FINRA - Financial Industry Regulatory Authority Inc.
08/06/2024 | News release | Distributed by Public on 08/06/2024 08:42
FINRA’s Membership Application Program: Safeguarding the Integrity of the Markets
FINRA's Membership Application Program (MAP) team serves as the first point of contact for firms looking to enter the broker-dealer industry. It works both to protect investors by ensuring would-be member firms meet FINRA standards of admission, and to help new and existing firms grow and evolve, ensuring a vibrant market for all.
On this episode, Cindy Foster, Vice President of MAP, joins us to share more about FINRA standards of admission and how the group works to ensure a smooth process for both current and prospective member firms.
Resources mentioned in this episode:
Episode 117: Reviewing and Approving Digital Asset Firms
Checklist for Mandatory Materiality Consultation
Residential Supervisory Locations (RSL) FAQs
Phone: 212-858-4000, option five
Email: [email protected]
Listen and subscribe to our podcast on Apple Podcasts, Google Podcasts, Spotify, YouTube or wherever you listen to your podcasts. Below is a transcript of the episode. Transcripts are generated using a combination of speech recognition software and human editors and may contain errors. Please check the corresponding audio before quoting in print.
FULL TRANSCRIPT
00:00 - 00:29
Kaitlyn Kiernan: FINRA's Membership Application Program team serves as the first point of contact for firms looking to enter the broker-dealer industry. It works both to protect investors by ensuring would-be member firms meet FINRA standards of admission, and to help new and existing firms grow and evolve, ensuring a vibrant market for all. On this episode, the program head joins us to share more about FINRA standards of admission and how the group works to ensure a smooth process for both current and prospective member firms.
00:29 - 00:37
Intro Music
00:37 - 00:52
Kaitlyn Kiernan: Welcome to FINRA Unscripted. I'm your host, Kaitlyn Kiernan. I'm pleased to welcome back to the show today Cindy Foster, vice president of the FINRA Member Application Program and the Statutory Disqualification Program. Cindy, thanks for joining me today.
00:52 - 00:53
Cindy Foster: Thanks for having me.
00:54 - 00:59
Kaitlyn Kiernan: So, to kick us off, can you reintroduce yourself and tell us a little bit about your background?
01:00 - 02:37
Cindy Foster: Of course. I've worked at FINRA for most of my professional career. At the beginning I worked in CRED or the Credentialing, Registration, Education and Disclosure Department. That's a mouthful. First, in the disclosure review and then on the state desk liaising with state regulatory agencies regarding registration, disclosure issues and FINRA rules. From there, I moved to Market Regulation, initially as an analyst in investigating fraud and insider trading in the over-the-counter markets.
After several years, I was promoted to associate director, and in my new role, I was in charge of member firm coordination, ensuring that firms and service providers were ready to report to OATS, the CAT predecessor. I also implemented market regulations, OATS compliance program. My work on OATS led me away from FINRA for several years. I relocated to northern New Jersey and accepted a job as chief compliance officer at SunGard Trading Systems BRASS. After a few years, I was promoted to executive vice president and I assumed responsibility for product management, tech and client services.
But after my daughter was born, my husband and I made a decision to be closer to family. And so that led me back to FINRA. When I first came back, I worked in Member Relations and Education for a few years, and I also spent several years as FINRA's ombudsman. And in August 2021, I transferred to my current position as Vice President of MAP and Statutory Disqualification.
02:37 - 02:50
Kaitlyn Kiernan: That sounds like quite the comprehensive experience, not just within FINRA with all the different groups, but also with some firm experience as well. And what is FINRA's Membership Application Program?
02:50 - 03:41
Cindy Foster: So, I like to say that FINRA's Membership Application Program group or MAP serves as the entry point to the securities industry. More often than not, you'll hear us described as a gatekeeper, and I think both are true. It's our job to ensure that firms demonstrate that they're capable of complying with industry rules and regulations. And we do that through FINRAs 14 standards of admission. Prospective FINRA members must seek approval for membership through the submission of a New Membership Application form.
Existing or current firms must file a Continuing Membership Application or a CMA when they're contemplating a material change in their business, or when FINRA rules require them to file a CMA.
03:41 - 03:45
Kaitlyn Kiernan: And why do firms need to apply for membership?
