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FINRA Sets June 1 'Evaluation Date' for High-Risk Firms

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What You Need to Know

  • FINRA on June 1 will start the process of determining which of the 3,400 broker-dealers should be labeled restricted firms.
  • Rule 4111 cracks down on risks posed by broker-dealers with a significant history of misconduct.
  • FINRA will provide additional resources to assist BDs with Rule 4111.

The Financial Industry Regulatory Authority on June 1 will start the process to determine which of the 3,400 broker-dealer firms under its purview meet the “preliminary criteria” to be categorized as a restricted firm under new Rule 4111.

Rule 4111, which became effective on Jan. 1, cracks down on risks posed by broker-dealers with a significant history of misconduct, including firms with a high concentration of individuals with such a history.

In a just-released Regulatory Notice, FINRA states that the first “Evaluation Date” for Rule 4111, Restricted Firm Obligations, will be June 1.

Robert Cook, FINRA’s CEO, said on Jan. 21 that FINRA will be rolling out this year its high-risk firm regime.

“We’re probably going to be making some amendments to that regime as necessary going forward,” Cook said. “For example, FINRA will issue a proposal to disclose on BrokerCheck the status of firms that are restricted firms under the rule and will be issuing in the coming weeks a notice about the first evaluation phase of that rule.”

Rule 4111 requires broker-dealers that are identified as restricted firms to deposit cash or qualified securities in a segregated, restricted account; adhere to specified conditions or restrictions; or comply with a combination of such obligations.

The rule establishes a multi-step, annual process through which FINRA will determine whether a member firm raises investor protection concerns substantial enough to require that it be designated (or re-designated) as a restricted firm and subject to additional obligations, including a restricted deposit requirement.

FINRA expects that, in subsequent years, the evaluation dates also will be on June 1.

In Regulatory Notice 21-34, FINRA stated that it will “evaluate whether future adjustments of the annual Evaluation Date are warranted and would announce any changes in such date sufficiently in advance.”

FINRA explains in the just-released notice that “the Evaluation Date is not the date when FINRA would actually perform the annual calculation of which member firms meet the Preliminary Criteria for Identification” to be designated a restricted firm.

Rather, “FINRA plans to actually perform the annual calculation at least 30 days after the Evaluation Date, to account for the time between when relevant disclosure events occurred and when firms must report those events on the Uniform Registration Forms,” the notice states.

Specifically, for each member firm, FINRA “will compute annually (on a calendar-year basis) the Preliminary Identification Metrics to determine if the member meets” the restricted firm criteria.

FINRA will be making public additional resources to assist BDs with Rule 4111. As FINRA explained in Reg Notice 21-34, these will include a list of expelled firms that will be published on FINRA’s website and an “early indicator calculation.”

FINRA expects that the first early indicator calculations will be available in early June, and said that it plans to publish on its website frequently asked questions concerning Rule 4111.


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