FINRA Proposes Rules Targeting Firms With History of Misconduct

May 13, 2019

On May 2, 2019, FINRA proposed new rules to designate “high-risk” firms and strengthen its ability to impose additional obligations on those firms.

  • Proposed Rule 4111 would authorize FINRA to designate “Restricted Firms” based on the number of event disclosures made by the firm and its registered persons. Restricted Firms would be subject to limitations on their operations and could be required to maintain restricted deposits that could only be withdrawn with FINRA’s consent.
  • Proposed Rule 9559 would create an expedited appeals process, including a process for challenging a designation as a Restricted Firm and any obligations imposed.

FINRA expects that only a small number of large firms (500 or more registered representatives) would be affected by the proposed rules, and that only zero to two would have been impacted in any given year had the rules been effective from 2013-2018.

Early signals from FINRA about this rulemaking generated concern that the standards would be overly subjective, leading to uncertainty in application.  We believe, however, that the proposed rules on balance reflect a reasonable, and largely objective, approach given FINRA’s stated goal to “impose tailored obligations” on those firms that “present heightened risk of harm to investors.”

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