78540 Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3This reflects a different numbering than was 

originally proposed. See Regulatory Notice 19–17 

(proposing to number the proposed new expedited 

proceeding rule as Rule ‘‘9559’’ and to renumber 

current Rule 9559 as Rule ‘‘9560’’). 

4For example, in October 2018, FINRA 

announced plans to consolidate its Examination 

and Risk Monitoring Programs, integrating three 

separate programs into a single, unified program to 

drive more effective oversight and greater 

consistency, eliminate duplication and create a 

single point of accountability for the examination 

of member firms. The consolidation brings those 

programs under a single framework designed to 

better direct and align examination resources to the 

risk profile and complexity of member firms. 

FINRA is conducting its examinations under this 

unified program in 2020. 

5For example, in 2015 FINRA’s Office of the 

Chief Economist (‘‘OCE’’) published a study that 

examined the predictability of disciplinary and 

other disclosure events associated with investor 

harm based on past similar events. The OCE study 

showed that past disclosure events, including 

regulatory actions, customer arbitrations and 

litigations of brokers, have significant power to 

predict future investor harm. See Hammad Qureshi 

& Jonathan Sokobin, Do Investors Have Valuable 

Information About Brokers? (OCE Working Paper, 

Aug. 2015). A subsequent academic research paper 

presented evidence that suggests a higher rate of 

new disciplinary and other disclosure events is 

highly correlated with past disciplinary and other 

disclosure events, as far back as nine years prior. 

See Mark Egan, Gregor Matvos, & Amit Seru, The 

Market for Financial Adviser Misconduct, J. Pol. 

Econ. 127, no. 1 (Feb. 2019): 233–295. 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–90527; File No. SR–FINRA– 

2020–041] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Notice of Filing of a 

Proposed Rule Change To Adopt 

FINRA Rule 4111 (Restricted Firm 

Obligations) and FINRA Rule 9561 

(Procedures for Regulating Activities 

Under Rule 4111) 

November 27, 2020. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2

notice is hereby given that on November 

16, 2020, the Financial Industry 

Regulatory Authority, Inc. (‘‘FINRA’’) 

filed with the Securities and Exchange 

Commission (‘‘SEC’’ or ‘‘Commission’’) 

the proposed rule change as described 

in Items I, II, and III below, which Items 

have been prepared by FINRA. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

FINRA is proposing to (1) adopt 

FINRA Rule 4111 (Restricted Firm 

Obligations) to require member firms 

that are identified as ‘‘Restricted Firms’’ 

to maintain a deposit in a segregated 

account from which withdrawals would 

be restricted, adhere to specified 

conditions or restrictions, or comply 

with a combination of such obligations; 

and (2) adopt a new FINRA Rule 9561 

(Procedures for Regulating Activities 

Under Rule 4111), and amend FINRA 

Rule 9559 (Hearing Procedures for 

Expedited Proceedings Under the Rule 

9550 Series), to create a new expedited 

proceeding to implement proposed Rule 

4111.3 In addition, FINRA proposes to 

adopt Capital Acquisition Broker 

(‘‘CAB’’) Rule 412 (Restricted Firm 

Obligations), to clarify that member 

firms that have elected to be treated as 

CABs would be subject to proposed 

FINRA Rule 4111, and to amend 

Funding Portal Rule 900(a) (Application 

of FINRA Rule 9000 Series (Code of 

Procedure) to Funding Portals), to 

clarify that funding portals would not be 

subject to proposed FINRA Rule 9561. 

The text of the proposed rule change 

is available on FINRA’s website at 

http://www.finra.org, at the principal 

office of FINRA and at the 

Commission’s Public Reference Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

FINRA included statements concerning 

the purpose of and basis for the 

proposed rule change and discussed any 

comments it received on the proposed 

rule change. The text of these statements 

may be examined at the places specified 

in Item IV below. FINRA has prepared 

summaries, set forth in sections A, B, 

and C below, of the most significant 

aspects of such statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

Background 

FINRA has been engaged in an 

ongoing effort to enhance its programs 

to address the risks that can be posed to 

investors and the broader market by 

individual brokers and member firms 

that have a history of misconduct. As 

part of these efforts, FINRA is proposing 

to adopt Rule 4111, which would 

impose obligations on member firms 

that have significantly higher levels of 

risk-related disclosures than similarly 

sized peers. FINRA would preliminarily 

identify these member firms by using 

numeric, threshold-based criteria and 

several additional steps that would 

guard against misidentification. The 

obligations could include requiring a 

member firm to maintain a specific 

deposit amount, with cash or qualified 

securities, in a segregated account at a 

bank or clearing firm, from which the 

member firm could make withdrawals 

only with FINRA’s approval. The 

obligations also could include 

conditions or restrictions on the 

operations and activities of the member 

firm and its associated persons that 

relate to, and are designed to address 

the concerns indicated by, the 

preliminary identification criteria and 

protect investors and the public interest. 

FINRA also is proposing to adopt 

FINRA Rule 9561, and amend FINRA 

Rule 9559, to create a new expedited 

proceeding to implement proposed Rule 

4111. 

FINRA has a number of tools to deter 

and remedy misconduct by member 

firms and the individuals they hire, 

including review of membership 

applications, focused examinations, risk 

monitoring and disciplinary actions. 

These tools have been effective in 

identifying and addressing a range of 

misconduct by individuals and member 

firms, and FINRA has continued to 

strengthen them. In recent years, for 

example, FINRA has enhanced its key 

investor protection rules and 

examination programs, expanded its 

risk-based monitoring of brokers and 

member firms, and deployed new 

technologies designed to make its 

regulatory efforts more effective and 

efficient.4

These efforts have strengthened 

protections for investors and the 

markets, but persistent compliance 

issues continue to arise in some FINRA 

member firms, which are a top focus of 

FINRA regulatory programs. While 

historically small in number, such firms 

generally do not carry out their 

supervisory obligations to ensure 

compliance with applicable securities 

laws and regulations and FINRA rules, 

and they act in ways that could harm 

their customers and erode trust in the 

brokerage industry. Recent academic 

studies, for example, find that some 

firms persistently employ brokers who 

engage in misconduct, and that 

misconduct can be concentrated at these 

firms. These studies also provide 

evidence that the past disciplinary and 

other regulatory events associated with 

a firm or individual can be predictive of 

similar future events.5 While these firms 

may eventually be forced out of the 

industry through FINRA action or 

otherwise, these patterns indicate a 

persistent, if limited, population of 

Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 78541 

6See FINRA Rule 9800 Series (Temporary and 

Permanent Cease and Desist Orders). 

7See Securities Exchange Act Release No. 88600 

(April 8, 2020), 85 FR 20745 (April 14, 2020) 

(Notice of Filing of File No. SR–FINRA–2020–011); 

see also Regulatory Notice 18–16 (April 2018). 

8See Securities Exchange Act Release No. 83181 

(May 7, 2018), 83 FR 22107 (May 11, 2018) (Notice 

of Filing and Immediate Effectiveness of File No. 

SR–FINRA–2018–018). 

9See Regulatory Notice 18–16 (April 2018). 

10The term ‘‘Covered Pending Arbitration Claim’’ 

is defined in proposed Rule 4111(i)(2) to mean, for 

purposes of Rule 4111, an investment-related, 

consumer initiated claim filed against the member 

or its associated persons in any arbitration forum 

Continued 

firms with a history of misconduct that 

may not be acting appropriately as a 

first line of defense to prevent customer 

harm by their brokers. 

Such firms expose investors to real 

risk. For example, FINRA has identified 

certain firms that have a concentration 

of associated persons with a history of 

misconduct, and some of these firms 

consistently hire such individuals and 

fail to reasonably supervise their 

activities. These firms generally have a 

retail business engaging in cold calling 

to make recommendations of securities, 

often to vulnerable customers. FINRA 

has also identified groups of individual 

brokers who move from one firm of 

concern to another firm of concern. 

Such firms and their associated persons 

often have substantial numbers of 

disclosures on their records. In such 

situations, FINRA closely examines the 

firms’ and brokers’ conduct, and where 

appropriate, FINRA will bring 

enforcement actions to bar or suspend 

the firms and individuals involved. 

However, individuals and firms with 

a history of misconduct can pose a 

particular challenge for FINRA’s 

existing examination and enforcement 

programs. In particular, examinations 

can identify compliance failures—or 

imminent failures—and prescribe 

remedies to be taken, but examiners are 

not empowered to require a firm to 

change or limit its business operations 

in a particular manner without an 

enforcement action. While these 

constraints on the examination process 

protect firms from potentially arbitrary 

or overly onerous examination findings, 

an individual or firm with a history of 

misconduct can take advantage of these 

limits to simply continue activities that 

pose risk of harm to investors until they 

result in an enforcement action. 

Enforcement actions in turn can only 

be brought after a rule has been violated 

and any resulting customer harm has 

already occurred. In addition, these 

proceedings can take significant time to 

develop, prosecute and conclude, 

during which time the individual or 

firm is able to continue misconduct, 

with significant risks of additional harm 

to customers and investors. Parties with 

serious compliance issues often will 

litigate enforcement actions brought by 

FINRA, which potentially involves a 

hearing and multiple rounds of appeals, 

forestalling the imposition of 

disciplinary sanctions for an extended 

period. For example, an enforcement 

proceeding could involve a hearing 

before a Hearing Panel, numerous 

motions, an appeal to the National 

Adjudicatory Council (‘‘NAC’’), and a 

further appeal to the SEC. Moreover, 

even when a FINRA Hearing Panel 

imposes a significant sanction, the 

sanction is stayed during appeal to the 

NAC, many sanctions are automatically 

stayed on appeal to the SEC, and they 

potentially can be stayed during appeal 

to the courts. And when all appeals are 

exhausted, the firm may have 

withdrawn its FINRA membership and 

shifted its business to another member 

or other type of financial firm, limiting 

FINRA’s jurisdiction and avoiding the 

sanction, including making restitution 

to customers. 

Temporary cease and desist 

proceedings, while useful, do not 

always provide an effective remedy for 

potential ongoing harm to investors 

during the enforcement process.6

Temporary cease and desist proceedings 

are available only in narrowly defined 

circumstances. Moreover, initiation by 

FINRA of a temporary cease and desist 

action does not necessarily enable more 

rapid intervention, because FINRA must 

be prepared to file the underlying 

disciplinary complaint at the same time. 

In addition, by the time sanctions are 

imposed, as noted above, the firm may 

have exited the industry, thereby 

limiting FINRA’s jurisdiction over the 

misconduct. In such circumstance, the 

firm may also fail to pay arbitration 

awards owed to claimants, leaving 

investors uncompensated and 

diminishing confidence in the securities 

markets. 

Therefore, FINRA is strengthening its 

tools to respond to firms and brokers 

with a significant history of misconduct, 

and the firms that employ those brokers, 

several of which are described below. 

Additional Steps Undertaken by FINRA 

To address these problems, FINRA 

has undertaken the following: 

➢ Published Regulatory Notice 18– 

15, which rearticulates the obligation of 

member firms to implement heightened 

supervisory procedures tailored to the 

associated persons with a history of 

misconduct; 

➢ Proposed rule amendments that 

would require a member firm to conduct 

with FINRA a materiality consultation 

before allowing persons with a history 

of misconduct to become owners, 

control persons, principals or registered 

persons of a member firm; authorize the 

imposition in a disciplinary proceeding 

of conditions and restrictions on the 

activities of a respondent member firm 

or respondent broker that are reasonably 

necessary for the purpose of preventing 

customer harm, and require a 

respondent broker’s member firm to 

adopt heightened supervisory 

procedures for such broker, when a 

disciplinary matter is appealed to the 

NAC or called for NAC review; require 

firms that apply to continue associating 

with a statutorily disqualified person to 

include in that application an interim 

plan of heightened supervision that 

would be effective throughout the 

application process; and allow the 

disclosure through FINRA BrokerCheck 

of the status of a member firm as a 

‘‘taping firm’’ under FINRA Rule 3170 

(Tape Recording of Registered Persons 

by Certain Firms); 7

➢ Published Regulatory Notice 18– 

17, which announced revisions to the 

FINRA Sanction Guidelines; 

➢ Raised fees for statutory 

disqualification applications; 8 and 

➢ Revised the qualification 

examination waiver guidelines to permit 

FINRA to more broadly consider past 

misconduct when considering 

examination waiver requests.9

While these efforts should help 

mitigate the risks posed by individual 

brokers with a history of misconduct, 

challenges remain where a member firm 

itself has a concentration of such 

brokers—in some cases because the firm 

seeks out such brokers—or otherwise 

has a history of substantial compliance 

failures. 

Proposed Rule 4111 (Restricted Firm 

Obligations) 

FINRA is proposing to adopt Rule 

4111 (Restricted Firm Obligations), a 

new rule that would use numeric 

thresholds based on firm-level and 

individual-level disclosure events and 

impose a Restricted Deposit 

Requirement on member firms that 

present a high degree of risk to the 

investing public. FINRA believes that 

the direct financial impact of a 

restricted deposit is most likely to 

change such member firms’ behavior— 

and therefore protect investors. An 

added benefit of this proposal would be 

to preserve member firm funds for 

payment of arbitration awards against 

them and their associated persons. The 

proposal would consider ‘‘Covered 

Pending Arbitration Claims’’ 10 and 

78542 Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 

that is unresolved; and whose claim amount 

(individually or, if there is more than one claim, in 

the aggregate) exceeds the member’s excess net 

capital. The claim amount includes claimed 

compensatory loss amounts only, not requests for 

pain and suffering, punitive damages or attorney’s 

fees, and shall be the maximum amount for which 

the member or associated person, as applicable, is 

potentially liable regardless of whether the claim 

was brought against additional persons or the 

associated person reasonably expects to be 

indemnified, share liability or otherwise lawfully 

avoid being held responsible for all or part of such 

maximum amount. This term conforms, in relevant 

part, to the definition of Covered Pending 

Arbitration Claim in Rule 1011(c). See Securities 

Exchange Act Release No. 88482 (March 26, 2020), 

85 FR 18299 (April 1, 2020) (Order Approving File 

No. SR–FINRA–2019–030). 

