The Financial Industry Regulatory Authority has yet to take action on designating “restricted firms” under a rule designed to protect investors from high-risk brokers, AdvisorHub reports.
FINRA approved Rule 4111 to publicly categorize restricted firms as those broker-dealers with a significant history of misconduct . They will now be required to deposit cash or qualified securities in a segregated account to pay customers arbitration claims and adhere to other specified conditions that are in the public interest. FINRA also decided to disclose a firm’s restricted status on BrokerCheck, a free tool that helps investors research the professional backgrounds of brokers and brokerage firms, as well as investment adviser firms and advisers.
But AdvisorHub reported that a review of FINRA’s BrokerCheck database of nearly 3,400 active member firms and 12,500 inactive broker-dealers revealed that no firms have been given the “restricted” designation so far. The review was conducted by SLCG Economic Consulting, a firm that frequently provides expert witness testimony for investors in securities litigation.
Hugh Berkson, a plaintiff lawyer and former president of the Public Investors Advocate Bar Association, said the actual impact of the restricted firms rule remains to be seen.
“While Rule 4111 was obviously well intended, its implementation leaves a lot to be desired,” Berkson was quoted as saying. “We’re curious what efforts FINRA has made to actually implement the rule.”
“Bad firms continue, like fungus, to thrive in the darkness provided by FINRA’s foot dragging on implementing this rule,” said Joe Peiffer, current PIABA president and a lawyer with a firm in New Orleans.
A FINRA spokesperson did not comment on whether any firms had been identified as restricted on BrokerCheck, but did say the evaluation process is ongoing.
Following the adoption of Rule 411, FINRA gave brokerages an opportunity to keep from falling into the restricted category by terminating brokers with disciplinary problems on their records within 30 days.
“I do not have or know of any [broker-dealer] clients who have had to deal with the restricted label,” said Gregg Breibart, a partner at Kaufman Dolowich in Fort Lauderdale. “Most of my clients have done everything in their power to avoid even getting close to the line under that rule.”
FINRA’s restricted firm rule was approved by the Securities and Exchange Commission in 2021 and went into effect the following year.
“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,” the SEC said in its order. “It creates incentives for member firms to change behaviors and activities, either to avoid being designated or re-designated as a restricted firm.”
Financial professionals who work for broker-dealers, RIAs or other financial service companies operate in a highly regulated industry that is overseen by the SEC, state regulators and other self-regulatory organizations such as FINRA and various exchanges. If you are the subject of a regulatory proceeding, contact Lewitas Hyman at (888) 655-6002 or through our online contact form for a free consultation.
