FINRA is requesting comment on proposed Rule 4111 (Restricted Firm Obligations) that would impose obligations, including financial requirements, on designated member firms that cross specified numeric disclosure-event thresholds. FINRA believes that the proposal would promote investor protection and market integrity and provide another tool to incentivize broker dealers to comply with regulatory requirements and to pay arbitration awards.

Prior to proposing Rule 4111, FINRA identified certain firms that have a concentration of representatives with a history of misconduct. Some of these firms consistently hire such individuals and fail to reasonably supervise their activities. These firms generally have a retail business with vulnerable customers and engage in cold calling to make recommendations of securities. FINRA also identified groups of brokers who move from one firm of concern to another firm of concern.  Further, some firms and their representatives have substantial numbers of disclosures on their records.

FINRA would preliminarily identify these members by using numeric, threshold-based criteria and several additional steps that would guard against misidentification.  The thresholds would be based on six categories of events or conditions, including: 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.

Once identified, the member firms would face certain obligations, including maintenance of a specific deposit amount, with cash or qualified securities, in a segregated account at a bank or clearing firm, from which the member could make withdrawals only with FINRA’s approval.  FINRA also aims to preserve firm funds for payment of arbitration awards against them.

FINRA’s proposal is part of its ongoing initiatives to protect investors from misconduct, but at what cost to broker dealers? We encourage our clients who have an opinion on FINRA’s proposed Rule 4111 to review Regulatory Notice 19-17, which can be found at http://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-19-17.pdf, and submit their comments to FINRA by July 1, 2019.