Rule 4111 Frequently Asked Questions

FINRA Rule 4111 (Restricted Firm Obligations) addresses risks from broker-dealers with a significant history of misconduct, including firms with a high concentration of individuals with a significant history of misconduct. The rule allows FINRA to impose new obligations on broker-dealers with significantly higher levels of risk-related disclosures than other similarly sized peers, based on numeric, threshold-based criteria. The obligations that can be imposed include a requirement to deposit cash or qualified securities in a segregated, restricted account, and other conditions and restrictions that are necessary or appropriate for the protection of investors and in the public interest.

The following frequently asked questions (FAQ) provide guidance on Rule 4111. This guidance speaks solely to the requirements of Rule 4111, and not to other FINRA rules or obligations, such as the obligations under Form BD (Uniform Application for Broker-Dealer Registration), Form U4 (Uniform Application for Securities Industry Registration or Transfer) and Form U5 (Uniform Termination Notice for Securities Industry Registration).

Section 1: General Questions

1.1  Pursuant to Rule 4111(b), the Department of Member Supervision (Department) will compute annually, for each member firm, the “Preliminary Identification Metrics” to determine if the member firm meets the “Preliminary Criteria for Identification.” If a member firm meets the Preliminary Criteria for Identification, does that mean the firm is a “Restricted Firm”?

No. Rule 4111 establishes a multi-step, annual process through which FINRA will determine whether a member firm raises investor protection concerns substantial enough to require that it be designated (or re-designated) as a “Restricted Firm” and subject to additional obligations. The annual calculation of a member firm’s Preliminary Identification Metrics to determine if it meets the Preliminary Criteria for Identification is the first step in this process.¹ Subsequent steps in this annual process include the Initial Department Evaluation, the one-time staff reduction option (when available), the Consultation, and the Department decision.² A Restricted Firm is a member firm that is designated as such in a Department decision.³

1.2  If a member firm has a one-time staff reduction option pursuant to Rule 4111(c)(2), does that mean that the member firm is a “Restricted Firm”?

No. Pursuant to Rule 4111(c)(2), if the Department determines that the member firm meets the Preliminary Criteria for Identification and such firm has met such criteria for the first time, such firm may reduce its staffing levels to no longer meet the Preliminary Criteria for Identification within 30 business days after being informed by the Department. In the annual Rule 4111 process, this one-time staff-reduction option (when available) is a step that occurs after the annual calculation and the Initial Department Evaluation, and before the Consultation and the Department decision. As explained in Rule 4111 FAQ 1.1, a “Restricted Firm” is a member firm that is designated as such in a Department decision.

Section 2:  Preliminary Identification Metrics

2.1.  Rule 4111(i)(10)(A), (C) and (D) define the Registered Person Adjudicated Event Metric, the Registered Person Termination and Internal Review Event Metric, and the Member Firm Adjudicated Event Metric to include disclosure events that “reached a resolution during the Evaluation Period.” The “Evaluation Period” is defined, in relevant part, as “the prior five years from the Evaluation Date.”⁴ The “Evaluation Date” is defined as “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.”⁵ Do the calculations of the Registered Person Adjudicated Event Metric, the Registered Person Termination and Internal Review Event Metric, and the Member Firm Adjudicated Event Metric include disclosure events that occurred on the Evaluation Date itself?

No. The Evaluation Period’s five-year lookback is not inclusive of the Evaluation Date itself. Thus, to the extent that the Registered Person Adjudicated Event Metric, the Registered Person Termination and Internal Review Event Metric, and the Member Firm Adjudicated Event Metric include disclosure events that “reached a resolution during the Evaluation Period,” they do not include disclosure events that occurred on the Evaluation Date itself.

