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FINRA Releases FAQ on Restricted Firm Rule

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What You Need to Know

  • The FAQ addresses Rule 4111 (Restricted Firm Obligations).
  • Rule 4111 became effective on Jan. 1 and sets extra requirements for BDs with a significant history of misconduct.
  • BDs that meet the preliminary criteria will not necessarily be deemed restricted, FINRA says.

The Financial Industry Regulatory Authority has released frequently asked questions guidance on Rule 4111 (Restricted Firm Obligations), which sets extra requirements for broker-dealers with a significant history of misconduct, including firms with a high concentration of high-risk brokers.

Restricted firms may be required to deposit cash into a segregated account to cover potential future regulatory fines.

FINRA said in early February that on June 1, it 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 became effective on Jan. 1.

FINRA said that it expects that the first “early indicator calculations” of which firms qualify as restricted, as described in Regulatory Notice 21-34, will be available to member firms in early June.

FINRA has also just released a list of the firms that have been expelled over the last five years.

While the Rule 4111 process “is new,” a FINRA spokesperson told ThinkAdvisor Thursday, the list “enables firms to see the list of expelled firms FINRA is referencing as part of calculating the expelled firm association metric.”

One question in the FAQ asks: If a broker-dealer meets the Preliminary Criteria for Identification, does that mean the firm is a “Restricted Firm”?

FINRA’s response: “No. Rule 4111 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.

“The annual calculation of a member firm’s Preliminary Identification Metrics to determine if it meets the Preliminary Criteria for Identification is the first step in this process. Subsequent steps in this annual process include the Initial Department Evaluation, the one-time staff reduction option (when available), the Consultation, and the Department decision. A Restricted Firm is a member firm that is designated as such in a Department decision.”


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