented an expedited review process for applications that meet certain criteria. FirstMark’s experience with this process has been very favorable.

It is important to note that undertaking any of these courses of action is a significant commitment of time and resources. This complex process, while improved in recent years, can be most effectively navigated with the guidance of a FINRA NMA expert. Mitch Atkins, FINRA’s former South Region Director, has over 21 years of experience with the FINRA Membership Application Program, and can help you intelligently navigate the process. Contact Mitch Atkins at FirstMark Regulatory Solutions 561-948-6511.