FINRA Rule 4111 – Making Misconduct More Expensive for Small Firms

In an effort to further clamp down on firms who have a history of “serious misconduct, ”FINRA enacted Rule 4111 (the “Rule”) on January 1, 2022, which adds new restrictions to such member firms. Starting June 1, 2022, FINRA will begin conducting a review to determine which firms meet the established criteria to be considered a “Restricted Firm.” These firms will be subject to both monetary and operational limitations, which would be established following a process of evaluation, review, and consultation. FINRA implemented this rule as an effort to protect investors and the public interest from members and member firms that present a future risk, based on prior issues, of potential harm to investors.

What are the “Restricted Firm Obligations” Under FINRA 4111?

If designated as a “Restricted Firm, ” in order to continue doing business, a Broker Dealer will now be required to hold funds in a “Restricted Deposit Account.” Firms which have a restriction implemented against them must maintain a deposit balance in this account, funded by cash or qualified securities that have an aggregate value not less than the Restricted Deposit Requirement imposed by FINRA. The deposit amount may not be withdrawn, in part or wholly, prior to the written consent of FINRA.

FINRA 4111 Restrictions

Restricted Firms may also be subject to other conditions or restrictions as well, depending on FINRA’s review and decision. FINRA will impose restrictions to such firms which may include: The inability to expand business lines, limitations to operate only under certain business lines, and possibly the inability to file a CMA of any kind.

Investigations will be Directed at Small Firms

It is important to note that this rule will primarily affect small and mid-size firms. Based on hypothetical tests run by FINRA, an estimated 80 firms will be investigated per year. Of those firms, approximately 91% will consist of small firms (<150 reps). Approximately 8% will be mid-sized firms (151-500 reps), and the remainder will be large firms of 500+ reps. While this is not a big-firm problem, it will be a big problem for the firms it affects.

What will Happen if My Firm is Selected?

Firms that are selected for evaluation, based on the calculation that FINRA will run annually, will be subject to the following process. First, the calculation will be evaluated to confirm its accuracy; then, any firm that continues to meet the criteria for evaluation will be allowed a 30-day grace period to terminate any registered persons they see fit to reduce risk.

Next, the firm will have a consultation with FINRA where it will be given an opportunity to demonstrate why it should either not be labeled a Restricted Firm, or at least not be subject to the maximum Restricted Deposit if selected for restriction. Following this consultation, the firm will be given a decision by FINRA and subject to any implemented restrictions.

FINRA RULE 4111 Implications for Broker Dealers

FINRA member firm requirements continue to evolve and grow more complex each year. Broker Dealers are required to be increasingly vigilant in how they conduct their compliance operations, as well as their hiring of registered individuals. This includes FINOPs, CEO’s and CCO’s. One way to help ensure that your firm does not reach Restricted Firm criteria is to outsource principals. CXG offers outsourced Series 4, 24, 27, and 53 Principals, as well as Branch Office Managers and many other positions. By adding reputable principals to your firm, you can ensure that your registered persons are well supervised, and your compliance protocols are effective.

FINRA Rule 4111 Compliance Consultation

If you are concerned or have questions about how Rule 4111 may affect your firm, we would be happy to offer our FINRA Compliance Consulting services. If you would like to know more about our Principal outsourcing or broker dealer compliance consulting services, book an appointment with one of our highly trained professionals to discuss your Broker Dealer requirements.

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