In addition, the Evaluation Date establishes the date as of when all specified events in Rule 4111 that are reportable on the Uniform Registration Forms, or otherwise included in Rule 4111, would be included in the annual calculation of the Preliminary Identification Metrics, not the date as of when the events that are reported would be counted. For example, if a relevant final regulatory action against a registered person occurred just prior to the Evaluation Date but was reported on Form U4 ten days after the Evaluation Date, the annual calculation of the member firm’s Preliminary Identification Metrics would count that disclosure event. Furthermore, the Evaluation Date is not the date when FINRA would actually perform the annual calculation of which member firms meet the Preliminary Criteria for Identification. Rather, FINRA plans to actually perform the annual calculation at least 30 days after the Evaluation Date, to account for the time between when relevant disclosure events occurred and when firms must report those events on the Uniform Registration Forms.⁶

2.2  Rule 4111(i)(10)(B), (C) and (E) define the Registered Person Pending Event Metric, the Registered Person Termination and Internal Review Event Metric, and the Member Firm Pending Event Metric to include disclosure events that are pending “as of the Evaluation Date.” Do the calculations of these metrics include disclosure events that first became pending on the Evaluation Date itself?

No. To the extent that the Registered Person Pending Event Metric, the Registered Person Termination and Internal Review Event Metric, and the Member Firm Pending Event Metric include disclosure events that are pending “as of the Evaluation Date,” they do not include disclosure events that first became pending on the Evaluation Date itself.

Further, as explained in Rule 4111 FAQ 2.1 above, the Evaluation Date establishes the date as of when all specified events in Rule 4111 that are reportable on the Uniform Registration Forms, or otherwise included in Rule 4111, would be included in the annual calculation of the Preliminary Identification Metrics, not the date as of when the events that are reported would be counted.

Section 3: Registered Persons In-Scope

3.1  A member firm terminates a registered person before, but within the one year prior to, the Evaluation Date. Is that person a “Registered Person In-Scope” for purposes of the Rule 4111 annual calculation to determine if the member firm meets the Preliminary Criteria for Identification?

Yes. Rule 4111(i)(13) defines “Registered Persons In-Scope” to mean “all persons registered with the firm for one or more days within the one year prior to the Evaluation Date.” Thus, if a member firm terminates a registered person within the one year prior to the Evaluation Date, that person will be a “Registered Person In-Scope” for purposes of the annual Rule 4111 calculation.

3.2  Rule 4111(i)(13) defines “Registered Persons In-Scope” to mean “all persons registered with the firm for one or more days within the one year prior to the Evaluation Date.” Does this look to which persons were registered with the member firm within the one year prior to the Evaluation Date or, instead, to which registered persons were employed with the member firm within that one-year lookback period?

The term “Registered Persons In-Scope” is expressly defined to include persons who were “registered” with the firm within the one year prior to the Evaluation Date. It is not defined with any reference to a period of employment. For example, if a member firm terminates a registered person’s employment more than one year prior to the Evaluation Date but files a Form U5 to fully terminate that person’s registration within the one year prior to the Evaluation Date, that individual will be a Registered Person In-Scope for purposes of the annual calculation to determine if the member firm meets the Preliminary Criteria for Identification. 

Section 4: Disclosure Event and Expelled Firm Association Categories

4.1  As described in Rule 4111(i)(4)(A)(i), one of the “Registered Person Adjudicated Events” is “a final investment-related, consumer-initiated customer arbitration award or civil judgment against the registered person in which the registered person was a named party or was a ‘subject of’ the customer arbitration award or civil judgment.” Is there a minimum dollar threshold on these arbitration awards and civil judgments?     

No. Consistent with the reporting requirements of the Uniform Registration Forms, there is no minimum dollar threshold on the arbitration awards or civil judgments that are included in Rule 4111(i)(4)(A)(i).

4.2  Rule 4111(i)(4)(F) defines “Registered Persons Associated with Previously Expelled Firms” to mean “any Registered Person In-Scope who was registered for at least one year with a previously expelled firm and whose registration with the previously expelled firm terminated during the Evaluation Period.” Which firms are considered “previously expelled firms” for purposes of Rule 4111(i)(4)(F)?^*

A previously expelled firm, within the meaning of Rule 4111(i)(4)(F), means a former member firm that was expelled for any reason.

*See Rule 4111 Compliance Tool - Lists of Expelled Firms.

