FINRA ANNOUNCES NEW RULE TO ADDRESS MISCONDUCT

There has been a lot of conversation over the past year about high risk activities, or high risk individuals.?

Different regulators have been finding different ways of managing what they consider as risks to investors so it comes as no surprise that FINRA would announce a rule change that affects what they have deemed “restricted firms”.?

In order to address firms with a history of serious misconduct (or firms with a high concentration of individuals with a history of misconduct) FINRA has brought out New Rule 4111 or the Restricted Firm Obligations.?

What does this mean??

This means that regulators are making it harder for brokers with disclosures to get hired.? Many of the largest firms already have established guidelines whereby they refuse to affiliate with a broker with even one disclosure.? Many firms won't hire an adviser or broker if they are under investigation (say as part of an 8210 Request because you were terminated for cause). In many cases, these are cases of being guilty until proven innocent.

Now the regulators are forcing firms with many disclosures to gamble if they decide to continue to employ these brokers.

This is why it is so important to get old disclosures expunged.

One of the major implications of Rule 4111 is that Restricted Firms will be required to establish a Restricted Deposits Account. Firms are then required to “deposit in that account cash or qualified securities with an aggregate value that is not less than the member firm’s Restricted Deposit Requirement, except in certain identified situations.” They also mention that the department may impose other conditions or restrictions that they deem necessary for the safety of investors.?

How do you know if your firm is on the list to be a Restricted Firm??

FINRA has released 6 preliminary criteria that they will be using to judge a firm and it’s employees and decide whether or not a firm will be considered restricted.?

These 6 criteria are:?

1. Registered Person Adjudicated Events
2. Registered Person Pending Events
3. Registered Person Termination and Internal Review Events
4. Member Firm Adjudicated Events
5. Member Firm Pending Events and
6. Registered Persons Associated with Previously Expelled Firms (also referred to as the Expelled Firm Association category).20

Criteria will be considered met if:

• two or more of the member firm’s Preliminary Identification Metrics are equal to or more than the corresponding Preliminary Identification Metrics Thresholds for the member firm’s size, and at least one of those Preliminary Identification Metrics is the Registered Person Adjudicated Event Metric, the Member Firm Adjudicated Event Metric, or the Expelled Firm Association Metric;28 and
• the member firm has two or more Registered Person or Member Firm Events (i.e., two or more events from Categories 1-5 above) during the Evaluation Period.29

As this will be done on a percentage of the firm’s size this rule might unfairly target smaller firms who are just starting out in the industry. However, we won’t be able to tell exactly how this will impact smaller firms until we see the rule in action across this year.?

What does this mean from a compliance standpoint??

“Rule 4111(g) establishes requirements to maintain books and records that evidence the member firm’s compliance with Rule 4111 and any Restricted Deposit Requirement or other conditions or restrictions imposed under that rule. In addition, the books and records provision specifically requires a member firm subject to a Restricted Deposit Requirement to provide to the Department, upon its request, records that demonstrate the member firm’s compliance with that requirement.”

And if you fail to comply? Well you may be required to suspend part if not all of your business!

For more information check out this notice from FINRA.?

Or drop your questions and thoughts in the comments below!