Page 39 - Investment Advisor - October 2021

THE PLAYING FIELD

By Melanie Waddell

FINRA’s New ‘Restricted Firm’ Plan Means

Broker-Dealers Are on Notice

The rule, which should go into effect next year, is good for the public, but

problematic for BDs, says Jon Henschen.

roker-dealers with a history of Deposit Requirement’ (RDR) acts as an
misconduct who also have hired additional insurance policy, or a sort of
Ba high percentage of brokers with regulatory hammer, to use against small
a similar track record need to brush up firms, where problematic advisors tend
on a new Financial Industry Regulatory to congregate and hang their licenses.”
Authority rule that seeks to expose poten- These firms, AdvisorLaw explains,
tial risks to investors by labeling these “identified as ‘restricted firms,’ will have
broker-dealers as “restricted firms.” to maintain a financial deposit (in the
FINRA’s plan, approved by the form of cash or securities) in a segregated
Securities and Exchange Commission in account, at a bank or clearing firm. The
late July, adopts Rule 4111, which uses cri- amount of the deposit is to be determined
teria to decide whether to designate BDs at the sole discretion of FINRA, and the
as “restricted firms.” The rule becomes firm’s ability to withdraw will be restrict-
effective within 180 days of when FINRA ed, subject only to FINRA approval.”
issues a regulatory notice, which it plans Based upon hypothetical test runs by
Broker-dealers with a to do by the end of September. FINRA itself, AdvisorLaw states, it was
As part of the SEC approval, FINRA
history of misconduct will propose amendments to Rule 8312 found that:
• FINRA will investigate up to 80 firms,
who also have hired (FINRA BrokerCheck Disclosure), to pro- or about 2% of the industry, per year.
a high percentage vide information as to whether a particu- • Of those, small firms (<150 reps)
lar member firm or former member firm
make up about 91%.
of brokers with a is designated a “restricted firm” pursuant • Mid-sized firms (151 to 500 reps)
account for about 8%.
similar track record to proposed Rules 4111 and 9561. The SEC “This is not a large firm problem —
also approved and amended rules to cre-
need to brush up on ate a new expedited proceeding to imple- it is squarely aimed at the small firm
a new FINRA rule ment proposed Rule 4111. that has less than 150 reps,” AdvisorLaw
maintains.
that seeks to expose RULE CHANGE IMPACT I checked with Jon Henschen, presi-
potential risks to The rule change sets up a process to dent of Henschen & Associates, a firm that
give a restricted firm an opportunity to
helps advisors find broker-dealer relation-
investors by labeling challenge the designation, as well as give ships, to get more details on how onerous
these broker-dealers as the firm a one-time opportunity to avoid compliance with the new rule will be.
the imposition of obligations by volun-
“restricted firms.” tarily reducing its workforce, according Do you see this rule as positive or
to FINRA. negative, and why?
Rule 4111, according to an AdvisorLaw We see this move by FINRA as a posi-
blog, “began as a way to impose addi- tive for the public and a negative for
tional capital requirements on firms the broker-dealers that are categorized
with a significant history of miscon- as a “restricted firm.” Since 2010, com-
duct. The Rule’s maximum ‘Restricted pliance standards and requirements

OCTOBER 2021 INVESTMENT ADVISOR 37