In August 2021, the Financial Industry Regulatory Authority (FINRA) announced the adoption of a new rule that aims to crack down on brokerage firms exhibiting a significant history of misconduct. As soon as Rule 4111 was adopted, industry experts scrambled to understand the potential ramifications of this new rule. Initially, FINRA released few details about how it would identify so-called “restricted” firms and what consequences these firms would have to pay. Now, as FINRA’s “Evaluation Date” moves closer, it may be helpful to explore some of the specifics of Rule 4111 and how they could impact brokerage firms and financial advisors in the near future.
How FINRA Defines a “Restricted” Firm
This new rule stems from FINRA’s efforts to discourage member firms from hiring or retaining brokers with a history of misconduct. The “High-Risk Broker Initiative” of 2013, among other initiatives and guidelines, has tried to disincentivize firms from employing risky brokers. However, Rule 4111 takes a more direct approach, setting forth strict criteria to determine whether a member firm should be labeled “restrictive.” Starting on July 1, 2022, FINRA will evaluate member firms to identify those that have markedly higher levels of risk-related disclosures compared to similar-sized firms.
What Happens Once a Firm is Labeled as Restricted
Once FINRA labels a firm as restricted, it will notify the firm and compel them to deposit cash or qualified securities in a restricted account. These funds will be reserved to cover pending or unpaid arbitration awards or similar types of claims. While FINRA maintains that an appeal process will be available to these restricted firms, the restricted designation status will still appear on the publicly available BrokerCheck database. Additionally, FINRA has announced an intention to revise the expungement request process in an attempt to severely limit the number of expungements granted to financial advisors.
Customized Legal Solutions When You Need Them
Whether you need help navigating an upcoming FINRA arbitration or you have a question about how Rule 4111 may impact your professional future, reaching out to an experienced securities law attorney can give you the clarity and confidence you need. Together, you can assess the specifics of your situation and determine the most strategic path forward.
Call Judex Law, LLC, today at (303) 523-4022 to discuss your concerns with a trusted and friendly securities law attorney.