03:45 - 04:17
Cindy Foster: In order to conduct securities transactions and do business with the investing public in the United States, firms must be registered with the SEC and be a member of a registered securities association. And currently, FINRA is the only national securities association. Firms must apply and meet certain membership standards to become a FINRA registered broker-dealer. At a high level, firms must meet conduct, operational and financial requirements before approval is granted.
04:17 - 04:21
Kaitlyn Kiernan: And what's the overall goal of having these standards?
04:22 - 04:46
Cindy Foster: Rigorous registration standards are important. They're needed to safeguard the integrity of the market and ensure investors can participate in the capital market system with confidence. During the membership application process, firms must demonstrate that they are capable of adhering to FINRA and industry rules and regulations while working in the best interests of their customers.
04:47 - 05:07
Kaitlyn Kiernan: Great. So, it sounds like MAP is the first step towards FINRA fulfilling its mission of investor protection and market integrity. You mentioned a New Membership Application for prospective firms and Continuing Membership Applications for current registered FINRA members. But can you talk about what MAP is responsible for here?
05:08 - 07:10
Cindy Foster: I want to start by saying that MAP's review of the NMA and the CMA applications is governed by the FINRA Rule 1000 series. All applications are reviewed through the lens of Rule 1014 or the 14 standards for admission, regardless of whether the firm is a new or current member. We ensure that firms are qualified to become a member or ready to expand their business. We ensure that firms have qualified individuals to perform and supervise the firm's planned business.
We take into consideration the firm's disciplinary actions, customer complaints, arbitrations, judicial matters in making a decision. We ensure the firm is putting into place adequate vendor and customer agreements, and I do want to point out those agreements don't have to be finalized when they apply, but they do have to show us that they are engaged in those discussions to get all appropriate agreements in place. Firms have to show sufficient capital.
They have to show us that they have sufficient financial controls in place. And we're also going to review their recordkeeping and supervisory controls and their operations. I'd also like to point out that when new members go through our process, they will have to participate in a membership interview, and that is MAP staff's opportunity to make sure that we understand all elements of the firm's planned business and that we fully understand the application and that the firm is actually ready to go and be approved as a member firm.
Firms who operate online trading platforms, or those who offer a mobile app through which they receive customer orders, are required to provide a demo of their trading platform before they can be approved. We expect the firms to be able to show that their platforms are functional, and we will want to see the full lifecycle of an order all the way through to trade execution.
07:11 - 07:20
Kaitlyn Kiernan: It sounds like a significant undertaking to apply for FINRA membership. How long does it typically take to work through the new member process?
07:21 - 08:59
Cindy Foster: MAP has rule-mandated deadlines. We are required to issue a decision within 180 days. The vast majority are done within that time frame. Some applications do take longer to review for a number of reasons. If a firm makes material changes to their application after they've filed it, or well within the review period, that will prolong the application. If the firm is not scheduled or pass the necessary exams, if their CEO or supervisory staff has not taken the necessary exams, we can't approve the firm. If the applications are complex or novel, meaning it's a new business that we've never seen before-we do get a lot of complex and novel applications in the Fintech space, alternative trading system space and in the crypto space.
My recommendation is that those firms call us, schedule a pre filing meeting, have a conversation with us. We'll meet with you in person. We'll meet with you via Zoom. But I think it's important that any firm contemplating filing an application or expanding their business should really think about calling us first before they file that application, and we can help them with guidance and make sure that they understand the process.
MAP does have fast track applications. That's something else I wanted to point out. We strive to complete applications that present as low risk or low complexity within 100 days if it's an NMA or a New Membership Application, or 75 days if it's a Continuing Membership Application.
08:59 - 09:28
Kaitlyn Kiernan: Great. So, we just had an update on FINRA's crypto hub, where we heard that there are now, I think, 36 approved crypto member firms. So, all of those firms went through the MAP program. And we also had an old podcast with a member of Cindy's team specifically on crypto firm membership application. So, we'll link to that in our show notes for anyone who wants to take a listen to that. But Cindy, what makes a firm eligible for a fast-track review that you just mentioned?
09:29 - 9:59
Cindy Foster: Applications that are determined to be low risk or low complexity can be handled in an expedited manner. Examples are like simple ownership changes, firms who engage in referral business only, firms engaging in private placements or mutual funds only. Prospective and current firms should contact MAP if they would like their application handled on a fast-track basis. We can provide some guidance and make a determination early in the process if it can be fast tracked.
