FINRA Adopts Amendments to FINRA Rule 8312 to Release Information on BrokerCheck Relating to Designation as a Restricted Firm
Summary
FINRA has adopted amendments to Rule 8312 (FINRA BrokerCheck Disclosure) to release information on BrokerCheck as to whether a particular current or former member firm is currently designated as a Restricted Firm pursuant to FINRA Rules 4111 (Restricted Firm Obligations) and 9561 (Procedures for Regulating Activities Under Rule 4111).1
The new rule amendments become effective on June 1, 2023.
The amended rule text is available in Attachment A.
Questions concerning this Notice should be directed to:
- Kosha Dalal, Vice President and Associate General Counsel, Office of General Counsel, at (202) 728-6903 or email; or
- Michael Garawski, Associate General Counsel, Office of General Counsel, at (202) 728-8835 or email.
Background & Discussion
Rule 4111 (Restricted Firm Obligations) is designed to protect investors and the public interest by strengthening tools available to FINRA to address the risks posed by member firms with a significant history of misconduct. The rule establishes an annual process to identify and designate as Restricted Firms member firms that present a high degree of risk to the investing public. This multi-step, annual process imposes on Restricted Firms a Restricted Deposit Requirement2 or, in addition or in the alternative, conditions or restrictions on the member firm’s operations that are necessary or appropriate to protect investors and the public interest.3 FINRA believes the rule also creates incentives for member firms to change behaviors and activities, either to avoid being designated or re-designated as a Restricted Firm.4 Rule 9561 establishes an expedited proceeding to implement Rule 4111.
Rules 4111 and 9561, as well as related amendments to FINRA Rule 9559 (Hearing Procedures for Expedited Proceedings Under the Rule 9550 Series), became effective on January 1, 2022.5 The first annual Rule 4111 process, which used a June 1, 2022, Evaluation Date, commenced in July 2022.6
BrokerCheck helps investors make informed choices about the brokers and member firms with which they conduct business by providing registration and disciplinary history to investors at no charge.7 FINRA requires member firms to inform their customers of the availability of BrokerCheck.8 To enhance the investor-protection benefits of Rule 4111, FINRA has amended Rule 8312 (FINRA BrokerCheck Disclosure) to release information on BrokerCheck as to whether a particular member firm or former member firm is currently designated as a Restricted Firm pursuant to Rules 4111 and 9561. Releasing this information will alert investors to research more carefully the background of the firm. It also will create additional incentives for firms with a significant history of misconduct to change behaviors and activities to reduce risk.
Information that a firm is a Restricted Firm will display on BrokerCheck on a firm’s summary and detailed BrokerCheck reports while that firm is designated as a Restricted Firm.9
The amendments to Rule 8312 become effective on June 1, 2023, which is also the Evaluation Date for the second annual Rule 4111 cycle. After the effective date of the new rule amendments, FINRA will release the relevant information on BrokerCheck beginning with the firms that are designated or re-designated as Restricted Firms in the second annual Rule 4111 cycle.
Endnotes
1 See Securities Exchange Act Release No. 96798 (February 3, 2023), 88 FR 8494 (February 9, 2023) (Order Approving File No. SR-FINRA-2022-015).
2 See Rule 4111(i)(15) (definition of “Restricted Deposit Requirement”).
3 See Securities Exchange Act Release No. 92525 (July 30, 2021), 86 FR 42925, 42932 (August 5, 2021) (Order Approving File No. SR-FINRA-2020-041, as Modified by Amendment Nos. 1 and 2) (“Rule 4111 Order”); see also Securities Exchange Act Release No. 92525 (July 30, 2021), 86 FR 49589 (September 3, 2021) (Order Approving File No. SR-FINRA-2020-041) (Correction).
4 See Rule 4111 Order, 86 FR 42925, 42926, 42932.
5 See Regulatory Notice 21-34 (September 2021).
6 See Rule 4111(i)(5) (definition of “Evaluation Date”); Information Notice 2/1/22 (FINRA Announces Rule 4111 (Restricted Firm Obligations) Evaluation Date).
7 The BrokerCheck website address is https://brokercheck.finra.org.
8 See FINRA Rules 2210(d)(8) and 2267.
9 The information also will be displayed on BrokerCheck during the course of any Rule 9561 expedited proceeding to review a Department of Member Supervision (“Department”) decision that designates a firm as a Restricted Firm, because the effectiveness of the Department decision will not be stayed during a Rule 9561 expedited proceeding. See Rule 9561(a)(4) (Effectiveness of the Rule 4111 Requirements). However, when a firm has requested a hearing in a Rule 9561 expedited proceeding, the firm’s BrokerCheck reports also will indicate, while the expedited proceeding is pending, that the firm’s Restricted Firm designation is on appeal.