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FINRA Proposes To Publicly Identify “Restricted Firms” On BrokerCheck – Financial Services



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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 content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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