The SEC adopted new FINRA Rule 4111 ("Restricted Firm Obligations") that will impose additional requirements on broker-dealers deemed to pose a significant risk to investors.
The new rule concerns firms with "significantly higher levels of risk-related disclosures (including, notably, sales-practice related disclosure events) than other similarly sized peers based on numeric, threshold-based criteria." FINRA Rule 4111 subjects restricted firms to additional limitations on their conduct or operations and requires these firms to post assets in a segregated account. This "Restricted Deposit Requirement," is intended to incentivize designated firms to engage in less risky behaviors. These restricted funds will not constitute good capital for other regulatory purposes and may cause Restricted Firms to be subject to higher capital requirements. The imposition of the restricted deposit requirement is subject to a "multistep process" of evaluation by FINRA's Department of Member Regulation.
The effective date of adoption will be 180 days following FINRA's regulatory notice on the SEC's approval.
In a joint statement, SEC Commissioners Allison Herren Lee and Caroline Crenshaw expressed appreciation for FINRA's increased attention to high-risk firms that raise significant investor protection concerns. Additionally, the Commissioners stated that FINRA (i) was collaborating with state securities regulators to share information concerning such firms and (ii) intends to promptly submit a separate filing for the public disclosure of the identities of high-risk firms.
Commentary - Steven Lofchie
See also FINRA Rule 3170, which is intended to put additional regulatory constraints on firms that employ a significant number of individuals with checkered pasts.
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