11For purposes of this Form 19b–4, ‘‘unpaid 

arbitration awards’’ also includes unpaid 

settlements related to arbitrations. 

12The term ‘‘Restricted Deposit Requirement’’ is 

defined in proposed Rule 4111(i)(15). 

13See proposed Rule 4111(i)(14) (proposed 

definition of ‘‘Restricted Deposit Account’’). 

14See proposed Rule 4111(i)(10) (definition of 

‘‘Preliminary Identification Metrics’’). 

15See proposed Rule 4111(i)(9) (definition of 

‘‘Preliminary Criteria for Identification’’). 

16See proposed Rule 4111(i)(11) (definition of 

‘‘Preliminary Identification Metrics Thresholds’’). 

17One of the event categories, Member Firm 

Adjudicated Events, includes events that are 

derived from customer arbitrations filed with 

FINRA’s dispute resolution forum. 

18See proposed Rule 4111(i)(4). 

19 ‘‘Registered Person Adjudicated Events,’’ 

defined in proposed Rule 4111(i)(4)(A), means any 

one of the following events that are reportable on 

the registered person’s Uniform Registration Forms: 

(i) A final investment-related, consumer-initiated 

customer arbitration award or civil judgment 

against the registered person in which the registered 

person was a named party, or was a ‘‘subject of’’ 

the customer arbitration award or civil judgment; 

(ii) a final investment-related, consumer-initiated 

customer arbitration settlement, civil litigation 

settlement or a settlement prior to a customer 

arbitration or civil litigation for a dollar amount at 

or above $15,000 in which the registered person 

was a named party or was a ‘‘subject of’’ the 

customer arbitration settlement, civil litigation 

settlement or a settlement prior to a customer 

arbitration or civil litigation; (iii) a final investmentrelated civil judicial matter that resulted in a 

finding, sanction or order; (iv) a final regulatory 

action that resulted in a finding, sanction or order, 

and was brought by the SEC or Commodity Futures 

Trading Commission (‘‘CFTC’’), other federal 

regulatory agency, a state regulatory agency, a 

foreign financial regulatory authority, or a selfregulatory organization; or (v) a criminal matter in 

which the registered person was convicted of or 

pled guilty or nolo contendere (no contest) in a 

domestic, foreign, or military court to any felony or 

any reportable misdemeanor. 

20 ‘‘Registered Person Pending Events,’’ defined in 

proposed Rule 4111(i)(4)(B), means any one of the 

following events associated with the registered 

person that are reportable on the registered person’s 

unpaid arbitration awards 11 in 

determining the size of a Restricted 

Firm’s ‘‘Restricted Deposit 

Requirement.’’ 12 The proposal also 

would establish presumptions that, 

when assessing an application by a 

member firm or former member firm 

that was previously designated as a 

Restricted Firm for withdrawal from a 

Restricted Deposit Account,13 the 

Department of Member Regulation 

(‘‘Department’’) shall: (i) Deny an 

application for withdrawal if the 

member firm, the member firm’s 

Associated Persons who are owners or 

control persons, or the former member 

firm have any Covered Pending 

Arbitration Claims or unpaid arbitration 

awards, or if the member firm’s 

Associated Persons have any Covered 

Pending Arbitration Claims or unpaid 

arbitration awards relating to 

arbitrations outstanding that involved 

conduct or alleged conduct that 

occurred while associated with the 

member firm; but (ii) approve a former 

member firm’s application for 

withdrawal when that former member 

firm commits in the manner specified 

by the Department to use the amount it 

seeks to withdraw from its Restricted 

Deposit to pay the former member firm’s 

specified unpaid arbitration awards. 

The proposed rule would create a 

multi-step process for FINRA’s 

determination of whether a member 

firm raises investor-protection concerns 

substantial enough to require that it be 

subject to additional obligations. Those 

obligations could include a requirement 

to maintain a deposit of cash or 

qualified securities in an account from 

which withdrawals would be restricted, 

or conditions or restrictions on the 

member firm’s operations that are 

necessary or appropriate for the 

protection of investors and in the public 

interest. The proposed rule would give 

each affected member firm several ways 

to affect outcomes, including a one-time 

opportunity to reduce staffing so as to 

no longer trigger the preliminary 

identification criteria and numeric 

thresholds. The firm also could explain 

to the Department why it should not be 

subject to a Restricted Deposit 

Requirement or propose alternatives, 

and the firm could challenge a 

Department determination by requesting 

a hearing before a Hearing Officer in an 

expedited proceeding. 

The proposed multi-step process 

includes numerous features designed to 

narrowly focus the new obligations on 

the firms most of concern. As the flow 

chart in Exhibit 2d reflects, this process 

is akin to a ‘‘funnel.’’ The top of the 

funnel applies to the range of member 

firms with the most disclosures, with a 

narrowing in the middle of the potential 

member firms that may be subject to 

additional obligations, and the bottom 

of the funnel reflecting the smaller 

number of member firms that are 

determined to present high risks to the 

investing public. 

➢ General (Proposed Rule 4111(a)) 

Proposed Rule 4111(a) would require 

a member designated as a Restricted 

Firm to establish a Restricted Deposit 

Account and maintain in that account 

deposits of cash or qualified securities 

with an aggregate value that is not less 

than the member’s Restricted Deposit 

Requirement, except in certain 

identified situations, and be subject to 

conditions or restrictions on the 

member’s operations as determined by 

the Department to be necessary or 

appropriate for the protection of 

investors and in the public interest. 

➢ Annual Calculation by FINRA of the 

Preliminary Criteria for Identification 

(Proposed Rule 4111(b)) 

The multi-step process would begin 

with an annual calculation. As 

explained more below, proposed Rule 

4111(b) would require the Department 

to calculate annually (on a calendar-year 

basis) the ‘‘Preliminary Identification 

Metrics’’ 14 to determine whether a 

member firm meets the ‘‘Preliminary 

Criteria for Identification.’’ 15 A key 

driver of that is whether a member 

firm’s ‘‘Preliminary Identification 

Metrics’’ meet quantitative, risk-based 

‘‘Preliminary Identification Metrics 

Thresholds.’’ 16

Several principles guided FINRA’s 

development of the proposed 

Preliminary Criteria for Identification 

and the proposed Preliminary 

Identification Metrics Thresholds. The 

criteria and thresholds are intended to 

be replicable and transparent to FINRA 

and affected member firms; employ the 

most complete and accurate data 

available to FINRA; be objective; 

account for different firm sizes and 

business profiles; and target the salespractice concerns that are motivating 

the proposal. These criteria are intended 

to identify member firms that present a 

high risk but avoid imposing obligations 

on member firms whose risk profile and 

activities do not warrant such 

obligations. 

Using these guiding principles, 

FINRA is proposing numeric thresholds 

based on six categories of events or 

conditions, nearly all of which are based 

on information disclosed through the 

Uniform Registration Forms.17 The six 

categories, collectively defined as the 

‘‘Disclosure Event and Expelled Firm 

Association Categories,’’ 18 are: 

1. Registered Person Adjudicated 

Events; 19

2. Registered Person Pending 

Events; 20

Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 78543 

Uniform Registration Forms: (i) A pending 

investment-related civil judicial matter; (ii) a 

pending investigation by a regulatory authority; (iii) 

a pending regulatory action that was brought by the 

SEC or CFTC, other federal regulatory agency, a 

state regulatory agency, a foreign financial 

regulatory authority, or a self-regulatory 

organization; or (iv) a pending criminal charge 

associated with any felony or any reportable 

misdemeanor. Registered Person Pending Events 

does not include pending arbitrations, pending civil 

litigations, or consumer-initiated complaints that 

are reportable on the registered person’s Uniform 

Registration Forms. 

21 ‘‘Registered Person Termination and Internal 

Review Events,’’ defined in proposed Rule 

4111(i)(4)(C), means any one of the following events 

associated with the registered person at a previous 

member firm that are reportable on the registered 

person’s Uniform Registration Forms: (i) A 

termination in which the registered person 

voluntarily resigned, was discharged or was 

permitted to resign from a previous member after 

allegations; or (ii) a pending or closed internal 

review by a previous member. FINRA has revised 

this definition, from the version proposed in 

Regulatory Notice 19–17 (May 2019), to clarify that 

termination and internal review disclosures 

concerning a person whom a member firm 

terminated would not impact that member firm’s 

own Registered Person Termination and Internal 

Review Metric; rather, they would only impact the 

metrics of member firms that subsequently register 

the terminated individual. 

22 ‘‘Member Firm Adjudicated Events,’’ defined in 

proposed Rule 4111(i)(4)(D), means any one of the 

following events that are reportable on the member 

firm’s Uniform Registration Forms or based on 

customer arbitrations filed with FINRA’s dispute 

resolution forum: (i) A final investment-related, 

consumer-initiated customer arbitration award in 

which the member was a named party; (ii) a final 

investment-related civil judicial matter that resulted 

in a finding, sanction or order; (iii) a final 

regulatory action that resulted in a finding, sanction 

or order, and was brought by the SEC or CFTC, 

other federal regulatory agency, a state regulatory 

agency, a foreign financial regulatory authority, or 

a self-regulatory organization; or (iv) a criminal 

matter in which the member was convicted of or 

pled guilty or nolo contendere (no contest) in a 

domestic, foreign, or military court to any felony or 

any reportable misdemeanor. 

23 ‘‘Member Firm Pending Events,’’ defined in 

proposed Rule 4111(i)(4)(E), means any one of the 

same kinds of events as the ‘‘Registered Person 

Pending Events,’’ but that are reportable on the 

member firm’s Uniform Registration Forms. 

24 ‘‘Registered Persons Associated with 

Previously Expelled Firms,’’ defined in proposed 

Rule 4111(i)(4)(F), means any ‘‘Registered Person 

In-Scope’’ who was registered for at least one year 

with a previously expelled firm and whose 

registration with the previously expelled firm 

terminated during the ‘‘Evaluation Period’’ (i.e., the 

prior five years from the ‘‘Evaluation Date,’’ which 

is the annual date as of which the Department 

calculates the Preliminary Identification Metrics). 

See proposed Rule 4111(i)(5), (6), and (13) 

(proposed definitions of ‘‘Evaluation Date,’’ 

‘‘Evaluation Period,’’ and ‘‘Registered Persons InScope’’). This proposed definition is narrower than 

the definition proposed in Regulatory Notice 19–17. 

25See proposed Rule 4111(i)(13). 

26See proposed Rule 4111(i)(12) (definition of 

Registered Person and Member Firm Events). 

27 Including an Expelled Firm Association Metric 

in the Preliminary Criteria for Identification is 

similar to how FINRA Rule 3170 (Tape Recording 

of Registered Persons by Certain Firms) imposes 

recording requirements on firms with specific 

percentages of registered persons who were 

previously associated with disciplined firms. 

28The purpose of ensuring that a firm does not 

meet the Preliminary Criteria for Identification 

solely because of pending matters is because FINRA 

recognizes that pending matters include disclosure 

events that may remain unresolved or that may 

subsequently be dismissed or concluded with no 

adverse action. As explained in more detail in the 

Economic Impact Assessment, FINRA also 

evaluated the impact of including and excluding 

pending matters from the Preliminary Criteria for 

Identification. Based on this evaluation, FINRA has 

included pending matters in the proposed criteria 

because they are critical to identifying firms that 

pose greater risks to their customers. 

3. Registered Person Termination and 

Internal Review Events; 21

4. Member Firm Adjudicated 

Events; 22

5. Member Firm Pending Events; 23

and 

6. Registered Persons Associated with 

Previously Expelled Firms (also referred 

to as the Expelled Firm Association 

category).24

To calculate whether a member firm 

meets the Preliminary Criteria for 

Identification, the Department would 

first compute the Preliminary 

Identification Metrics for each of the 

Disclosure Event and Expelled Firm 

Association Categories. Each category’s 

Preliminary Identification Metric 

computation would start with a 

calculation of the sum of the pertinent 

disclosure events or, for the Expelled 

Firm Association category, the sum of 

the Registered Persons Associated with 

Previously Expelled Firms. For the 

adjudicated disclosure-event based 

categories, the counts would include 

disclosure events that were resolved 

during the prior five years from the date 

of the calculation. For the pending 

events categories and pending internal 

reviews, the counts would include 

disclosure events that are pending as of 

the date of the calculation. In addition, 

for the three Registered Person 

disclosure-event based categories, the 

counts would include disclosure events 

across all Registered Persons In-Scope, 

which is defined to include persons 

registered with the member firm for one 

or more days within the one year prior 

to the calculation date.25

Each of those six sums would then be 

standardized to determine the member’s 

six Preliminary Identification Metrics. 