Section 5: Preliminary Identification Metrics Thresholds

5.1  Will the “Preliminary Identification Metrics Thresholds” change each year? 

No. The Preliminary Identification Metrics Thresholds are part of the text of Rule 4111(i)(11).  The Preliminary Identification Metrics Thresholds will remain the same, unless and until FINRA amends the text of Rule 4111(i)(11) through a rulemaking.

5.2  When FINRA conducts the Rule 4111 annual calculation, will a member firm be compared to all member firms or, instead, only to firms in its peer group?

The annual Rule 4111 calculation of whether a member firm meets the Preliminary Criteria for Identification will use the Preliminary Identification Metrics Thresholds for that firm’s size, based on the number of its Registered Persons In-Scope as of the Evaluation Date. There are numeric thresholds for seven different firm sizes to ensure that each member firm is compared only to its similarly sized peers.⁷

Section 6: One-Time Staff Reduction

6.1  Pursuant to Rule 4111(c)(2), if the Department determines that the member firm meets the Preliminary Criteria for Identification and such member firm has met such criteria for the first time, such member firm may reduce its staffing levels to no longer meet the Preliminary Criteria for Identification within 30 business days after being informed by the Department. To use the staff-reduction option, Rule 4111(c)(2) further requires the member firm to provide evidence of the staff reduction to the Department identifying the terminated individuals. For purposes of accomplishing the staff-reduction option, may a member firm hire registered persons who have no relevant disclosures on their Uniform Registration Forms? 

No. Rule 4111(c)(2) makes clear that the staff-reduction option permits a firm to “reduce” staff to no longer meet the Preliminary Criteria for Identification.

6.2   A member firm seeks to use the Rule 4111(c)(2) staff-reduction option. That member firm terminated a registered person six months before the Evaluation Date. When the member firm provides evidence of the staff reduction to the Department identifying the terminated individuals, may the firm include the person it terminated within the one year prior to the Evaluation Date?

A.  Yes. When a member firm exercises an available staff-reduction option and provides evidence of the staff reduction to the Department identifying the terminated individuals, those individuals can include ones who were terminated after the Evaluation Date and ones who were terminated within the one year prior to the Evaluation Date.

6.3  Pursuant to Rule 4111(c)(2), a member firm that uses a staff-reduction option shall not rehire in any capacity a person terminated to accomplish the staff reduction for a period of one year. When does the one-year rehiring ban period commence?

To use the staff-reduction option, Rule 4111(c)(2) requires that the member firm “provide evidence of the staff reduction to the Department identifying the terminated individuals.” The one-year rehiring ban commences when, pursuant to Rule 4111(c)(2), the member firm provides to the Department evidence of the staff reduction that identifies the individuals the firm has terminated to accomplish the staff reduction.

6.4  Is the Rule 4111(c)(2) staff-reduction option available only when a member firm meets the Preliminary Criteria for Identification for the first time, or can the member firm defer using its staff-reduction option to a subsequent Rule 4111 cycle?

The text of Rule 4111(c)(2) makes clear that a member firm has a one-time, staff-reduction option when it has met the Preliminary Criteria for Identification “for the first time.” Accordingly, a member firm may not defer using its staff-reduction option to a subsequent Rule 4111 cycle.   

6.5  When will a staff reduction be sufficient “to no longer meet the Preliminary Criteria for Identification,” within the meaning of Rule 4111(c)(2)? 

To meet the Preliminary Criteria for Identification, a member firm must meet certain conditions, including, among others, that “[t]wo or more of the member’s Preliminary Identification Metrics are equal to or more than the corresponding Preliminary Identification Metrics Thresholds, and at least one of these metrics is among the following metrics: (i) Registered Person Adjudicated Event Metric; (ii) Member Firm Adjudicated Event Metric; and (iii) Expelled Firm Association Metric.”⁸ Determining a member firm’s Preliminary Identification Metrics involves division calculations, in which the numerator of each metric calculation is the number of disclosure events or the number of Registered Persons Associated with Previously Expelled Firms, as appropriate, and the denominator is the number of Registered Persons In-Scope.

When a member firm uses the Rule 4111(c)(2) staff-reduction option, the Department will assess whether the member firm’s staff reductions have sufficiently reduced the numerators of those metric calculations, so that the member firm no longer meets the Preliminary Criteria for Identification.

