SEC Approves FINRA’s Deposit Rule for High-Risk Firms

Posted on August 12th, 2021 at 12:35 PM
SEC Approves FINRA’s Deposit Rule for High-Risk Firms

From the Desk of Jim Eccleston at Eccleston Law:

Financial Industry Regulatory Authority (FINRA) Rule 4111, which was approved by the Securities and Exchange Commission (SEC) in July, enables the regulator to levy “new obligations” on advisory firms that are deemed to be high risk. 

An advisory firm will be designated as high risk based on whether the firm or its advisors have exceeded thresholds of risk-related or investor-harming disclosures, according to the SEC. The rule requires that high-risk firms establish segregated accounts with funds tabbed to pay pending arbitration claims to clients. According to the SEC, “this proposal is designed to address persistent compliance issues that arise at some FINRA member firms that generally do not carry out their supervisory obligations to achieve compliance with applicable securities laws and regulations and FINRA rules, and act in ways that could harm their customers and erode confidence in the brokerage industry.” 

Prior to Rule 4111, which will take effect in January 2022, FINRA was allowed only to file enforcement actions or seek restitution after client harm has occurred or a rule has been violated. According to the new rule, FINRA will complete an annual analysis of each member firm in order to determine which firms will be required to fund the segregated accounts or comply with additional restrictions. The firms that are designated as high-risk will have a one-time opportunity to challenge FINRA’s categorization or voluntarily reduce their advisor workforce to evade the segregated account requirement. 

Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, regulatory and disciplinary matters.

 

Tags: eccleston, eccleston law, sec, finra, high-risk firms

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