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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.