For the five ‘‘Registered Person and 

Member Firm Events’’ categories 

(Categories 1–5 above),26 the proposed 

Preliminary Identification Metrics are in 

the form of an average number of events 

per registered broker, calculated by 

taking each category’s sum and dividing 

it by the number of Registered Persons 

In-Scope. The sixth Preliminary 

Identification Metric—the proposed 

Expelled Firm Association Metric—is in 

the form of a percentage concentration 

at the member firm of Registered 

Persons Associated with Previously 

Expelled Firms. This concentration is 

calculated by taking the number of 

Registered Persons Associated with 

Previously Expelled Firms and dividing 

it by the number of Registered Persons 

In-Scope. 

A firm’s six Preliminary Identification 

Metrics are used to determine if the 

member firm meets the Preliminary 

Criteria for Identification. To meet the 

Preliminary Criteria for Identification, a 

member firm would need to meet the 

Preliminary Identification Metrics 

Thresholds, set forth in proposed Rule 

4111(i)(11), for two or more of the 

appropriate metrics listed above for its 

size and, if it does, one of these metrics 

must be for adjudicated events or the 

Expelled Firm Association Metric, and 

the firm must have two or more 

Registered Person and Member Firm 

Events (i.e., events in categories besides 

the Registered Persons Associated with 

Previously Expelled Firms category).27

This involves analyzing the extent to 

which the Preliminary Identification 

Metrics meet the specified numeric 

Preliminary Identification Metrics 

Thresholds and meet additional 

conditions intended to prevent a 

member firm from becoming potentially 

subject to additional obligations solely 

as a result of pending matters or a single 

event or condition.28 Specifically, the 

Department would: 

• First, pursuant to proposed Rules 

4111(b) and (i)(9)(A), evaluate whether 

two or more of the member firm’s 

Preliminary Identification Metrics are 

equal to or more than the corresponding 

Preliminary Identification Metrics 

Thresholds for the member firm’s size, 

and whether at least one of those 

Preliminary Identification Metrics is the 

Registered Person Adjudicated Event 

Metric, the Member Firm Adjudicated 

Event Metric, or the Expelled Firm 

Association Metric; and 

• second, pursuant to proposed Rules 

4111(b) and (i)(9)(B), evaluate whether 

the member firm has two or more 

Registered Person or Member Firm 

Events (i.e., two or more events from 

Categories 1–5 above). 

If all of these conditions are met, the 

member firm would meet the 

Preliminary Criteria for Identification. 

Each specific numeric threshold in 

the Preliminary Identification Metrics 

Thresholds grid in proposed Rule 

4111(i)(11) is a number which 

represents outliers with respect to peers 

for the type of events in the category 

(i.e., the firm is at the far tail of the 

respective category’s distribution), 

which is intended to preliminarily 

78544 Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 

29Because FINRA has narrowed the definition of 

Registered Persons Associated with Previously 

Expelled Firms from the version that was originally 

proposed in Regulatory Notice 19–17, FINRA also 

has revised the Expelled Firm Association Metric 

Thresholds. 

30 Due to the revisions in the Preliminary Criteria 

for Identification, discussed above, and the 

inclusion of the year 2019 in the review period, this 

estimate and other corresponding estimates in the 

Economic Impact Assessment have changed from 

the ones in Regulatory Notice 19–17. 31The ‘‘Evaluation Date’’ is defined in proposed 

Rule 4111(i)(5) to mean the date, each calendar 

year, as of which the Department calculates the 

Preliminary Identification Metrics to determine if 

the member firm meets the Preliminary Criteria for 

Identification. 

32OCE has tested the Preliminary Criteria for 

Identification, including the Preliminary 

Identification Metrics Thresholds, in several ways. 

For example, OCE has compared the firms captured 

by the proposed criteria to the firms that have 

recently been expelled or that have unpaid 

arbitration awards. OCE also has consulted with 

Department staff and examiners about whether, 

based on their experience, the criteria identifies 

firms that appear to present high risks to investors. 

identify member firms that present 

significantly higher risk than a large 

percentage of the membership. In 

addition, there are numeric thresholds 

for seven different firm sizes, to ensure 

that each member firm is compared only 

to its similarly sized peers.29 As 

explained more below in the Economic 

Impact Assessment, based on recent 

history FINRA expects that its annual 

calculations will identify between 45– 

80 member firms that meet the 

Preliminary Criteria for Identification.30

The following three examples 

demonstrate—in practical terms—the 

point at which a member firm’s 

Preliminary Identification Metrics 

would meet the Preliminary 

Identification Metrics Thresholds in 

proposed Rule 4111(i)(11): 

Preliminary identification metrics thresholds Practical equivalent 

Example 1 (member firm 

size between 1–4 registered persons).

The Preliminary Identification Metrics Threshold for the 

Registered Person Adjudicated Event Metric, for a 

member firm that has between one and four Registered Persons In-Scope as of the Evaluation 

Date,31 is 0.50 (or 0.50 events per Registered Broker 

In-Scope).

For a member firm with four Registered Persons InScope as of the Evaluation Date, the member would 

meet the Preliminary Identification Metrics Threshold 

for the Registered Person Adjudicated Event Metric if 

the sum of its four Registered Persons In-Scope’s 

Adjudicated Events, which reached a resolution over 

the five years before the Evaluation Date, was two or 

more. 

(4 Registered Persons In-Scope) * (0.50 Preliminary 

Identification Metrics Threshold for the Registered 

Person Adjudicated Event Metric) = (2 Adjudicated 

Events) 

Example 2 (member firm 

size between 20–50 registered persons).

The Preliminary Identification Metrics Threshold for the 

Member Firm Adjudicated Event Metric, for a member firm that has between 20–50 Registered Persons 

In-Scope as of the Evaluation Date, is 0.20 (or 0.20 

events per Registered Broker In-Scope).

For a member firm with 50 Registered Persons InScope as of the Evaluation Date, the member firm 

would meet the Preliminary Identification Metrics 

Threshold for the Member Firm Adjudicated Event 

Metric if the sum of the member firm’s Adjudicated 

Events, which reached a resolution over the five 

years before the Evaluation Date, was ten or more. 

(50 Registered Persons In-Scope) * (0.20 Preliminary 

Identification Metrics Threshold for the Member Firm 

Adjudicated Event Metric) = (10 Adjudicated Events) 

Example 3 (member firm 

size between 51–150 registered persons).

The Preliminary Identification Metrics Threshold for the 

Expelled Firm Association Metric, for a member firm 

that has between 51–150 Registered Persons InScope as of the Evaluation Date, is 0.03 (or a 3% 

concentration level).

For a member firm with 100 Registered Persons InScope as of the Evaluation Date, the member firm 

would meet the Preliminary Identification Metrics 

Threshold for the Expelled Firm Association Metric if 

the sum of its Registered Persons Associated with 

Previously Expelled Firms was three or more. 

(100 Registered Persons In-Scope) * (0.03 Preliminary 

Identification Metrics Threshold for the Expelled Firm 

Association Metric) = (Three Registered Persons Associated with Previously Expelled Firms) 

In a comment to Regulatory Notice 19– 

17, SIFMA requested more clarity 

around when the annual Evaluation 

Date would be. FINRA would announce 

the first Evaluation Date no less than 

120 calendar days before the first 

Evaluation Date. Subsequent Evaluation 

Dates would be on the same month and 

day each year, except when that date 

falls on a Saturday, Sunday or federal 

holiday, in which case the Evaluation 

Date would be on the next business day. 

FINRA has conducted a thorough 

analysis of the proposed criteria and 

thresholds to ensure that the proposed 

Preliminary Criteria for Identification 

preliminarily identify the types of 

member firms that are motivating this 

rule proposal.32 As explained below, 

however, the proposed rule involves 

several additional steps to guard against 

the risk of misidentification. 

➢ Initial Department Evaluation 

(Proposed Rule 4111(c)(1)) 

For each member firm that meets the 

Preliminary Criteria for Identification, 

the Department would conduct, 

pursuant to proposed Rule 4111(c)(1), 

an initial internal evaluation to 

determine whether the member firm 

does not warrant further review under 

Rule 4111. In doing so, the Department 

would review whether it has 

information to conclude that the 

computation of the member firm’s 

Preliminary Identification Metrics 

included disclosure events or other 

conditions that should not have been 

included because they are not consistent 

with the purpose of the Preliminary 

Criteria for Identification and are not 

reflective of a firm posing a high degree 

of risk. For example, the Department 

may have information that the 

computation included disclosure events 

that were not sales-practice related, 

were duplicative (involving the same 

customer and the same matter), or 

mostly involved compliance concerns 

best addressed by a different regulatory 

response by FINRA. The Department 

would evaluate the events to determine, 

among other things, whether they 

Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 78545 

33The proposed factors that the Department 

would consider when determining a maximum 

Restricted Deposit Requirement have been revised 

from the ones proposed in Regulatory Notice 19– 

17. Some of the revisions are to ensure that 

proposed Rule 4111(i)(15) describes more 

accurately the factors that would be relevant to a 

determination of the maximum Restricted Deposit 

Requirement. In this regard, the ‘‘annual revenues’’ 

and ‘‘net capital requirements’’ factors proposed in 

Regulatory Notice 19–17 have been modified to 

‘‘revenues’’ and ‘‘net capital,’’ and ‘‘assets,’’ 

‘‘expenses,’’ and ‘‘liabilities’’ have been added as 

factors. Another revision clarifies that the Covered 

Pending Arbitration Claims and unpaid arbitration 

awards factors include claims and awards against 

the firm and its Associated Persons. The 

Department’s consideration of claims and awards 

against the firm’s Associated Persons would focus 

on claims and awards against Associated Persons 

who are owners or control persons and on claims 

and awards relating to arbitrations that involved 

conduct or alleged conduct that occurred while 

associated with the member firm. The revised 

proposed definition also adds the member firm’s 

‘‘insurance coverage for customer arbitration 

awards or settlements’’ as a factor. FINRA believes 

that, if Restricted Firms were able to procure errors 

and omissions policies, or other kinds of insurance 

coverage, for some or all of the kinds of arbitration 

claims that customers typically bring, that could 

warrant a reduced Restricted Deposit Requirement 

and would be behavior to encourage. 

indicated risks to investors or market 

integrity, rather than, for instance, 

repeated violations of procedural rules. 

The Department would also consider 

whether the member firm has addressed 

the concerns signaled by the disclosure 

events or conditions or altered its 

business operations, including staffing 

reductions, such that the threshold 

calculation no longer reflects the 

member firm’s current risk profile. 

Essentially, the purpose of the 

Department’s initial evaluation is to 

determine whether it is aware of 

information that would show that the 

member firm—despite having met the 

Preliminary Criteria for Identification— 

does not pose a high degree of risk. 

Pursuant to proposed Rule 4111(c)(3), 

if the Department determines, after this 

initial evaluation, that the member firm 

does not warrant further review, the 

Department would conclude that year’s 

Rule 4111 process for the member firm 

and would not seek that year to impose 

any obligations on it. If, however, the 

Department determines that the member 

firm does warrant further review, the 

Rule 4111 process would continue. 

➢ One-Time Opportunity To Reduce 

Staffing Levels (Proposed Rule 

4111(c)(2)) 

If the Department determines, after its 

initial evaluation, that a member firm 

warrants further review under proposed 

Rule 4111, such member firm—if it 

would be meeting the Preliminary 

Criteria for Identification for the first 

time—would have a one-time 

opportunity to reduce its staffing levels 

to no longer meet these criteria, within 

30 business days after being informed 

by the Department. The member firm 

would be required to demonstrate the 

staff reduction to the Department by 

identifying the terminated individuals. 

The proposed rule would prohibit the 

member firm from rehiring any persons 

terminated pursuant to this option, in 

any capacity, for one year. A member 

firm that has reduced staffing levels at 

this stage may not use that staffreduction opportunity again. 

If the Department determines that the 

member firm’s reduction of staffing 

levels results in its no longer meeting 

the Preliminary Criteria for 

Identification, the Department would 

close out that year’s Rule 4111 process 

for the member firm and would not seek 

that year to impose any obligations on 

that firm. If, on the other hand, the 

Department determines that the member 

firm still meets the Preliminary Criteria 

for Identification even after its staff 

reductions, or if the member firm elects 

not to use its one-time opportunity to 

reduce staffing levels, the Department 

would proceed to determine the firm’s 

maximum Restricted Deposit 

Requirement, and the member firm 

would proceed to a ‘‘Consultation’’ with 

the Department. 

➢ FINRA’s Determination of a 

Maximum Restricted Deposit 

Requirement (Proposed Rule 

4111(i)(15)) 

For members that warrant further 

review after being deemed to meet the 

Preliminary Criteria for Identification 

and after the initial Department 

evaluation, the Department would then 

determine the member’s maximum 

‘‘Restricted Deposit Requirement.’’ 

The Department would tailor the 

member firm’s maximum Restricted 

Deposit Requirement amount to its size, 

operations and financial conditions. As 

provided in proposed Rule 4111(i)(15), 

the Department would consider the 

nature of the member firm’s operations 

and activities, revenues, commissions, 

assets, liabilities, expenses, net capital, 

the number of offices and registered 

persons, the nature of the disclosure 

events counted in the numeric 

thresholds, insurance coverage for 

customer arbitration awards or 

settlements, concerns raised during 

FINRA exams, and the amount of any of 

the firm’s or its Associated Persons’ 

‘‘Covered Pending Arbitration Claims’’ 

or unpaid arbitration awards.33 Based 

on a consideration of these factors, the 

Department would determine a 

maximum Restricted Deposit 

Requirement for the member firm that 

would be consistent with the objectives 

of the rule, but not significantly 

undermine the continued financial 

stability and operational capability of 

the member firm as an ongoing 

enterprise over the next 12 months. 

