The SEC’s Recent Ruling For High-Risk Firms

The Securities and Exchange Commission (SEC) recently approved FINRA’s new rule that allows it to display an alert on its BrokerCheck tool when a brokerage firm is flagged as “restricted.” This “restricted” designation will be displayed prominently on the firm’s BrokerCheck page and will include a link to a page that explains why the firm is considered high-risk by FINRA. This “scarlet-letter” punishment serves as a warning to potential clients that the firm, or its individual advisors, may have a history of engaging in misconduct or other high-risk activities.

“Restricted” Labels Designated Under FINRA Rule 4111

The determination of a “restricted” designation is based on the number of disclosures on the records of a brokerage firm and its professionals, including disciplinary events and investor complaints, as detailed in FINRA Rule 4111, which took effect in January 2022. The SEC order stated that the “restricted” designation and its publication on BrokerCheck are expected to incentivize member firms to change their behavior and activities, to avoid being designated as such. The “restricted” designations will begin appearing no later than FINRA’s second annual evaluation of its member firms — in June of 2023.

If you remember our previous 4111 blogs, FINRA was authorized by the SEC to devise its list of restricted firms and impose new obligations, including the requirement of establishing a segregated pool of funds. FINRA has already indicated that the new rule has prompted some firms to clean up their rosters and avoid the “restricted” label. Anecdotally, this increase in Form U5 termination disclosures for certain advisors with other disclosures is something that AdvisorLaw has been seeing since FINRA first tabulated the Rule 4111 metrics in June of 2022.

The Behavioral Change Of Firms And The Impact On Financial Advisors 

The most obvious implication of this ruling is that firms and potential clients will now be able to easily identify brokerages with past issues, misconduct, and other high-risk activities. In turn, potential customers and investors may be turned off by the designation and decide to do business elsewhere. That negative marketing, in addition to the financial penalties doled out by FINRA, will ensure that firms must make seismic changes in their personnel to avoid this outcome.

Advisors with past disclosures will feel the trickle-down pressure of their firms, as management decides that the easiest way to maintain compliance with Rule 4111 is to terminate advisors with a history of misconduct. Subsequently, those recently-terminated advisors, looking to land with a new firm, will become pariahs due to future liability issues within Rule 4111. 

How To Avoid The Crosshairs

If you have several disclosures on your record due to customer complaints or arbitrations, it’s important to take steps to mitigate your exposure right away. Removing disclosures from the public record, including the CRD, BrokerCheck, and IAPD/IARD, is a complex process, and the success of removal efforts can depend on the specific circumstances of the case. 

Contact AdvisorLaw Today

AdvisorLaw’s team of attorneys has successfully removed thousands of meritless or defamatory disclosures from public records, including the CRD, BrokerCheck, and the IAPD/IARD. Through the removal of underlying disclosures on a rep’s record, we can help protect the advisor and the firm from FINRA’s Rule 4111 “scarlet-letter” designation.

Contact us today for a complimentary consultation!

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