For example, Firm A has 10 Registered Persons In-Scope, four of whom each have one Registered Person Adjudicated Event that reached a resolution during the Evaluation Period. Firm A’s Registered Person Adjudicated Event Metric is 0.4 (i.e., [4 Registered Person Adjudicated Events] ÷ [10 Registered Persons In-Scope] = 0.4), which exceeds the firm’s Registered Persons Adjudicated Event Metric Threshold for its firm-size category (0.2 metric threshold, for Firm-Size Category 3).⁹ In addition, Firm A’s Member Firm Adjudicated Event Metric exceeds the corresponding metric threshold, and the firm meets all conditions to meet the Preliminary Criteria for Identification for the first time. When using its staff-reduction option, Firm A terminates three of the registered persons who have Registered Person Adjudicated Events. This staff reduction reduces Firm A’s Registered Person Adjudicated Event Metric to 0.1 (i.e., [1 Registered Person Adjudicated Event] ÷ [10 Registered Persons In-Scope] = 0.1), which is no longer equal to or more than the corresponding metric threshold (which remains at 0.2), and results in only one of Firm A’s Preliminary Identification Metrics (its Member Firm Adjudicated Event Metric) remaining equal to or more than the corresponding metric threshold. Thus, Firm A’s staff reduction would successfully result in Firm A no longer meeting the Preliminary Criteria for Identification.

6.6  For purposes of accomplishing the Rule 4111(c)(2) staff-reduction option, by when must the member firm terminate individuals?   

For purposes of accomplishing the staff-reduction option, all terminations of individuals must occur within the 30-business-day period set forth in Rule 4111(c)(2). Terminations that occur after the expiration of the 30-business-day period will not count for purposes of a Rule 4111(c)(2) staff reduction.

6.7 When a member firm terminates an individual for purposes of the Rule 4111(c)(2) staff-reduction option, is it sufficient to terminate the individual’s registration?

No. When a member firm terminates an individual for purposes of the Rule 4111(c)(2) staff-reduction option, the member firm must fully terminate the individual from the firm and not rehire the individual in any capacity for a period of one year.

Section 7. Restricted Deposit Requirement; Restricted Deposit Account

7.1 What does it mean to “promptly” establish a Restricted Deposit Account and deposit in that account a Restricted Deposit Requirement, within the meaning of Rule 4111(e)(1)(B) and (C)?

When a Department decision issued pursuant to either Rule 4111(e)(1)(B) or (e)(1)(C) requires a member firm to “promptly” establish a Restricted Deposit Account and deposit in that account a Restricted Deposit Requirement, FINRA expects that the member firm shall do so within 15 calendar days of the date of the Department decision, unless the member firm shows good cause for needing additional time.

Section 8: Rule 4111 Compliance Resources

8.1 FINRA will house the Rule 4111 Compliance Tool in the FINRA Gateway. What is that tool, and how does a member firm access it? New

The Rule 4111 Compliance Tool will provide, as they are issued, reports of: (1) the annual calculation of whether the member firm met the Preliminary Criteria for Identification, including its Preliminary Identification Metrics, as of the Evaluation Date for a given year;¹⁰ and (2) interim calculations as of an Evaluation Date for that given year.

Each year’s report of the annual calculation will be issued shortly after the Rule 4111 annual calculation is conducted for that year. Prior to each year’s report of the annual calculation, FINRA generally expects to issue three reports of interim calculations for that given year, at regular intervals.¹¹ The reports of interim calculations will be generated for informational purposes only; whether a firm will meet the Preliminary Criteria for Identification in the annual calculation could change based on subsequent events.

In the FINRA Account Management System located in the FINRA Gateway, Super Account Administrators (SAAs) can assign eligible users the “Firm View Rule 4111 Compliance Tool” entitlement. It is located under Registrations, in the CRD section. If a firm’s SAA does not grant this entitlement to any of its users, the firm will be unable to access the tool.

For questions regarding this resource or entitlement questions, please contact the FINRA Support Center at (301) 869-6699 or send an email to the Compliance Tools team.

Endnotes