10:00 - 10:25
Kaitlyn Kiernan: I know MAP is currently handling a number of New Member Applications resulting from recent SEC rulemaking that requires certain firms, including proprietary trading firms and others that take on significant liquidity providing roles, to register with the SEC and become FINRA members. Is MAP doing anything to help facilitate the New Member Application process for these impacted firms?
10:26 - 12:45
Cindy Foster: Yes, we are. There were two noteworthy changes made to strengthen oversight of firms trading across markets, and to create a more consistent regulatory framework. On August 23rd, 2023, the SEC approved amendments to Rule 15 B9-1. The rule narrowed the exemption, which requires any broker or dealer registered with the Commission to become a member of a national securities association. The compliance date for these firms is September 6th, 2024.
There could be as many as 64 firms impacted by the change to Rule 15 B9-1. On February 6th, 2024, the SEC adopted amendments to SEC Rules 3a5-4 and 3A44-2. These rules broaden the definition of dealers or government securities dealers and subject them to registration requirements under the Exchange Act. The compliance date for these rules is April 29th, 2025.
As a consequence of the rule amendments, market participants such as proprietary trading firms, private funds and liquidity providers that assumes certain dealer-like roles or engage in certain levels of buying and selling government securities are required to register with the SEC and become a member of a self-regulatory organization and, of course, comply with federal securities laws and regulatory obligations. We're still gathering information regarding the number of firms impacted by these changes.
For both rules, FINRA leverage cross-functional working groups. We worked across teams and departments to understand the impact of both sets of rules. And in the case of 15 B9-1, we were able to create a short form membership application, which we leveraged for the majority of the firms that applied for FINRA membership. The deadline, however, for the short form has passed, and any firm submitting an application going forward will need to submit form NMA. But we'll still try to process those applications on an expedited basis.
12:47 - 12:57
Kaitlyn Kiernan: We've talked a lot about the new membership application process and the details there, but what's the purpose of a Continuing Membership Application?
12:59 - 13:42
Cindy Foster: Essentially, if you're looking to make significant changes or material changes to your business, you're required to file a CMA. So current members who are planning to expand their business or add a certain amount of additional staff or branch offices might need to file a Continuing Membership Application. I would encourage any firm thinking about making a business expansion or adding new business activities to again, contact MAP, triage and schedule a call with us to discuss it. But I'd also encourage that they review Rule 1017 and Interpretive Material or IM 1011-1.
13:42 - 13:47
Kaitlyn Kiernan: And how does this process differ from the New Member Application process?
13:47 - 14:39
Cindy Foster: It's very similar to the new membership application process, in that firms must demonstrate that they are ready to expand or take on the new business activities that I just mentioned. They must also demonstrate that they are financially ready to expand, and that they have the appropriate level of resources and experience to pursue and supervise new activities. The 14 standards will apply, and MAP will examine how the firm expansion will impact the firm's overall business models.
So, basically similar to an NMA. When we review CMAs, we're still going to apply those 14 standards to ensure that the firm can continue operating with these new business lines or with expanded staff or personnel, and still meet those 14 standards.
14:40 - 14:58
Kaitlyn Kiernan: Great. And how is MAP working to support firms that may need to file a Continuing Membership Application as a result of the introduction of a new Residential Supervisory Location office category, which just was introduced as part of post-COVID rulemaking changes?
15:00 - 16:08
Cindy Foster: The end of COVID relief that aligned with the Residential Supervisory Location rules gave rise to several questions from firms. The two questions that we got most often from firms are does adding a second seat constitute a new office? So, for example, now many of us work from the office part time and from home part time, and firms didn't understand whether or not they now had two seats where there used to be one. And then the other question that we got a lot was whether firms that added offices or personnel during COVID are covered under safe harbor or Interpretive Material 1011-1. So, we've been talking to a lot of firms about the changes that they made during COVID relief, and how that is aligned with the residential supervisory location rules and helping them to work through whether or not a CMA is actually needed. A really good resource for firms regarding the end of COVID relief and the residential location rules is the Frequently Asked Questions on FINRA Rule 3110.19 that's available on FINRA.org.
