FINRA Registration Update

FINRA Proposes Short-Form Membership Application Process for Selected Firms

FINRA announced a proposal that would set forth a short-form membership application process for firms that apply for FINRA membership in response to the amendments adopted by the SEC on August 23, 2023.   

The amendments approved by the SEC removed the gross income exemption that enabled firms to trade for their own account with other broker-dealer firms.  The Commission has announced an effective date of November 6, 2023, and a compliance date of September 6, 2024. Under the amended rules, an SEC registered broker-dealer will be required to join FINRA if it effects securities transactions other than on an exchange where it is a member, unless:

1. it is a member of a national securities exchange;
2. it carries no customer accounts; and
3. such transactions (i) result solely from orders that are routed by a national securities exchange of which the broker or dealer is a member to comply with Rule 611 of Regulation NMS or the Options Order Protection and Locked/Crossed Market Plan; or (ii) are solely for the purpose of executing the stock leg of a stock-option order.

The proposal FINRA filed with the SEC (FINRA Interpretive Material IM-1013-3 and FINRA Interpretive Material Section 4(e) of Schedule to the FINRA By-Laws) is intended to make the application process faster and more efficient for eligible firms. It also includes a partial waiver of the New Member Application fee.  Firms must meet certain criteria to qualify for the expedited process, including: 1) they must be an SEC-registered non-FINRA member that is applying for membership due to the 15b9-1 amendments and, 2) as of August 23, 2023, they must have been a member of a national securities exchange for which FINRA has had a Regulatory Service Agreement (RSA) for the prior 12-month period.

The FINRA membership application proposal for 15b9-1 firms includes the following points:

• Eligible Firms may file a short-form membership application.  Depending on facts and circumstances (i.e., where a statutorily disqualified person or regulatory gaps are identified) FINRA may find it necessary to obtain additional information to evaluate an Eligible Firm membership.
• The FINRA Membership Interview will be waived.
• FINRA aims to process Eligible Firm membership applications within 100 days (which FINRA says is in line with or more quickly than current Fast Track timeframes).
• Eligible Firms were able to begin applying on November 6, 2023 (the proposed rule change notes that Eligible Firms must apply for membership at least 120 days before the September 6, 2024, compliance date).
• FINRA has proposed a partial waiver of the NMA fee, which would be one-half the fee.
• If a firm seeks to materially expand or change the firm’s business operations, they would need to file a full application and have a membership interview.
• FINRA understands that approximately 62 firms may seek to become FINRA members by the compliance date.

FINRA has designated the proposed rule change as constituting a “non-controversial” rule change under paragraph (f)(6) of Rule 19b-4 under the Act, which renders the proposal effective upon receipt of the filing by SEC. The SEC is publishing this notice to solicit comments on the proposed rule change from interested persons.  It is best for broker-dealers engaged in proprietary trading activities to act now to assess the impact on their businesses.  As a registered broker-dealer subject to oversight of a self-regulatory organization, firms have a framework to start but will need to perform a gap analysis from their current state vs. FINRA requirements.  It is in their best interest to be prepared to move forward to be at the “front-of-the-line” and avoid potential delays.

Oyster Consulting’s experts are industry leaders and former regulators that have experience navigating the complexities of the New Member Application process. Oyster also has experienced industry practitioners in broker-dealer trading and compliance that understand this unique business and its associated regulatory requirements. Our experts are well-versed in all aspects of establishing and operating a broker-dealer as a FINRA member.  Oyster Consulting will help you evaluate the impact of this rule change to your business model, complete a current state assessment, prepare a gap analysis, and support or manage the New Membership Application process.