FINRA’s intent is that the maximum 

Restricted Deposit Requirement should 

be significant enough to change the 

member firm’s behavior but not so 

burdensome that it would force the 

member firm out of business solely by 

virtue of the imposed deposit 

requirement. 

➢ Consultation (Proposed Rule 4111(d)) 

If the Department determines, after 

the process discussed above, that a 

member firm warrants further Rule 4111 

review, the Department would consult 

with the member firm, pursuant to 

proposed Rule 4111(d). This 

Consultation will give the member firm 

an opportunity to demonstrate why it 

does not meet the Preliminary Criteria 

for Identification, why it should not be 

designated as a Restricted Firm, and 

why it should not be subject to the 

maximum Restricted Deposit 

Requirement. 

In the Consultation, there would be 

two rebuttable presumptions: That the 

member firm should be designated as a 

Restricted Firm; and that it should be 

subject to the maximum Restricted 

Deposit Requirement. The member firm 

would bear the burden of overcoming 

those presumptions. 

Proposed Rule 4111(d)(1) governs 

how a member may overcome these two 

presumptions. First, a member may 

overcome the presumption that it 

should be designated as a Restricted 

Firm by clearly demonstrating that the 

Department’s calculation that the 

member meets the Preliminary Criteria 

for Identification is inaccurate because, 

among other things, it included events, 

in the six categories described above, 

that should not have been included 

because, for example, they are 

duplicative, involving the same 

customer and the same matter, or are 

not sales-practice related. Second, a 

member firm may overcome the 

presumption that it should be subject to 

the maximum Restricted Deposit 

Requirement by clearly demonstrating 

to the Department that the member firm 

would face significant undue financial 

hardship if it were required to maintain 

the maximum Restricted Deposit 

Requirement and that a lesser deposit 

requirement would satisfy the objectives 

of Rule 4111 and be consistent with the 

protection of investors and the public 

interest; or that other conditions and 

restrictions on the operations and 

activities of the member firm and its 

associated persons would address the 

78546 Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 

34 In Regulatory Notice 19–17 (May 2019), FINRA 

originally proposed that the member firm would be 

required, upon requesting a hearing, to deposit the 

lesser of 50% of the Restricted Deposit Requirement 

or 25% of the firm’s average excess net capital 

during the prior calendar year. FINRA has revised 

this provision because, although the no-stay 

provisions are a fundamental part of how the 

proposed rule would protect investors, FINRA 

believes that this aspect of the no-stay provisions 

could be less burdensome than originally proposed 

and still achieve its intended purpose. 

concerns indicated by the thresholds 

and protect investors and the public 

interest. 

Proposed Rule 4111(d)(2) governs 

how the Department would schedule 

and provide notice of the Consultation. 

In a change from the proposal in 

Regulatory Notice 19–17, the 

Department would provide the written 

letter required by the rule at least seven 

days prior to the Consultation, and 

would establish a process whereby the 

member can request a postponement for 

good cause shown. These changes, 

which are in response to a comment on 

Regulatory Notice 19–17, are intended 

to ensure that the firms have sufficient 

time to prepare for the Consultation and 

to enhance the procedural protections. 

Proposed Rule 4111(d)(3) provides 

guidance on what the Department 

would consider during the Consultation 

when evaluating whether a member firm 

should be designated as a Restricted 

Firm and subject to a Restricted Deposit 

Requirement. This provision also 

provides member firms with guidance 

on how to attempt to overcome the two 

rebuttable presumptions. For example, 

proposed Rule 4111(d)(3) requires that 

the Department consider: 

• Information provided by the 

member firm during any meetings as 

part of the Consultation; 

• relevant information or documents, 

if any, submitted by the member firm, 

in the manner and form prescribed by 

the Department, as would be necessary 

or appropriate for the Department to 

review the computation of the 

Preliminary Criteria for Identification; 

• any plan submitted by the member 

firm, in the manner and form prescribed 

by the Department, proposing in detail 

the specific conditions or restrictions 

that the member firm seeks to have the 

Department consider; 

• such other information or 

documents as the Department may 

reasonably request from the member 

firm related to the evaluation; and 

• any other information the 

Department deems necessary or 

appropriate to evaluate the matter. 

To the extent a member firm seeks to 

claim undue financial hardship, it 

would be the member firm’s burden to 

support that with documents and 

information. 

➢ Department Decision and Notice 

(Proposed Rule 4111(e)); No Stays 

After the Consultation, proposed Rule 

4111(e) would require that the 

Department render a Department 

decision. Under proposed Rule 

4111(e)(1), there are three paths that 

decision might take: 

• If the Department determines that 

the member firm has rebutted the 

presumption that it should be 

designated as a Restricted Firm, the 

Department’s decision would state that 

the member firm will not be designated 

that year as a Restricted Firm. 

• If the Department determines that 

the member firm has not rebutted the 

presumption that it should be 

designated as a Restricted Firm or the 

presumption that it must maintain the 

maximum Restricted Deposit 

Requirement, the Department’s decision 

would designate the member firm as a 

Restricted Firm and require the member 

firm to promptly establish a Restricted 

Deposit Account, deposit and maintain 

in that account the maximum Restricted 

Deposit Requirement, and implement 

and maintain specified conditions or 

restrictions, as necessary or appropriate, 

on the operations and activities of the 

member firm and its associated persons 

that relate to, and are designed to 

address the concerns indicated by, the 

Preliminary Criteria for Identification 

and protect investors and the public 

interest. 

• If the Department determines that 

the member firm has not rebutted the 

presumption that it should be 

designated as a Restricted Firm but has 

rebutted the presumption that it must 

maintain the maximum Restricted 

Deposit Requirement, the Department’s 

decision would designate the member 

firm as a Restricted Firm; would impose 

no Restricted Deposit Requirement on 

the member firm, or would require the 

member firm to promptly establish a 

Restricted Deposit Account, deposit and 

maintain in that account a Restricted 

Deposit Requirement in such dollar 

amount less than the maximum 

Restricted Deposit Requirement as the 

Department deems necessary or 

appropriate; and would require the 

member firm to implement and 

maintain specified conditions or 

restrictions, as necessary or appropriate, 

on the operations and activities of the 

member firm and its associated persons 

that relate to, and are designed to 

address the concerns indicated by, the 

Preliminary Criteria for Identification 

and protect investors and the public 

interest. 

Pursuant to proposed Rule 4111(e)(2), 

the Department would provide a written 

notice of its decision to the member 

firm, pursuant to proposed Rule 9561 

and no later than 30 days from the latest 

scheduling letter provided to the 

member firm under proposed Rule 

4111(d)(2), that states the obligations to 

be imposed on the member firm, if any, 

and the ability of the member firm to 

request a hearing with the Office of 

Hearing Officers in an expedited 

proceeding, as further described below. 

Proposed Rule 4111(e)(2) would 

provide that a request for a hearing 

would not stay the effectiveness of the 

Department’s decision. However, upon 

requesting a hearing of a Department 

decision that imposes a Restricted 

Deposit Requirement, the member firm 

would only be required to maintain in 

a Restricted Deposit Account the lesser 

of 25% of its Restricted Deposit 

Requirement or 25% of its average 

excess net capital during the prior 

calendar year, until the Office of 

Hearing Officers or the NAC issues its 

final written decision in the expedited 

proceeding.34 This has one exception: A 

member firm that is re-designated as a 

Restricted Firm and is already subject to 

a previously imposed Restricted Deposit 

Requirement would be required to 

maintain the full amount of its 

Restricted Deposit Requirement until 

the Office of Hearing Officers or the 

NAC issues its final written decision in 

the expedited proceeding. 

Considering the nature of the firms 

identified as Restricted Firms and the 

risks they present, the immediate 

effectiveness of the Department’s 

decision will help protect investors 

during the pendency of the expedited 

proceeding. Moreover, FINRA believes 

that the no-stay provision is consistent 

with fairness principles, because 

obligations would be imposed only after 

firms are preliminarily identified, from 

among their firm-size peer group, by 

transparent criteria and a process that 

involves an initial evaluation and a 

consultation with the firm. 

➢ Continuation or Termination of 

Restricted Firm Obligations (Proposed 

Rule 4111(f)) 

The proposed Restricted Firm 

Obligations Rule would require FINRA 

to determine annually whether each 

member firm is, or continues to be, a 

Restricted Firm and whether the 

member firm should be subject to any 

obligations. For this reason, proposed 

Rule 4111(f) contains provisions that set 

forth how any obligations that were 

imposed during the Rule 4111 process 

in one year are continued or terminated 

Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 78547 

35This revision, and additional revisions to 

proposed Rule 4111(f)(3) discussed below, are 

intended to make more clear the process that would 

guide the Department’s assessment of applications 

for withdrawal from a Restricted Deposit 

Requirement. 

36The seven-day period to request a Consultation 

is a revision from the proposal in Regulatory Notice 

19–17 (May 2019), which proposed a 30-day period. 

37See proposed Rule 4111(i)(7) (definition of 

‘‘Former Member’’). 

38The presumptions in proposed Rule 

4111(f)(3)(B) have been modified from what was 

proposed in Regulatory Notice 19–17. In addition, 

in clarifying changes from Regulatory Notice 19–17, 

proposed Rule 4111(f)(3) expressly provides that 

the Covered Pending Arbitration Claims and unpaid 

arbitration awards of a member firm’s ‘‘Associated 

Persons’’ are pertinent to an application for a 

withdrawal from the Restricted Deposit 

Requirement. 

in that same year and in subsequent 

years. 

Proposed Rule 4111(f)(1), titled 

‘‘Currently Designated Restricted 

Firms,’’ establishes constraints on a 

member firm’s ability to seek to modify 

or terminate, directly or indirectly, any 

obligations imposed pursuant to Rule 

4111. Because the Restricted Firm 

Obligations Rule would entail annual 

reviews by the Department to determine 

whether a member firm is a Restricted 

Firm that should be subject to 

obligations, a Restricted Firm could seek 

each year to terminate or modify any 

obligations that continue to be imposed. 

For this reason, proposed Rule 4111 

does not authorize a Restricted Firm to 

seek, outside of the Consultation 

process and any ensuing expedited 

proceedings after a Department 

decision, a separate interim termination 

or modification of any obligations 

imposed. Rather, proposed Rule 

4111(f)(1) provides that a member firm 

that has been designated as a Restricted 

Firm will not be permitted to withdraw 

all or any portion of its Restricted 

Deposit Requirement, or seek to 

terminate or modify any deposit 

requirement, conditions, or restrictions 

that have been imposed on it, without 

the prior written consent of the 

Department. In a change from the 

proposal in Regulatory Notice 19–17, 

there would be a presumption that the 

Department shall deny an application 

by a member firm or former member 

firm that is currently designated as a 

Restricted Firm to withdraw all or any 

portion of its Restricted Deposit 

Requirement.35

Proposed Rule 4111(f)(2), titled ‘‘ReDesignation as a Restricted Firm,’’ 

addresses the scenario when the 

Department determines in one year that 

a member firm is a Restricted Firm, and 

in the following year determines that 

the member firm still meets the 

Preliminary Criteria for Identification. 

In that instance, the Department would 

re-designate the member firm as a 

Restricted Firm, and the obligations 

previously imposed on the member firm 

would continue unchanged, unless 

either the member firm or the 

Department requests, within seven days 

of the Department’s decision to redesignate the member firm as a 

Restricted Firm, a Consultation.36 If a 

Consultation is requested, the 

obligations previously imposed would 

continue unchanged unless and until 

the Department modifies or terminates 

them after the Consultation. In addition, 

in the Consultation process, a 

presumption would apply that any 

previously imposed Restricted Deposit 

Requirement, conditions or restrictions 

would remain effective and unchanged, 

absent a showing by the party seeking 

changes that they are no longer 

necessary or appropriate for the 

protection of investors or in the public 

interest. At the end of the Consultation, 

the Department would be required to 

provide written notice of its 

determination to the member firm, no 

later than 30 days from the date of the 

latest scheduling letter provided to the 

member firm under Rule 4111(d)(2). 

Proposed Rule 4111(f)(3), titled 

‘‘Previously Designated Restricted 

Firms,’’ addresses the scenario where 

the Department determines in one year 

that a member firm is a Restricted Firm, 

but in the following year(s) determines 

that the member firm or former member 

firm 37 either does not meet the 

Preliminary Criteria for Identification or 

should not be designated as a Restricted 

Firm. In that case, the member firm or 

former member firm would no longer be 

subject to any obligations previously 

imposed under proposed Rule 4111. 

There would be one exception: A former 

Restricted Firm would not be permitted 

to withdraw any portion of its Restricted 

Deposit Requirement without 

submitting an application and obtaining 

the Department’s prior written consent 

for the withdrawal. Such an application 

would be required to include, among 

other things set forth in proposed Rule 

4111(f)(3)(A), evidence as to whether 

the firm, its Associated Persons, or the 

former member firm have Covered 

Pending Arbitration Claims or any 

unpaid arbitration awards outstanding. 

