The SEC recently approved a rule proposal that would allow FINRA to disclose on BrokerCheck whether a brokerage has been designated as a “restricted firm.” FINRA has been under scrutiny for years to rein in rogue brokers, and the new labeling of this restricted firm designation is a huge component of that effort. 

FINRA Rules 4111 (Restricted Firm Obligations) 

FINRA Rule 4111 established an annual process to designate member firms as “Restricted Firms” when the member firms present a high degree of risk to the investing public, based on numeric thresholds of firm-level and individual-level disclosure events, and then impose on such member firms a “Restricted Deposit Requirement.” 

The rule is designed to protect investors and the public interest by strengthening the tools available to FINRA to address the risks posed by member firms with a significant history of misconduct. According to FINRA, the rule creates incentives for member firms to change behaviors and activities, either to avoid being designated or re-designated as a Restricted Firm. 

A “restricted firm” is required to deposit money into an account controlled by FINRA that could be used to fund arbitration awards and for other purposes. FINRA also can place additional conditions on restricted firms. The restricted-firm rule was proposed by FINRA in 2019 and approved by the SEC  in 2021. It went into force early last year. 

Amendments to FINRA Rule 8312 

With the latest SEC decision, FINRA will be able to highlight restricted status on a firm’s BrokerCheck summary and detailed report. Under the proposed amendment, those reports would include the text, “This firm is currently designated as a Restricted Firm pursuant to FINRA Rule 4111 (Restricted Firm Obligations),” in a color or font that is prominent.  

The alert also would include the text “Click here for more information,” with a hyperlink to a page on FINRA’s website that provides for the investing public with a clear explanation of FINRA Rule 4111 and what it means to be a Restricted Firm. FINRA said it will announce when it will begin doing so after completing the first cycle of reviews of firms for restriction. 

The “restricted” designation and its publication on BrokerCheck, should incentivize “member firms to change behaviors and activities, either to avoid being designated or re-designated as a Restricted Firm,” according to the SEC order. 

To learn more about the approved amendment, click here