Blog FinReg + Policy Watch July 26, 2022

FINRA Proposes to Publicly Identify “Restricted Firms” on BrokerCheck

BrokerCheck is the database through which FINRA publishes licensing, registration, and disciplinary history of brokerage industry firms and their personnel. BrokerCheck does not currently specify whether a particular firm is a “Restricted Firm”–one FINRA considers to “pose far higher risks to the public than firms of similar size” based on history of misconduct by firms and their registered persons, including adjudicated and pending matters and matters related to termination and internal review.

FINRA’s proposal to publicly identify Restricted Firm status may, as FINRA puts it, “incentivize firms with a significant history of misconduct to change behaviors and activities to reduce risk” and also “improve [their] supervisory and compliance practices.”  That’s an aspirational endeavor for nearly every firm, even those with pristine regulatory histories.  But the proposal also puts firms in the position of potentially needing to explain to existing and prospective customers what the designation is, what the firm or its personnel did wrong to warrant the designation, and how that might affect the services the customer receives or the overall relationship.  In the era of Reg. BI and Form CRS compliance, firms should consider how being publicly labelled as a Restricted Firm might affect other disclosure obligations they have and, importantly, how registered representatives respond to related questions from current and prospective customers. That said, FINRA does intend to provide a hyperlink to educational material that explains the meaning of the Restricted Firm designation.

FINRA explained that the proposal is intended to enhance disclosure to the public while at the same time enhancing investor-protection.  Significantly, FINRA does not intend on publishing information about the obligations or conditions to which a Restricted Firm is subject (such as a Restricted Deposit Requirement, as defined in Rule 4111, or restrictions on business lines, product types offered, opening new accounts, business expansions, mergers, consolidations, or changes in control).  Nevertheless, FINRA does intend on sharing with state securities regulators information concerning member designations and related restrictions and obligations.

Firms have seven days to dispute the Restricted Firm designation (or seek to reduce accompanying requirements/restrictions) with FINRA’s Office of Hearing Officers once they are notified that FINRA’s Department of Member Regulation has made the status determination.  The designation will cease to appear on BrokerCheck when the firm is no longer considered a Restricted Firm, which FINRA will assess annually.  But that means, once designated, that the label will remain in BrokerCheck for at least one year.

The post FINRA Proposes to Publicly Identify “Restricted Firms” on BrokerCheck appeared first on FinReg + Policy Watch.