The Department would determine 

whether to authorize a withdrawal, in 

part or in whole. Proposed Rule 

4111(f)(3)(B)(i) would establish a 

presumption that the Department shall 

approve an application for withdrawal if 

the member firm, its Associated 

Persons, or the former member firm 

have no Covered Pending Arbitration 

Claims or unpaid arbitration awards. 

Proposed Rule 4111(f)(3)(B)(ii) would 

establish presumptions that the 

Department shall: (a) Deny an 

application for withdrawal if the 

member firm, the member firm’s 

Associated Persons who are owners or 

control persons, or the former member 

have any ‘‘Covered Pending Arbitration 

Claims,’’ unpaid arbitration awards, or if 

the member’s Associated Persons have 

any ‘‘Covered Pending Arbitration 

Claims’’ or unpaid arbitration awards 

relating to arbitrations that involved 

conduct or alleged conduct that 

occurred while associated with the 

member; but (b) approve an application 

by a former member for withdrawal if 

the former member commits in the 

manner specified by the Department to 

use the amount it seeks to withdraw 

from its Restricted Deposit to pay the 

former member’s specified unpaid 

arbitration awards.38 The Department 

would be required to issue, pursuant to 

proposed Rule 9561, a notice of its 

decision on an application to withdraw 

from the Restricted Deposit Account 

within 30 days from the date the 

application is received by the 

Department. 

➢ Restricted Deposit Account (Proposed 

Rule 4111(i)(14)) 

If a Department decision requires a 

member firm to establish a Restricted 

Deposit Account, proposed Rule 

4111(i)(14) would govern this account. 

The underlying policy for the proposed 

account requirements is that, to make a 

deposit requirement effective in creating 

appropriate incentives to member firms 

that pose higher risks to change their 

behavior, the member firm must be 

restricted from withdrawing any of the 

required deposit amount, even if it 

terminates its FINRA membership. 

The proposed rule would require that 

the Restricted Deposit Account be 

established, in the name of the member 

firm, at a bank or the member firm’s 

clearing firm. The account must be 

subject to an agreement in which the 

bank or the clearing firm agrees: Not to 

permit withdrawals from the account 

absent FINRA’s prior written consent; to 

keep the account separate from any 

other accounts maintained by the 

member firm with the bank or clearing 

firm; that the cash or qualified securities 

on deposit will not be used directly or 

indirectly as security for a loan to the 

member firm by the bank or the clearing 

firm, and will not be subject to any setoff, right, charge, security interest, lien, 

or claim of any kind in favor of the 

bank, clearing firm or any person 

claiming through the bank or clearing 

78548 Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 

39 In the event of a liquidation of a Restricted 

Firm, funds or securities on deposit in the 

Restricted Deposit Account would be additional 

financial resources available for the Restricted 

Firm’s trustee to distribute to those with claims 

against the Restricted Firm. 

40See Exhibit 5. 41 17 CFR 240.15c3–1. 

42Proposed Rule 9561(a)(1) would define the 

‘‘Rule 4111 Requirements’’ to mean the 

requirements, conditions, or restrictions imposed 

by a Department determination under proposed 

Rule 4111. 

firm; that if the member firm becomes 

a former member, the Restricted Deposit 

Requirement in the account must be 

maintained, and withdrawals will not 

be permitted without FINRA’s prior 

written consent; that FINRA is a thirdparty beneficiary to the agreement; and 

that the agreement may not be amended 

without FINRA’s prior written consent. 

In addition, the account could not be 

subject to any right, charge, security 

interest, lien, or claim of any kind 

granted by the member.39

➢ Books and Records (Proposed Rule 

4111(g)) 

Proposed Rule 4111(g) would 

establish new requirements to maintain 

books and records that evidence the 

member firm’s compliance with the 

Restricted Firm Obligations Rule and 

any Restricted Deposit Requirement or 

other conditions or restrictions imposed 

under that rule. In addition, the 

proposed books and records provision 

would specifically require a member 

firm subject to a Restricted Deposit 

Requirement to provide to the 

Department, upon its request, records 

that demonstrate the member firm’s 

compliance with that requirement. 

➢ Notice of Failure To Comply 

(Proposed Rule 4111(h)) 

FINRA also is proposing a 

requirement to address the situation 

when a member firm fails to comply 

with the obligations imposed pursuant 

to proposed Rule 4111. Under proposed 

Rule 4111(h), FINRA would be 

authorized to issue a notice pursuant to 

proposed Rule 9561 directing a member 

firm that is not in compliance with its 

Restricted Deposit Requirement, or with 

any conditions or restrictions imposed 

under Rule 4111, to suspend all or a 

portion of its business. 

➢ Definitions (Proposed Rule 4111(i)) 

A complete list of defined terms used 

in proposed Rule 4111 appears in 

proposed Rule 4111(i).40

➢ Net Capital Treatment of the Deposits 

in the Restricted Deposit Account 

(Proposed Rule 4111.01) 

Proposed Supplementary Material .01 

would clarify that because of the 

restrictions on withdrawals from a 

Restricted Deposit Account, deposits in 

such an account cannot be readily 

converted to cash and therefore shall be 

deducted in determining the member’s 

net capital under Exchange Act Rule 

15c3–1 41 and FINRA Rule 4110. 

➢ Compliance With Continuing 

Membership Application Rule 

(Proposed Rule 4111.02—Compliance 

with Rule 1017) 

Proposed Supplementary Material .02 

would clarify that nothing in proposed 

Rule 4111 would alter a member firm’s 

obligations under Rule 1017 

(Application for Approval of Change in 

Ownership, Control, or Business 

Operations). A member firm subject to 

proposed Rule 4111 would need to 

continue complying with the 

requirements of Rule 1017 and submit 

continuing membership applications as 

necessary. 

➢ Examples of Conditions and 

Restrictions (Proposed Rule 4111.03) 

In a change from Regulatory Notice 

19–17, FINRA is proposing to add, in 

supplementary material to proposed 

Rule 4111, a non-exhaustive list of 

examples of conditions and restrictions 

that the Department could impose on 

Restricted Firms. FINRA believes that 

providing these examples will provide 

clarity about the Department’s authority 

to impose conditions and restrictions 

without restricting the Department’s 

flexibility to react and respond to 

different sources of risk. The nonexhaustive list of examples of 

conditions and restrictions includes: (1) 

Limitations on business expansions, 

mergers, consolidations or changes in 

control; (2) filing all advertising with 

FINRA’s Department of Advertising 

Regulation; (3) imposing requirements 

on establishing and supervising offices; 

(4) requiring a compliance audit by a 

qualified, independent third party; (5) 

limiting business lines or product types 

offered; (6) limiting the opening of new 

customer accounts; (7) limiting 

approvals of registered persons entering 

into borrowing or lending arrangements 

with their customers; (8) requiring the 

member to impose specific conditions 

or limitations on, or to prohibit, 

registered persons’ outside business 

activities of which the member has 

received notice pursuant to Rule 3270; 

and (9) requiring the member to prohibit 

or, as part of its supervision of approved 

private securities transactions for 

compensation under Rule 3280 or 

otherwise, impose specific conditions 

on associated persons’ participation in 

private securities transactions of which 

the member has received notice 

pursuant to Rule 3280. 

➢ Planned Review of Proposed Rule 

4111 

FINRA plans to conduct a review of 

proposed Rule 4111 after gaining 

sufficient experience under proposed 

Rule 4111. Among other things, FINRA 

would review whether the Preliminary 

Identification Metrics Thresholds 

remain targeted and effective at 

identifying member firms that pose 

higher risks. 

Proposed Amendments to the Rule 9550 

Series To Establish a New Expedited 

Proceeding To Implement the 

Requirements of Proposed Rule 4111 

FINRA is proposing to establish a new 

expedited proceeding in proposed Rule 

9561 (Procedures for Regulating 

Activities Under Rule 4111) that would 

allow member firms to request a prompt 

review of the Department’s 

determinations under the Restricted 

Firm Obligations Rule and grant a right 

to challenge any of the ‘‘Rule 4111 

Requirements,’’ including any 

Restricted Deposit Requirements, 

imposed.42 The new expedited 

proceeding would govern how the 

Department provides notice of its 

determinations and afford affected 

member firms the right to seek a Hearing 

Officer’s review of those determinations. 

The proposed expedited proceeding is 

similar in nature to FINRA’s other 

expedited proceedings. 

➢ Notices Under Proposed Rule 4111 

(Proposed Rule 9561(a)) 

Proposed Rule 9561(a) would 

establish an expedited proceeding for 

the Department’s determinations under 

proposed Rule 4111 to designate a 

member firm as a Restricted Firm and 

impose obligations on the member; and 

to deny a member’s request to access all 

or part of its Restricted Deposit 

Requirement. 

Proposed Rule 9561(a) would require 

the Department to serve a notice that 

provides its determination and the 

specific grounds and factual basis for 

the Department’s action; states when the 

action will take effect; informs the 

member firm that it may file, pursuant 

to Rule 9559, a request for a hearing in 

an expedited proceeding within seven 

days after service of the notice; and 

explains the Hearing Officer’s authority. 

The proposed rule also would provide 

that, if a member firm does not request 

a hearing, the notice of the Department’s 

Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 78549 

43Proposed amendments to Rule 9559 contain 

other related timing requirements for proceedings 

pursuant to proposed Rule 9561. 

44See FINRA Rule 9559(q). 

determination will constitute final 

FINRA action. 

Proposed Rule 9561(a) also would 

provide that any of the Rule 4111 

Requirements imposed in a notice 

issued under proposed Rule 9561(a) are 

immediately effective. In general, a 

request for a hearing would not stay 

those requirements. There would be one 

partial exception: When a member firm 

requests review of a Department 

determination under proposed Rule 

4111 that imposes a Restricted Deposit 

Requirement on the member for the first 

time, the member firm would be 

required to deposit, while the expedited 

proceeding was pending, the lesser of 

25% of its Restricted Deposit 

Requirement or 25% of its average 

excess net capital over the prior year. 

➢ Notice for Failure To Comply With 

the Proposed Rule 4111 Requirements 

(Proposed Rule 9561(b)) 

Proposed Rule 9561(b) would 

establish an expedited proceeding to 

address a member firm’s failure to 

comply with any requirements imposed 

pursuant to proposed Rule 4111. 

Proposed Rule 9561(b) would 

authorize the Department, after 

receiving authorization from FINRA’s 

chief executive officer (‘‘CEO’’), or such 

other executive officer as the CEO may 

designate, to serve a notice stating that 

the member firm’s failure to comply 

with the Rule 4111 Requirements, 

within seven days of service of the 

notice, will result in a suspension or 

cancellation of membership. The 

proposed rule would require that the 

notice identify the requirements with 

which the member firm is alleged to 

have not complied; include a statement 

of facts specifying the alleged failure; 

state when the action will take effect; 

explain what the member firm must do 

to avoid the suspension or cancellation; 

inform the member firm that it may file, 

pursuant to Rule 9559, a request for a 

hearing in an expedited proceeding 

within seven days after service of the 

notice; and explain the Hearing Officer’s 

authority. The proposed rule also would 

provide that, if a member firm does not 

request a hearing, the suspension or 

cancellation will become effective seven 

days after service of the notice. 

Proposed Rule 9561(b) also would 

provide that a member firm could file a 

request seeking termination of a 

suspension imposed pursuant to the 

rule, on the ground of full compliance 

with the notice or decision. The 

proposed rule would authorize the head 

of the Department to grant relief for 

good cause shown. 

➢ Hearings (Proposed Amendments to 

the Hearing Procedures Rule) 

If a member firm requests a hearing 

under proposed Rule 9561, the hearing 

would be subject to Rule 9559 (Hearing 

Procedures for Expedited Proceedings 

Under the Rule 9550 Series). FINRA is 

proposing several amendments to Rule 

9559 that would be specific to hearings 

requested pursuant to proposed Rule 

9561. 

Hearings in expedited proceedings 

under proposed Rule 9561 would have 

processes that are similar to the hearings 

in most of FINRA’s other expedited 

proceedings—including requirements 

for the parties’ exchange of documents 

and exhibits, the time for conducting 

the hearing, evidence, the record of the 

hearing, the record of the proceeding, 

failures to appear, the timing and 

contents of the Hearing Officer’s 

decision, the Hearing Officer’s 

authority, and the authority of the NAC 

to call an expedited proceeding for 

review—and FINRA is proposing 

amendments to the Rule 9559 

provisions that govern these processes 

to adapt them for expedited proceedings 

under proposed Rule 9561. A few 

features of the proposed amendments to 

Rule 9559 warrant emphasis or 

guidance. 

• Hearing Officer’s Authority (Proposed 

Amended Rule 9559(d) and (n)) 

Hearings in expedited proceedings 

under proposed Rule 9561 would be 

presided over by a Hearing Officer. The 

Hearing Officer’s authority would differ 

depending on whether the hearing is in 

an action brought under proposed Rule 

9561(a) (Notices Under Rule 4111) or 

9561(b) (Notice for Failure to Comply 

with the Rule 4111 Requirements). 

Proposed amended Rule 9559(n)(6) 

would provide that the Hearing Officer, 

in actions brought under proposed Rule 

9561(a), may approve or withdraw any 

and all of the Rule 4111 Requirements, 

or remand the matter to the Department, 

but may not modify any of the Rule 

4111 Requirements, or impose any other 

requirements or obligations available 

under proposed Rule 4111. 

