Brokerage Firms With History of Misconduct Will Have To Put Money Aside for Investor Claims

SEC Approves New FINRA Rule That Will Designate Some Brokerage Firms as “Restricted”

The Financial Industry Regulatory Authority (FINRA) rule 4111, which will require certain brokerage firm members with histories of broker misconduct to put aside reserve funds to pay for both future and unpaid investor claims, has now been approved by the Securities and Exchange Commission (SEC).

These broker-dealers will be deemed “restricted” based on numeric thresholds to be determined by the self-regulatory organization (SRO) that involve six conditions including disclosure events involving the firm or its registered individuals, firings, and affiliated registered individuals from broker-dealers that already have been expelled.

The funds, which must be placed in a separate account at a clearing house or a bank, will have what is being called a “Restricted Deposit Requirement” and can only be used upon approval by FINRA. The deposit amount will be calculated for each restricted firm depending on its size, financial health, and operations. However, broker-dealers designated as restricted would also have an opportunity to argue for why a lesser deposit amount would still satisfy Rule 4111’s objectives especially if the higher figure could lead to the firm suffering financial difficulties.

FINRA Wants Firms’ “Restricted” Status Published on BrokerCheck

Based on FINRA data from 2019, 1.3% of all member firms satisfied the criteria for preliminary identification. Moving forward, the SRO will evaluate brokerage firms each year to see whether they should receive the “restricted” designation. 

Member firms will have an opportunity to prove why they don’t fall under that category. Broker-dealers that do get the designation will have thirty days to fire financial advisors who are considered high-risk so that the firms can drop below the numeric threshold. These brokerage firms wouldn’t be able to rehire these individuals for at least a year. 

FINRA Rule 4111 would go into effect 180 days after the SRO puts out a Regulatory Notice announcing the SEC’s approval of the rule. Already, FINRA Associate General Counsel Michael Garawski has notified the Commission, in a letter, that proposed amendments to Rule 8312 involving BrokerCheck disclosures are in the works. The amendments would mandate for firms with a “restricted” status to have that information made public on their profiles in BrokerCheck. 

FINRA arbitration awards that have gone unpaid are an issue of concern for the SRO. In 2018, 30% of cases in which damages were awarded to broker-dealer customers went unpaid. Here are statistics from FINRA for unpaid award damages in 2019:

  • 1631 FINRA arbitration cases resulted in settlements.
  • 313 cases ended with awards.
  • 141 cases awarded damages.
  • 38 cases that were awarded damages went unpaid — that was about $19M.

Skilled FINRA Arbitration Lawyers

For over 30 years, Shepherd Smith Edwards and Kantas (SSEK Law Firm at has represented investors in their FINRA arbitration claims against the broker-dealers and their financial advisors that caused them financial harm. We have recovered many millions of dollars for our clients.

SSEK Law Firm is known for fighting for investors and protecting their rights. To speak with one of our knowledgeable FINRA arbitration attorneys, call (800) 259-9010 or contact us online today.

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