On May 2, the Financial Industry Regulatory Authority announced a new proposal targeting brokerage firms with questionable disciplinary histories. In a Regulatory Notice released on its website, FINRA announced that it is considering a plan to require member firms with a high number of registered representatives with disciplinary histories to pay into a fund that would be overseen and controlled by FINRA. The proposed fund would be held in reserve and the money used, upon FINRA’s written consent, to pay out potential arbitration awards filed by customers. FINRA is seeking comments on the proposed Rule 4111 until July 1, 2019, at which point it will be considered by the Securities and Exchange Commission.
The proposal comes in response to consistent public pressure to reduce the number of unpaid arbitration awards and is FINRA’s latest attempt to improve customer and investor protections within the securities industry. Despite the potential widespread application of this new proposed rule, FINRA has made assurances that the Rule is intended to involve only a small number of member firms – those that it has deemed “Restricted Firms.” The affected firms are those that FINRA considers to pose a significantly higher level of risk-related disclosures than their similarly-sized peers by generally failing to carry out their supervisory obligations concerning compliance with securities laws and regulations and frequently acting in a manner detrimental to their customers and to the industry as a whole.
If enacted, Rule 4111 is predicted to affect between 75 and 100 member firms per year, based on a formula published by FINRA. The formula takes into account several factors, including the size of the firm, the number of registered persons employed by the firm, and the number of disciplinary events involving persons employed by the firm within the previous five years.
FINRA’s stated objective with the proposal is increased accountability within the industry.
Troutman Sanders represents financial services institutions and their associated persons in FINRA arbitration disputes and regulatory matters involving customer, employment, and intra-industry claims.