The Financial Industry Regulatory Authority's Rule 4111, which went into effect on January 1, 2022, may significantly impact smaller businesses and representatives with only minor regulatory disclosures. Recently, registered representatives with only a few disclosures on their records could easily find a home at a broker-dealer. But those days may be coming to an end, according to WealthManagement.com.
FINRA Rule 4111 addresses risks from broker-dealers with a significant history of misconduct, including firms with a high concentration of individual employees with a substantial record of misconduct. The rule allows FINRA to impose new obligations on broker-dealers with significantly higher levels of risk-related disclosures than other similarly sized peers, based on numeric, threshold-based criteria.
Additionally, the rule requires broker-dealers, determined to post the most significant risk to investors, to set aside funds in a dedicated account to meet future FINRA fines, including potential unpaid arbitration awards. FINRA has not yet specified the amount restricted firms will have to set aside.
According to data released by FINRA, about 1.3 percent of all member firms meet the preliminary criteria for identification on the restricted firm list as of 2019. Smaller broker-dealers, in particular, may be at a disadvantage. FINRA has identified 45 member firms, 40 of which are small broker-dealers with no more than 150 registered representatives.
Several small firms have indicated that Rule 4111 is an area of concern. Jennifer Szaro, a member of FINRA's small firm advisory committee, shared that one fear is that good firms will get swept into the rule. Being on the restricted list can have damaging effects, not just from a regulatory standpoint but also with clearing firms and other vendors the broker-dealers worth with, according to Szaro.
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