FINRA has adopted new rules specifically tailored towards firms with a significant history of misconduct. The new rules, which become effective on January 1, 2022, allow FINRA to impose new obligations on broker-dealers with significantly higher levels of risk-related disclosures than other similarly sized peers. The new rules would also apply to firms with a high concentration of individuals with a significant history of misconduct.  

FINRA has adopted New Rule 4111 (Restricted Firm Obligations), New Rule 9561 (Procedures for Regulating Activities Under Rule 4111), and amendments to Rule 9559 (Hearing Procedures for Expedited Proceedings Under the Rule 9550 Series) to address the risks that can be posed to investors by individual brokers and members firms that have a history of misconduct. Rule 4111 requires member firms that are deemed “Restricted Firm” to deposit cash or qualified securities in a segregated, restricted account. According to FINRA, it believes that the direct financial impact of a restricted deposit is likely to change such member firms’ behavior and thereby protect investors. Further, pursuant to Rule 4111, “Restricted Firms” may also be subject to other conditions or restrictions on their operations as appropriately determined by FINRA, in addition to restricted deposits.

New Rule 9561 establishes a new expedited proceeding that allows member firms to request a prompt review of FINRA’s “Restricted Firm” designation and challenge any of the “Rule 4111 Requirements” imposed, including any restricted deposit requirements. Moreover, if a member firm requests a hearing under Rule 9581, the hearing will be subject to Rule 9559.

We encourage our broker dealer clients to review Regulatory Notice 21-34 and to take prompt steps to ensure their policies, procedures, and practices reflect regulatory expectations addressed in the notice.