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Rules & Regulations

FINRA Proposes New Rule 4111 Addressing Firms with a Significant History of Misconduct

May 3, 2019

by Howard Haykin


As part of FINRA’s ongoing initiatives to protect investors from misconduct, FINRA has proposed new Rule 4111 (Restricted Firm Obligations) that would “impose tailored obligations, including possible financial requirements, on designated member firms that cross specified numeric disclosure-event thresholds.”
The member firms that could be subject to these obligations, while small in number, present heightened risk of harm to investors and their activities may undermine confidence in the securities markets as a whole. The proposal would further promote investor protection and market integrity and give FINRA another tool to incentivize member firms to comply with regulatory requirements and to pay arbitration awards.



FINRA is requesting comment by July 1, 2019, on …


1.  PROPOSED NEW RULE 4111 (RESTRICTED FIRM OBLIGATIONS) ...  which would authorize FINRA to require “Restricted Firms,” identified by a multi-step process involving threshold calculations, to make deposits of cash or qualified securities that could not be withdrawn without FINRA’s prior written consent, adhere to other conditions or restrictions on the member’s operations that are necessary or appropriate for the protection of investors and in the public interest, or be subject to some combination of those obligations; and


2.  PROPOSED NEW RULE 9559 (PROCEDURES FOR REGULATING ACTIVITIES UNDER RULE 4111) ...  which would : (i) create a new Rule 9559; and, (ii) amend existing Rule 9559 (Hearing Procedures for Expedited Proceedings Under the Rule 9550 Series) and renumber it as Rule 9560 … to create an expedited proceeding that allows a prompt review of the determinations under the Restricted Firm Obligations Rule and grants a member a right to challenge any obligations imposed.



As proposed, FINRA Rule 4111 provides detailed enforcement based on the following designated sections:


  • General/Multi-Step Process for Identifying “Restricted Firms” [Rule 4111(a)]
  • Annual Calculation by FINRA of Preliminary Criteria for Identification [Rule 4111(b)]
  • Initial Department Evaluation [Rule 4111(c)(1)]
  • One-Time Opportunity to Reduce Staffing Levels (Rule 4111(c)(2)]
  • FINRA’s Determination of a Maximum Restricted Deposit Requirement [Rule 4111(i)(15)]
  • Consultation [Rule 4111(d)]
  • Department Decision [Rule 4111(e)]; No Stays
  • Continuation or Termination of Restricted Firm Obligations [Rule 4111(f)]
  • Restricted Deposit Account [Rule 4111(i)(14)]
  • Books and Records [Rule 4111(g)]
  • Notice of Failure to Comply [Rule 4111(h)]
  • Definitions [Rule 4111(i)]
  • Compliance with Continuing Membership Application Rule [Rule 4111.02 - Compliance with Rule 1017]



FINANCIALISH TAKE AWAY.    FINRA has taken credible steps toward safeguarding investors from broker-dealers that have a concentration of individuals with histories of misconduct – particularly those that consistently hire such individuals and fail to reasonably supervise their activities. However, FINRA enforcement actions and its related sanctions have often had limited impact because they can only take place after rules have been violated and customers have been harmed.


As proposed, FINRA Rule 4111 would impose obligations on members that have significantly higher levels of risk-related disclosures than similarly sized peers. The obligations could include:


  • requiring a member to maintain 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;
  • preserving such firm funds for payment of arbitration awards against them.


The proposal would achieve this both through how a member’s “covered pending arbitration claims” and unpaid arbitration awards could impact the size of its restricted deposit requirement, and a presumption that a member would continue to maintain a restricted deposit if it has any “covered pending arbitration claims” or unpaid arbitration awards.



For further details, click on Regulatory Notice 19-17, Protecting Investors from Misconduct.