Proposed amended Rule 9559(n)(6) 

would authorize the Hearing Officer, in 

failure-to-comply actions under 

proposed Rule 9561(b), to approve or 

withdraw the suspension or 

cancellation of membership, and impose 

any other fitting sanction. Authorizing a 

Hearing Officer to impose any other 

fitting sanction is intended to provide a 

Hearing Officer with authority that is 

appropriate for responding to situations 

involving member firms that repeatedly 

fail to comply with an effective FINRA 

action under proposed Rule 4111. 

• Timing Requirements 

The proposed amendments to the 

Hearing Procedures Rule are intended to 

give member firms a prompt process for 

challenging a Department decision 

under proposed Rule 4111. Proposed 

amended Rule 9559(f) would require 

that a hearing in actions under proposed 

Rule 9561(a) be held within 30 days, 

and that a hearing in failure-to-comply 

actions under proposed Rule 9561(b) be 

held within 14 days, after the member 

firm requests a hearing.43

Proposed amended Rule 9559(o) 

would require the Hearing Officer, in all 

actions pursuant to proposed Rule 9561, 

to prepare a proposed written decision, 

and provide it to the NAC’s Review 

Subcommittee, within 60 days of the 

date of the close of the hearing. 

Pursuant to Rule 9559(q), the Review 

Subcommittee could call the proceeding 

for review within 21 days after receipt 

of the proposed decision. As in most 

expedited proceedings, the timing of 

FINRA’s final decision would then 

depend on whether or not the Review 

Subcommittee calls the matter for 

review.44

• Contents of the Decision 

Proposed amended Rule 9559(p) 

would govern the contents of the 

Hearing Officer’s decision. The 

proposed amendments would broaden 

Rule 9559(p)(6) to account for the kinds 

of obligations that could be imposed 

under proposed Rule 4111. Rule 9559(p) 

would otherwise remain the same. For 

example, Rule 9559(p) would continue 

to require that the Hearing Officer’s 

decision include a statement setting 

forth the findings of fact with respect to 

any act or practice the respondent was 

alleged to have committed or omitted or 

any condition specified in the notice, 

the Hearing Officer’s conclusions 

regarding the condition specified in the 

notice, and a statement in support of the 

disposition of the principal issues raised 

in the proceeding. 

Additional guidance may be helpful, 

considering the different kinds of issues 

that may arise in an expedited 

proceeding pursuant to proposed Rule 

9561. For example, in a request for a 

hearing of a Department determination 

that imposes a Restricted Deposit 

Requirement or other obligations under 

Rule 4111, the principal issues raised 

may include whether: (1) The member 

78550 Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 

45Attempts to collaterally attack final matters are 

also precluded in other FINRA proceedings. Cf. 

Dep’t of Enforcement v. Amundsen, Complaint No. 

2010021916601, 2012 FINRA Discip. LEXIS 54, at 

*21–24 (FINRA NAC Sept. 20, 2012) (rejecting 

respondent’s attempt to collaterally attack a 

judgment that was required to be disclosed on Form 

U4), aff’d, Exchange Act Release No. 69406, 2013 

SEC LEXIS 1148 (Apr. 18, 2013), aff’d, 575 F. App’x 

1 (D.C. Cir. 2014); Membership Continuance 

Application of Member Firm, Application No. 

20060058633, 2007 FINRA Discip. LEXIS 31, at *51 

(July 2007) (holding, in a membership proceeding, 

that a firm may not address its and its FINOP’s past 

disciplinary history by collaterally attacking those 

past violations) (citing BFG Sec., Inc., 55 SEC. 276, 

279 n.5 (2001)); Jan Biesiadecki, 53 SEC. 182, 185 

(1997) (describing, in eligibility proceedings, 

FINRA’s long-standing policy of prohibiting 

collateral attacks on underlying disqualifying 

events). 

46FINRA notes that the proposed rule change 

would impact all member firms, including member 

firms that have elected to be treated as capital 

acquisition brokers (‘‘CABs’’), given that the CAB 

rule set incorporates the FINRA Rule 9550 Series 

by reference. In addition, FINRA is proposing to 

adopt CAB Rule 412, to reflect that a CAB would 

be subject to Rule 4111. 

The proposed rule change would not impact, 

however, member firms that are funding portals. At 

this time, regulatory experience with funding 

portals is still at an early stage. The permissible 

business activities of funding portals are limited 

and, as such, it is not clear that funding portals 

present the corresponding risks that FINRA is 

seeking to address in the broker-dealer space. 

Moreover, developing relevant metrics and 

thresholds for funding portals would require a 

separate effort and analysis because, unlike brokerdealers, the Uniform Registration Forms do not 

apply to funding portals and their associated 

persons. Accordingly, FINRA is proposing to amend 

Funding Portal Rule 900(a) to add proposed Rule 

9561 as a rule to which funding portal members 

would not be subject. 

47 15 U.S.C. 78o–3(b)(6). 

48See, e.g., Roland Strausz, Delegation of 

Monitoring in a Principal-Agent Relationship, Rev. 

Econ. Stud. 64(3):337–57 (July 1997). The paper 

shows that in a standard principal-agent framework, 

the delegation of monitoring by the principal (e.g., 

a regulator) to the agent (e.g., a firm) can be 

economically efficient for both parties. 

49See supra note 5. 

firm should not be designated a 

Restricted Firm; (2) the Department 

incorrectly included disclosure events 

when calculating whether the member 

firm meets the Preliminary Criteria for 

Identification; (3) a Restricted Deposit 

Requirement would impose an undue 

financial burden on the member firm; or 

(4) the obligations imposed are 

inconsistent with the standards set forth 

in proposed Rule 4111(e). In a request 

for a hearing of a Department 

determination that denies a request to 

withdraw amounts from a Restricted 

Deposit Account, the principal issues 

raised may include whether the member 

firm or its Associated Persons have 

Covered Pending Arbitration Claims or 

unpaid arbitration awards and the 

nature of those claims or awards. 

• No Collateral Attacks on Underlying 

Disclosure Events 

In expedited proceedings pursuant to 

proposed Rule 9561(a) to review a 

Department determination under the 

Restricted Firm Obligations Rule, a 

member firm may sometimes seek to 

demonstrate that the Department 

included incorrectly disclosure events 

when calculating whether the member 

firm meets the Preliminary Criteria for 

Identification. When the member firm 

does so, however, it would not be 

permitted to collaterally attack the 

underlying merits of those final actions. 

An expedited proceeding under 

proposed Rule 9561 would not be the 

forum for attempting to re-litigate past 

final actions.45

If the Commission approves the 

proposed rule change, FINRA will 

announce the effective date of the 

proposed rule change in a Regulatory 

Notice to be published no later than 60 

days following Commission approval. 

The effective date will be no later than 

60 days following publication of the 

Regulatory Notice announcing 

Commission approval.46

2. Statutory Basis 

FINRA believes that the proposed rule 

change is consistent with the provisions 

of Section 15A(b)(6) of the Act,47 which 

requires, among other things, that 

FINRA rules must be designed to 

prevent fraudulent and manipulative 

acts and practices, to promote just and 

equitable principles of trade, and, in 

general, to protect investors and the 

public interest. The proposed rule 

change is designed to protect investors 

and the public interest by strengthening 

the tools available to FINRA to address 

the risks posed by member firms with a 

significant history of misconduct, 

including firms at which individuals 

with a significant history of misconduct 

concentrate. The proposed rule would 

create strong measures of deterrence 

while a firm is designated as a 

Restricted Firm, limiting the potential 

for harm to the public. It also should 

create incentives for firms to change 

behaviors and activities, either to avoid 

being designated as a Restricted Firm or 

lose an existing Restricted Firm 

designation, to mitigate FINRA’s 

concerns. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

FINRA does not believe that the 

proposed rule change will result in any 

burden on competition that is not 

necessary or appropriate in furtherance 

of the purposes of the Act. 

FINRA has undertaken an economic 

impact assessment, as set forth below, to 

analyze the regulatory need for the 

proposed rulemaking, its potential 

economic impacts, including 

anticipated benefits and costs, and the 

alternatives FINRA considered in 

assessing how to best meet its regulatory 

objectives. 

Economic Impact Assessment 

1. Regulatory Need 

FINRA uses a number of measures to 

deter and discipline misconduct by 

firms and brokers, and continually 

strives to strengthen its oversight of the 

brokers and firms it regulates. These 

measures span across several FINRA 

programs, including review of new and 

continuing membership applications, 

risk monitoring of broker and firm 

activity, cycle and cause examinations, 

and enforcement and disciplinary 

actions. 

As part of its efforts to monitor and 

deter misconduct, FINRA has adopted 

rules that impose supervisory 

obligations on firms to ensure they are 

appropriately supervising their brokers’ 

activities. These rules require each firm 

to establish, maintain and enforce 

written procedures to supervise the 

types of business in which it engages 

and the activities of its associated 

persons that are reasonably designed to 

achieve compliance with applicable 

securities laws and regulations, and 

FINRA rules. Under this regulatory 

framework, FINRA also provides 

guidance to ensure consistency in 

interpretation of the rules and to further 

strengthen compliance across firms. As 

such, all firms play an important role in 

ensuring effective compliance with 

applicable securities laws and FINRA 

rules to prevent misconduct. This is 

consistent with the incentives of 

economic agents.48

Nonetheless, some firms do not 

effectively carry out these supervisory 

obligations to ensure compliance and 

they act in ways that could harm their 

customers—sometimes substantially. 

For example, recent academic studies 

find that some firms persistently employ 

brokers who engage in misconduct, and 

that misconduct can be concentrated at 

these firms. These studies also provide 

evidence of predictability of future 

disciplinary and other regulatory-related 

events for brokers and firms with a 

history of past similar events.49 These 

patterns suggest that some firms may 

not be acting appropriately as a first line 

of defense to prevent customer harm. 

Further, some firms may take advantage 

of the fair-process protections afforded 

to them under the federal securities 

Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 78551 

50 Investors may also file claims in courts or other 

dispute resolution forums. Successful claimants in 

these forums may face similar challenges associated 

with collecting awards or judgments. 

51As discussed above, recent studies provide 

evidence of predictability of future regulatoryrelated events for brokers and firms with a history 

of past regulatory-related events. As a result, 

brokers and firms with a history of past regulatoryrelated events pose greater risk of future harm to 

their customers than other brokers and firms. 52For example, for each of the six Preliminary 

Identification Metrics, the Preliminary 

Identification Metrics Threshold was chosen to 

capture one to five percent of the firms with the 

highest number of events per registered broker or 

the highest concentrations of Registered Persons 

Associated with Previously Expelled Firms, in 

respective firm-size categories. 

53FINRA defines a small firm as a member with 

at least one and no more than 150 registered 

persons, a mid-size firm as a member with at least 

151 and no more than 499 registered persons, and 

a large firm as a member with 500 or more 

registered persons. See FINRA By-Laws, Article I. 

54FINRA notes that part of the decline in the 

number of events and the firms that would have 

met the proposed criteria may be associated with 

an approximately 15% decline in the overall 

number of registered firms during the 2013–2019 

review period. 

laws and FINRA rules to forestall timely 

and appropriate regulatory actions, 

thereby limiting FINRA’s ability to curb 

misconduct promptly. Without 

additional protections, the risk of 

potential customer harm may continue 

to exist at firms that fail to effectively 

carry out their supervisory obligations 

or are associated with a significant 

number of regulatory-related events. 

Further, even where harmed investors 

obtain arbitration awards, harm 

followed by recompense typically 

comes with some economic costs to 

customers and brokers, and firms may 

still fail to pay those awards. Unpaid 

arbitration awards harm successful 

customer claimants and may diminish 

investors’ confidence in the arbitration 

process.50

To mitigate these risks, FINRA seeks 

additional authority to impose 

obligations on firms that pose these 

types of greater risk to their customers. 

The proposed Restricted Firm 

Obligations Rule would identify firms 

based upon a concentration of 

significant firm and broker events on 

their disclosure records that meet the 

proposed criteria and specified 

thresholds. Under the proposal, FINRA 

seeks to impose obligations on the 

operations and activities of the member 

and its associated persons that are 

necessary or appropriate to address the 

concerns indicated by the Preliminary 

Criteria for Identification and protect 

investors and the public interest. 

2. Economic Baseline 

The economic baseline used to 

evaluate the economic impacts of the 

proposed rules is the current regulatory 

framework, including FINRA rules 

relating to supervision, the membership 

application process, statutory 

disqualification proceedings and 

disciplinary proceedings that provide 

rules to deter and discipline misconduct 

by firms and brokers. This baseline 

serves as the primary point of 

comparison for assessing economic 

impacts of the proposed rules, including 

incremental benefits and costs. 

The proposals are intended to apply 

to firms that pose far greater risks to 

their customers than other firms. One 

identifier of these types of firms is that 

they and their brokers generally have 

substantially more regulatory-related 

events on their records than do their 

peers.51 Consistent with this, the 

proposed Restricted Firm Obligations 

Rule would specifically apply to firms 

that have far more Registered Person 

and Member Firm Events, or far higher 

concentrations of Registered Persons 

Associated with Previously Expelled 

Firms, compared to their peers.52 Based 

on staff analysis of all firms registered 

with FINRA between 2013 and 2019, 

firms that would have met the 

Preliminary Criteria for Identification 

had on average four to nine times more 

Registered Person and Member Firm 

Events than peer firms at the time of 

identification. Specifically, the number 

of events per firm, for firms that would 

have met the Preliminary Criteria for 

Identification, ranged, on average, from 

25–52 events during the Evaluation 

Period, compared to 4–5 events per firm 

for firms that would not have met the 

Preliminary Criteria for Identification. 