16:09 - 16:27
Kaitlyn Kiernan: We'll link to the resources that are available on FINRA.org in our show notes. So, one thing that has come up is materiality consultations. Can you tell us more about what that is and how that fits into the Continuing Membership Application process?
16:27 - 18:00
Cindy Foster: Sure. Materiality consultations. We usually refer to them as mat cons. There are two types of materiality consultations, voluntary mat cons or mandatory mat cons. Firms who are unsure if their planned business changes constitute a material change can submit a voluntary material consult. It's basically a letter or memo that is submitted through the FINRA Gateway. There's no charge to submit a voluntary matter, and it could actually save you the time of completing a CMA and CMA fees.
A mandatory consultation is required under Rule 1017(a)6. A member must file a materiality consultation when there are specified changes in ownership control, business operations, including business expansions that involve covered pending arbitration claims, unpaid arbitration awards, or unpaid settlements related to an arbitration. Under Rule 1017(a)7, a member firm must submit a materiality consult when an individual is seeking to become an owner, control person, a principal or registered person of a member firm, and that individual has criminal matters in the prior five years, or if there are other risk events. There's no cost to submitting a mandatory or voluntary material consultation.
18:00 - 18:19
Kaitlyn Kiernan: And of course, one notable difference between a New Membership Application and a Continuing Membership Application is a current member they have a risk monitoring analyst, they have points of contact within FINRA already. If they have questions, should they reach out to MAP first or the risk monitoring analyst. How do you guys work together?
18:20 - 18:48
Cindy Foster: That's a really good question. If you're a current member, I encourage you to reach out to your risk monitoring analyst. They can also help you decide whether or not the changes that you're contemplating are material or not and help you through that process. And if they believe a mat con or CMA is needed, they will connect you to MAP triage or schedule a meeting for all of us to talk through the matter so we can make the best determination for the firm.
18:49 - 18:57
Kaitlyn Kiernan: Great. And so, just to wrap up, where can member firms or prospective member firms learn more about MAP and these processes?
18:58 - 20:28
Cindy Foster: So, I always encourage firms to call us. We have something called an early firm meeting process or a pre-filing process. And we encourage firms to take advantage of that, regardless of whether or not you're thinking about filing an application tomorrow, next month or a year from now. Call us and we will meet with you as many times as we have to or need to, to help you to be successful in that application process. Another place for firms to go is to FINRA.org.
We recently, over the last year or so, published over 15 topical compliance tools that really speak to the application process. And these compliance tools are really helpful not only to new members or firms seeking FINRA membership, but it's also helpful for current firms. There's also a video series on FINRA.org that's also topical based, and the video series is really helpful while you're actually going through the application process.
If you're working on the financial sections or the financial questions, you can pull up that video and review what is required in the application, and those videos are there for you to watch as many times as you need during the application process. I also encourage firms to review our frequently asked questions that are also available on the Map Compliance Tool page on FINRA.org.
20:29 - 20:54
Kaitlyn Kiernan: Great. We'll link to those resources in the show notes. And as a final question, going back to the beginning of our conversation, you mentioned that some call the MAP program a gatekeeper to the industry, but it sounds like MAP, while it's looking to ensure strong, consistent industry standards, is not looking to keep firms out, but is actually doing a lot of work to facilitate new membership, including from new business models. Is that right?
20:55 - 21:29
Cindy Foster: I absolutely agree with you, Kaitlyn. That's why I actually like to refer to MAP's role as the entry point to the organization. We want new members. We want firms to evolve their business and grow their business. And innovation is good for the markets and it's good for the investing public. Our only role is to make sure that the new members can comply or can demonstrate that they can comply with industry rules and regulations. And we're there to help and to guide you through the process.
21:30 - 21:56
Kaitlyn Kiernan: Well, Cindy, thank you so much for joining me once again to provide an update on MAP. It's been a pleasure having you back. Listeners, if you don't already, be sure to subscribe to FINRA Unscripted wherever you listen to podcasts. You can now even find us on YouTube. And if you want to get in touch, you can email us at FINRA Unscripted at FINRA.org. Today's episode was produced by me, Kaitlyn Kiernan and edited and engineered by John Williams. Until next time.
21:56 - 22:01
Outro Music
22:01 - 22:29
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