FINRA Alert! Notice of Filing and Immediate Effectiveness of a Proposed Rule Change to Amend FINRA Rules 4111 (Restricted Firm Obligations) and 9561 (Procedures for Regulating Activities Under Rule 4111)
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**Notice of Filing and Immediate Effectiveness of a Proposed Rule Change to Amend FINRA Rules 4111 (Restricted Firm Obligations) and 9561 (Procedures for Regulating Activities Under Rule 4111)**Comments due: 21 days after publication in the Federal Register
Purpose
On July 30, 2021, the Commission approved rules concerning firms with a significant history of misconduct, including new Rule 4111 (Restricted Firm Obligations), amendments to Rule 9559 (Hearing Procedures for Expedited Proceedings Under the Rule 9550 Series), and new Rule 9561 (Procedures for Regulating Activities Under Rule 4111).4 The rules allow FINRA to impose obligations on broker-dealers with significantly higher levels of risk-related disclosures than other similarly sized peers based on numeric, threshold-based criteria.5 Specifically, Rule 4111 requires members that are identified as “Restricted Firms” to deposit cash or qualified securities in a segregated account, adhere to specified conditions or restrictions, or comply with a combination of such obligations.6
The annual Rule 4111 process through which FINRA will determine which members are Restricted Firms, and the obligations to impose on them, has several steps and includes features that narrowly focus the obligations on the firms of most concern.7 The first step is the annual calculation.8 Specifically, for each member, the Department of Member Regulation (“Department”) will compute annually the member’s “Preliminary Identification Metrics” to determine if it meets the “Preliminary Criteria for Identification.”9 The date, each calendar year, as of which the Department calculates the Preliminary Identification Metrics to determine if the member meets the Preliminary Criteria for Identification is the “Evaluation Date.”10
For a member that meets the Preliminary Criteria for Identification during the annual calculation, the Department will conduct an Initial Department Evaluation.11 If the Department determines that the member warrants further review, and such member has met the Preliminary Criteria for the first time, the member will have a one-time staff-reduction opportunity to no longer meet the Preliminary Criteria for Identification.12 A member that still meets the Preliminary Criteria for Identification after the staff-reduction opportunity, or that does not have a one-time staff-reduction opportunity available, will proceed to a Consultation.13
After the Consultation, the Department will issue a Department decision concerning the member.14 A Department decision will indicate whether the member is designated as a Restricted Firm.15 For a member that is designated as a Restricted Firm, the Department decision also will state the obligations that are imposed on that member.16 These obligations can include a “Restricted Deposit Requirement,” specified conditions or restrictions on the operations and activities of the member and its associated persons, or both.17 Rule 4111(e) includes provisions concerning, in pertinent part, the Department’s 30-day deadline for rendering, and issuing notice of, its decision.18
To implement Rule 4111, FINRA created two new expedited proceedings.19 Rule 9561(a) governs a new expedited proceeding that allows a member to request a prompt review of the Department’s determinations. Rule 9561(b) governs a new expedited proceeding to address a member’s failure to comply with any requirements, conditions or restrictions imposed on it pursuant to Rule 4111 and Rule 9561(a). The procedures for the Rule 9561(b) expedited proceeding include, in pertinent part, provisions concerning the notices that the Department may issue to commence a Rule 9561(b) expedited proceeding and the contents of those notices.20 Rule 9561(b) is expressly referenced in Rule 4111(h), which concerns notices of a member’s failures to comply with a Restricted Deposit Requirement or conditions or restrictions imposed pursuant to Rule 4111.
Rules 4111 and 9561, and the amendments to Rule 9559, became effective on January 1, 2022.21 The first Evaluation Date for Rule 4111 will be June 1, 2022.22
FINRA is proposing technical, non-substantive changes to Rules 4111 and 9561, for clarity and consistency, and to avoid unintended consequences of the 30-day deadline currently specified in Rule 4111(e). Specifically, FINRA is proposing amendments to: (1) Rule 4111(b), which concerns the annual calculation of the Preliminary Criteria for Identification, to delete the reference to “on a calendar-year basis,” as the Evaluation Date establishes the operative time periods under the rule; (2) Rule 4111(e), to modify and clarify when the 30-day time period commences for the Department to render, and issue notice of, its decisions; (3) Rule 4111(h), to more closely align its description of the notices issued pursuant to Rule 9561(b) with the text of Rule 9561(b); (4) Rule 9561(b)(3), to modify the second sentence to use the phrase “suspension or cancellation of membership,” to be consistent with how the phrase “suspension or cancellation of membership” is used throughout Rule 9561; and (5) Rules 4111(f)(3), (i)(2), and (i)(15), to remove the capitalization from the term “Associated Person,” to be consistent with how the term is used throughout the FINRA Rulebook.
Thus, for purposes of consistency and clarity, FINRA proposes to amend Rule 4111(h) to provide that, pursuant to the procedure set forth in Rule 9561(b), FINRA may issue a suspension or cancellation notice to a member that is not in compliance with a Restricted Deposit Requirement or conditions or restrictions imposed by Rule 4111, stating that the failure to comply within seven days of service of the notice will result in a suspension or cancellation of membership.