The median number of events per firm, 

for the firms that would have met the 

Preliminary Criteria for Identification, 

ranged from approximately 9–18 events, 

compared to zero events among other 

firms that would not have met the 

Preliminary Criteria for Identification. 

Although disciplinary and regulatoryrelated events are one of the identifiers 

for firms posing higher risk, FINRA 

recognizes that firms posing higher risks 

do not always manifest themselves with 

greater disclosures on their records. 

These firms may be newer, have 

recently made changes in management, 

staff or approach, or simply may be 

more effective in avoiding regulatory 

marks. 

3. Economic Impacts 

a. Proposed Restricted Firm Obligations 

Rule 

To estimate the number and types of 

firms that would meet the Preliminary 

Criteria for Identification, FINRA 

analyzed the categories of events and 

conditions associated with the proposed 

criteria for all firms during the 2013– 

2019 review period. For each year, 

FINRA determined the approximate 

number of firms that would have met 

the proposed criteria. The number of 

firms that would have met the proposed 

criteria during the review period serves 

as a reasonable estimate for the number 

of firms that would have been directly 

impacted by this proposal had it been in 

place at the time. This analysis indicates 

that there were 45–80 such firms at the 

end of each year during the review 

period, as shown in Exhibit 3a. These 

firms represent 1.3–2.0% of all firms 

registered with FINRA in any year 

during the review period. The 

population of firms identified by the 

proposed criteria reflects the 

distribution of firm size in the full 

population of registered firms. 

Approximately 88–94% of these firms 

were small, 4–12% were mid-size and 

0–3% were large at the end of each year 

during the review period, as shown in 

Exhibit 3b.53

FINRA notes that the number of firms 

that would have met the proposed 

criteria during the review period have 

declined (by approximately 44%) from 

80 firms in 2013 to 45 firms in 2019. 

This decline is associated with an 

overall decrease in the number of 

Registered Person and Member Firm 

Events and the number of firms 

associated with these events.54

Specifically, the Registered Person and 

Member Firm Events have declined by 

24% and the number of firms with one 

or more of these events has declined by 

22% during the review period. 

However, the average number of events 

per firm identified by the proposed 

criteria has increased, suggesting that 

there may be an increase in 

concentration of events across a smaller 

set of firms that may pose greater risks 

to their customers. For example, the 

average number of Registered Person 

and Member Firm Events for the firms 

identified by the criteria has increased 

by 94% from 24 events per firm in 2013 

to 47 events per firm in 2019. These 

trends over the 2013–2019 review 

period suggest that while many firms 

continue to improve their regulatory 

records over time, a small proportion of 

firms may continue to further engage in 

activities that pose greater risks to their 

customers, which the proposed rule is 

intended to address. 

In developing the proposed 

Preliminary Criteria for Identification, 

FINRA paid significant attention to the 

impact of possible misidentification of 

firms, specifically, the economic tradeoff between including firms that are less 

78552 Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 

55For example, subjecting firms that are less 

likely to pose a risk to customers to the proposed 

Restricted Deposit Requirement or other obligations 

would impose additional and unwarranted costs on 

these firms, their brokers and their customers. 56 In order to evaluate the effectiveness of the 

proposed criteria at identifying firms that pose 

greater risks, FINRA examined the overlap between 

the firms that would have met the Preliminary 

Criteria for Identification each year during the 

review period and the firms that were subsequently 

expelled, associated with unpaid awards, or 

identified by Department staff as suitable 

candidates for additional obligations. Finally, as 

discussed below, FINRA also examined disclosure 

events associated with firms that would have met 

the Preliminary Criteria for Identification each year 

during the review period, subsequent to meeting the 

criteria, to assess the extent of risk posed by these 

firms. 

57Further, as discussed above, the Department 

would consider a member firm’s and its Associated 

Persons’ unpaid arbitration awards as one of the 

factors in determining the amount of the Restricted 

Deposit Requirement. As a result, there would be 

additional incentives to pay unpaid arbitration 

awards. 

58This analysis examines firms that would have 

met the Preliminary Criteria for Identification from 

2013 until 2017 (instead of the 2013–2019 review 

period) to allow sufficient time for the ‘‘new’’ 

events to resolve in the post-identification period. 

59Certain firms would have met the criteria in 

multiple years during the review period. The 180 

firms discussed in the text correspond to the unique 

number of firms that would have met the criteria 

in one or more years during the review period. 

60Specifically, FINRA examined and counted all 

Registered Person and Member Firm Events that 

occurred any time after the firms were identified 

until December 31, 2019. 

likely to subsequently pose risk of harm 

to customers, and not including firms 

that are more likely to subsequently 

pose risk of harm to customers. There 

are costs associated with both types of 

misidentifications.55 The proposed 

criteria, including the proposed 

numerical thresholds, aim to balance 

these economic trade-offs associated 

with over- and under-identification.56

Further protection against 

misidentification would be provided by 

the proposed initial Department 

evaluation and the Consultation 

process. 

➢ Anticipated Benefits 

The proposal’s primary benefit would 

be to reduce the risk and associated 

costs of possible future customer harm. 

This benefit would arise directly from 

additional restrictions placed on firms 

identified as Restricted Firms and 

resulting expected increased scrutiny by 

these firms on their brokers. Further, 

this benefit would also accrue indirectly 

from improvements in the compliance 

culture, both by firms that meet the 

proposed criteria and by firms that do 

not. For example, the proposal may 

create incentives for firms that meet the 

Preliminary Criteria for Identification to 

change activities and behaviors, to 

mitigate the Department’s concerns. 

Similarly, the proposal may have a 

deterrent effect on firms that do not 

meet the Preliminary Criteria for 

Identification, particularly firms that 

may be close to meeting the proposed 

criteria. These firms may change 

behavior and enhance their compliance 

culture in ways that better protect their 

customers. 

The proposal also may help address 

unpaid arbitration awards. Under the 

proposed rule, the Department may 

require a Restricted Firm to maintain a 

restricted deposit at a bank or a clearing 

firm that agrees not to permit 

withdrawals absent FINRA’s approval. 

The amount of the Restricted Deposit 

Requirement would take into 

consideration, among other factors, the 

amount of any Covered Pending 

Arbitration Claims and unpaid 

arbitration awards against the member 

firm or its Associated Persons. 

Moreover, the proposed rule would 

have presumptions that the Department 

would: (a) Deny an application by a 

member firm or former member firm 

that was previously designated as a 

Restricted Firm for a withdrawal from 

the Restricted Deposit if the member 

firm, its Associated Persons who are 

owners or control persons, or the former 

member firm have any Covered Pending 

Arbitration Claims or unpaid arbitration 

awards, or if the member firm’s 

Associated Persons have any Covered 

Pending Arbitration Claims or unpaid 

arbitration awards relating to 

arbitrations that involved conduct or 

alleged conduct that occurred while 

associated with the member firm; but (b) 

approve a former member firm’s 

application for withdrawal if the former 

member firm commits in the manner 

specified by the Department to use the 

amount it seeks to withdraw from its 

Restricted Deposit to pay the former 

member firm’s specified unpaid 

arbitration awards. Accordingly, the 

proposed rule could potentially create 

incentives for firms to pay unpaid 

arbitration awards against the firm or its 

Associated Persons, thereby alleviating, 

to some extent, harm to successful 

claimants and enhancing investor 

confidence in the arbitration process.57

To scope these potential benefits and 

assess the potential risk posed by firms 

that would meet the proposed 

Preliminary Criteria for Identification, 

FINRA evaluated the extent to which 

firms that would have met the criteria 

during 2013–2017 58 (had the criteria 

existed) and their brokers were 

associated with ‘‘new’’ Registered 

Person and Member Firm Events after 

having met the proposed criteria. These 

‘‘new’’ events correspond to events that 

were identified or occurred after the 

firm’s identification, and do not include 

events that were pending at the time of 

identification and subsequently 

resolved in the years after identification. 

As shown in Exhibit 3c, FINRA 

estimates that there were 77 firms that 

would have met the Preliminary Criteria 

for Identification in 2013. These firms 

were associated with 1,552 ‘‘new’’ 

Registered Person and Member Firm 

Events that occurred after their 

identification, between 2014 and 2019. 

Exhibit 3c similarly shows the number 

of events associated with firms that 

would have met the Preliminary Criteria 

for Identification in 2014, 2015, 2016 

and 2017. Across 2013–2017, there were 

180 unique firms 59 that would have met 

the proposed Preliminary Criteria for 

Identification, and these firms were 

associated with a total of 2,995 

Registered Person and Member Firm 

Events that occurred in the years after 

they met the proposed criteria.60

Exhibit 3c also shows the number of 

Registered Person and Member Firm 

Events for these firms compared to other 

firms. Specifically, FINRA calculated a 

factor which represents a multiple for 

the average number of events (on a per 

registered person basis) for firms that 

would have met the Preliminary Criteria 

for Identification relative to other firms 

of the same size that would not have 

met the Preliminary Criteria for 

Identification. For example, as shown in 

Exhibit 3c, the factor of 6.1x for 2013 

indicates that firms meeting the 

Preliminary Criteria for Identification in 

2013 had 6.1 times more new disclosure 

events (per registered person) in the 

years after identification (2014–2019) 

than other firms of the same size 

registered in 2013 that would not have 

met the Preliminary Criteria for 

Identification. Overall, this analysis 

demonstrates that firms that would have 

met the Preliminary Criteria for 

Identification during the 2013–2017 

period had on average approximately 6– 

20 times more new disclosure events 

after their identification than other firms 

in the industry during the same period 

that would not have met the Preliminary 

Criteria for Identification. 

➢ Anticipated Costs 

The anticipated costs of this proposal 

would fall primarily upon firms that 

meet the Preliminary Criteria for 

Identification and that the Department 

deems to warrant further review after its 

initial evaluation. Although FINRA 

would perform the annual calculation 

and conduct an internal evaluation, 

firms may choose to expend effort to 

monitor whether they would meet the 

Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 78553 

61These costs would likely vary significantly 

across firms. Costs would depend on the specific 

obligations imposed specific to the firm and its 

business model. In addition, costs could escalate if 

a heightened supervision plan applied to brokers 

that serve as principals, executive managers, 

owners, or in other senior capacities. Such plans 

may entail reassignments of responsibilities, 

restructuring within senior management and 

leadership, and more complex oversight and 

governance approaches. 

62For example, during the 2013 to 2019 review 

period, only one to two percent of the registered 

persons had any qualifying events in their 

regulatory records, which represents the most 

conservative estimate of the set of registered 

persons who might be impacted by the proposed 

rule. Further, the vast majority of member firms, 

approximately 98%, would likely be able to employ 

most of the individuals seeking employment in the 

industry—including ones who have some 

disclosures—without coming close to meeting the 

Preliminary Criteria for Identification. 

Preliminary Criteria for Identification, 

and incur associated costs, at their own 

discretion. To the extent that a firm 

deemed to warrant further review under 

proposed Rule 4111 chooses to seek to 

rebut the presumption that it is a 

Restricted Firm subject to the maximum 

Restricted Deposit Requirement, it 

would incur costs associated with 

collecting and providing information to 

FINRA. For example, these firms may 

provide information on any disclosure 

events that may be duplicative or not 

sales-practice related. These firms may 

also provide information on any undue 

significant financial hardship that 

would result from a maximum 

Restricted Deposit Requirement. 

Likewise, a firm availing itself of the 

one-time staffing reduction opportunity 

incurs the separation costs, along with 

the potential for lost future revenues. 

In addition, firms subject to a 

Restricted Deposit Requirement or other 

obligations would incur costs associated 

with these additional obligations. These 

would include, for example, costs 

associated with setting up the Restricted 

Deposit Account and ongoing 

compliance costs associated with 

maintaining the account. Further, as a 

result of restrictions on the use of cash 

or qualified securities in the deposit 

account or other restrictions on the 

firm’s activities, the firm may lose 

economic opportunities, and its 

customers may lose the benefits 

associated with the provision of these 

services. 

Similarly, a firm required to apply 

heightened supervision to its brokers 

would incur implementation and 

ongoing costs associated with its 

heightened supervision plan.61 Firms 

that meet the Preliminary Criteria for 

Identification also may incur costs 

associated with enhancing their 

compliance culture, including possibly 

terminating registered persons with a 

significant number of disclosure 

events—through exercising the one-time 

staffing reduction option under 

proposed Rule 4111 or otherwise—and 

reassigning the responsibilities of these 

individuals to other registered persons. 

Finally, there may be indirect costs, 

including greater difficulty or increased 

cost associated with maintaining a 

clearing arrangement, loss of trading 

partners, or similar impairments where 

third parties can determine that a firm 

meets the proposed Preliminary Criteria 

for Identification or has been deemed to 

be a Restricted Firm. 

Firms that do not meet the proposed 

Preliminary Criteria for Identification, 

particularly ones that understand they 

are close to meeting the proposed 

criteria, also may incur costs associated 

with enhancing their compliance 

culture or making other changes in 

order to avoid meeting the proposed 

criteria in the future. These costs may 

include terminating registered persons 

with disciplinary records, replacing 

them with existing or new hires, 

enhancing compliance policies and 

procedures, and improving supervision 

of registered persons. Finally, registered 

persons with significant number of 

disciplinary or other disclosure events 

on their records may find it difficult to 

retain employment, or get employed by 

new firms, particularly where those 

firms and their associated registered 

persons already have disciplinary 

records. Similarly, firms meeting the 

proposed criteria or those close to 

meeting the proposed criteria may find 

it difficult to hire registered persons 

with disclosure events. FINRA notes, 

however, that the anticipated economic 

impacts on firms hiring and registered 

persons seeking employment would 

likely be limited to a small proportion 

of registered persons and member 

firms.62

➢ Other Economic Impacts 

FINRA also has considered the 

possibility that, in some cases, this 

proposal may impose restrictions on 

brokers’ and firms’ activities that are 

less likely to subsequently harm their 

customers. In such cases, these brokers 

and firms may lose economic 

opportunities or find it difficult to retain 

brokers or customers. FINRA believes 

that the proposal mitigates such risks by 

requiring an initial layer of 

Departmental review, and providing 

affected firms an opportunity to engage 

in a Consultation with the Department 

and request a review of the 

Department’s determination in an 

expedited proceeding. 

FINRA also considered that some 

firms may consider not reporting, 

underreporting, or failing to file timely, 

required disclosures on Uniform 

Registration Forms in an effort to avoid 

costs associated with the proposals. 

However, this potential impact is 

mitigated because many events are 

reported by regulators or in separate 

public notices by third parties and, as a 

result, FINRA can monitor for these 

unreported events. Further, failing to 

timely update Uniform Registration 

Forms is a violation of FINRA rules and 

can result in fines and penalties, thereby 

serving as a deterrent for 

underreporting, misreporting and failing 

to file timely required disclosures. 

Considering that the proposed criteria 

are based on a firm’s experience relative 

to its similarly sized peers, FINRA does 

not believe that the proposed criteria 

impose costs on competition between 

firms of different sizes. Further, because 

FINRA would perform the annual 

calculation to determine the firms that 

meet the Preliminary Criteria for 

Identification, the costs a firm incurs to 

monitor its status in relation to the 

proposed criteria would be 

discretionary and not likely create any 

competitive disadvantage based on firm 

size. Although the proposed rule would 

not impose these monitoring costs, 

FINRA would provide transparency 

around how the Preliminary Criteria for 

Identification are calculated and 

appropriate guidance to assist firms 

seeking to monitor their status. 

Similarly, FINRA does not anticipate 

that the proposed Restricted Firm 

Obligations Rule, including the 

Restricted Deposit Requirement or any 

required conditions and restrictions, 

would create competitive disadvantages 

across firms of different sizes. This is, in 

part, because FINRA would consider the 

number of offices and registered 

persons, among other factors, when 

determining the appropriate maximum 

Restricted Deposit Requirement or any 

conditions and restrictions, to ensure 

that the obligations are appropriately 

tailored to the firm’s business model but 

do not significantly undermine the 

continued financial stability and 

operational capability of the firm as an 

ongoing enterprise over the ensuing 12 

months. 

As discussed above, FINRA would 

exercise some discretion in determining 

the maximum Restricted Deposit 

Requirement and tailor it to the size, 

operations and financial conditions of 

the firm, among other factors. This 

approach is intended to align with 

FINRA’s objective to have the specific 

financial obligation be significant 

enough to change a Restricted Firm’s 

78554 Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 

63The effect of the no-stay provision is that 

imposed obligations would apply immediately, 

even during the pendency of any hearing request. 

As a result, the no-stay provision would impose 

direct costs on misidentified firms or firms for 

which the obligations imposed are not necessary or 

appropriate. 

64 IIROC Consolidated Rule 9208 permits IIROC 

to impose terms and conditions on an IIROC Dealer 

Member’s membership when IIROC considers these 

terms and conditions appropriate to ensure the 

member’s continuing compliance with IIROC 

requirements. 

behavior but not so burdensome that it 

would indirectly force it out of business. 

In determining the specific maximum 

Restricted Deposit Requirement, FINRA 

would consider a range of factors, 

including the nature of the firm’s 

operations and activities, revenues, 

commissions, assets, liabilities, 

expenses, net capital, the number of 

offices and registered persons, the 

nature of the disclosure events counted 

in the numeric thresholds, insurance 

coverage for customer arbitration 

awards or settlements, concerns raised 

during FINRA exams, and the amount of 

any of the firm’s or its Associated 

Persons’ ‘‘Covered Pending Arbitration 

Claims’’ or unpaid arbitration awards. In 

developing the proposal, FINRA 

considered the possibility of having a 

transparent formula, based on some of 

these factors, to determine a maximum 

Restricted Deposit Requirement. 

However, as discussed in more detail 

below, given the range of relevant 

factors and differences in firms’ 

business models, operations, and 

financial conditions, FINRA decided not 

to propose a uniform, formulaic 

approach across all firms. 

In developing the proposal, FINRA 

also considered the possibility that the 

size of the maximum Restricted Deposit 

Requirement may be too burdensome for 

the firms, and could undermine their 

financial stability and operational 

capability. FINRA believes that these 

risks are mitigated by providing affected 

firms an opportunity to engage in a 

Consultation process with FINRA and 

propose a lesser Restricted Deposit 

Requirement or restrictions or 

conditions on their operations. Further, 

as discussed above, Restricted Firms 

would have the opportunity to request 

a review of the Department’s 

determination in an expedited 

proceeding. 

b. Proposed Expedited Proceeding Rule 

When FINRA imposes obligations on 

a firm pursuant to the proposed 

Restricted Firm Obligations Rule, the 

firm may experience significant 

limitations to its business activities and 

incur direct and indirect costs 

associated with the obligations imposed. 

The proposed Expedited Proceeding 

Rule would, in general, require that 

these obligations apply immediately, 

even during the pendency of any 

appeal. 

The proposed rule would be 

associated with investor protection 

benefits through the impact of the nostay provision in proposed Rule 

9561(a)(4). Under the proposal, 

obligations imposed by the Department 

would be effective immediately, except 

that a firm that is subject to a Restricted 

Deposit Requirement under proposed 

Rule 4111 and requests a hearing would 

be required to make only a partial 

deposit while the hearing is pending. 

This would reduce the risk of investor 

harm during the pendency of a hearing. 

Similarly, the no-stay provision may 

limit hearing requests by firms that seek 

to use them only as a way to forestall 

FINRA obligations. 

The benefit of the proposed rule 

accruing to firms would be to permit 

firms to appeal FINRA’s determinations 

(both to request prompt review of 

obligations imposed or of 

determinations for failure to comply) in 

an expedited proceeding, thereby 

reducing undue costs where firms may 

have been misidentified or where the 

obligations imposed are not necessary or 

appropriate to address the concerns 

indicated by the Preliminary Criteria for 

Identification and protect investors and 

the public interest. For example, the 

proposed rule is anticipated to reduce 

any undue costs by the proceeding’s 

expedited nature. Similarly, the 

proposed rule’s time deadlines may also 

reduce the costs of the proceedings, in 

certain cases. 

The costs would be borne by firms 

that choose to seek review via the 

proposed expedited proceeding, and 

these costs can be measured relative to 

a standard proceeding. These firms 

would incur costs associated with 

provisions and procedures specific to 

this proposed rule, including the 

provision that the obligations imposed 

would not be stayed.63 This would 

include the obligations imposed under 

the proposed rule, including the 

Restricted Deposit Requirement, and the 

requirement that the firm, upon the 

Department’s request, provide evidence 

of its compliance with these obligations. 

However, the extent of the costs 

associated with the Restricted Deposit 

Requirement would be mitigated by the 

expedited nature of the proceeding and 

by the provision that would require a 

firm, during the pendency of an 

expedited hearing process, to maintain 

only a partial deposit requirement. 

As with the other proposals, FINRA 

does not anticipate that the proposed 

rule would have differential competitive 

effects based on firm size or other 

criteria. The costs and benefits are 

anticipated to apply to all firms that 

request a hearing in an expedited 

proceeding. 

4. Alternatives Considered 

FINRA recognizes that the design and 

implementation of the rule proposals 

may impose direct and indirect costs on 

a variety of stakeholders, including 

firms, brokers, regulators, investors and 

the public. Accordingly, in developing 

its rule proposals, FINRA seeks to 

identify ways to enhance the efficiency 

and effectiveness of the proposed rules 

while maintaining their regulatory 

objectives. For example, FINRA 

considered several alternatives to 

addressing the risks posed by firms and 

their brokers that have a history of 

misconduct, including alternative 

approaches and alternative 

specifications to the numeric threshold 

based-approach and the Restricted 

Deposit Requirement. 

a. Alternative to the Proposed Numeric 

Threshold-Based Approach 

In addition to the proposed approach 

based on numeric thresholds, FINRA 

considered an approach similar to the 

Investment Industry Regulatory 

Organization of Canada’s (IIROC) ‘‘terms 

and conditions’’ rule, IIROC 

Consolidated Rule 9208, that would 

allow FINRA to identify a limited 

number of firms with significant 

compliance failures and impose on 

them appropriate terms and conditions 

to ensure their continuing compliance 

with the securities laws, the rules 

thereunder, and FINRA rules.64 FINRA 

considered and evaluated the economic 

impacts of such a terms and conditions 

rule relative to proposed Rule 4111. 

Compared to proposed Rule 4111, a 

terms and conditions rule would 

provide FINRA with greater flexibility 

in identifying firms that should be 

subject to additional obligations. This 

greater flexibility could help better 

target its application and reduce 

misidentification by allowing FINRA to 

leverage non-public information, 

including regulatory insights collected 

as part of its monitoring and 

examination programs, in identifying 

firms that pose the greatest risk. Further, 

under a terms and conditions rule, 

FINRA could quickly update its 

identification of firms based on 

emerging risk patterns, to ensure that 

the rule continues to be effective at 

addressing firms that presently pose the 

greatest risk. This flexibility could 

Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 78555 

65As discussed in more detail below, several 

commenters expressed concerns about including 

pending and un-adjudicated events in the 

Preliminary Criteria for Identification. Commenters 

suggested that pending events are often associated 

with frivolous cases and that many pending 

regulatory investigations and criminal proceedings 

are discontinued without action. 

66 In assessing the impact of removing pending 

events from the Preliminary Criteria for 

Identification and restricting the criteria solely to 

final events, FINRA also examined the number of 

firms that would have met or exceeded at least one 

Preliminary Identification Metrics Threshold in the 

Registered Person Adjudicated Events, Member 

Firm Adjudicated Events, or Registered Persons 

Associated with Expelled Firms categories, during 

the relevant period. This analysis showed that the 

number of firms identified by this alternative 

criteria would increase from 45–80 firms to 131– 

196 firms, each year, during the review period. 

Similarly, FINRA estimates the number of firms that 

would have met or exceeded at least two thresholds 

within these categories to be 32–57 firms, each year, 

during the review period. 67For example, customers may file complaints 

that are false or erroneous and such complaints may 

subsequently be withdrawn by the customers or get 

dismissed by arbitrators or judges. 

mitigate the risk that the criteria and 

thresholds in proposed Rule 4111 no 

longer identify the appropriate firms. 

Further, as discussed above, the 

identification criteria in proposed Rule 

4111 may not identify all the firms that 

pose material risk to their customers, 

such as firms that may act to stay just 

below the proposed criteria and 

thresholds by any means, including 

misreporting or underreporting 

disclosure events. The absence of a set 

identification criteria in a terms and 

conditions rule would make it more 

difficult for firms to evade the 

identification criteria and thus could 

provide greater investor protections.+ 

At the same time, a terms and 

conditions rule may have certain 

disadvantages relative to proposed Rule 

4111. For example, a benefit of 

proposed Rule 4111 is the deterrent 

effect it may have on firms that do not 

meet the proposed Preliminary Criteria 

for Identification, particularly firms that 

may be close to meeting the criteria. 

These firms may change behavior and 

enhance their compliance culture in 

ways that could better protect their 

customers. By comparison, under a 

terms and conditions rule, in the 

absence of transparent criteria, firms 

would have to assess FINRA’s view of 

the significance of repeated exam 

findings to determine whether to change 

their conduct to avoid potential terms 

and conditions. 

Although FINRA has considered, and 

will continue to explore, this 

alternative, it is not proposing a terms 

and conditions rule at this time. 

b. Alternative Specifications for the 

Proposed Numeric Threshold-Based 

Approach 

FINRA also considered several 

alternatives to the numerical thresholds 

and conditions for the Preliminary 

Criteria for Identification. In 

determining the proposed criteria, 

FINRA focused significant attention on 

the economic trade-off between 

incorrect identification of firms that 

may not subsequently pose risk of harm 

to their customers, and not including 

firms that may subsequently pose risk of 

harm to customers. FINRA also 

considered three key factors: (1) The 

different categories of reported 

disclosure events and metrics, including 

the Expelled Firm Association Metric; 

(2) the counting criteria for the number 

of reported events or conditions; and (3) 

the time period over which the events 

or conditions are counted. FINRA 

considered several alternatives for each 

of these three factors. 

➢ Alternatives Associated With the 

Categories of Disclosure Events and 

Metrics 

In determining the different types of 

disclosure events, FINRA considered all 

categories of disclosure events reported 

on the Uniform Registration Forms, 

including the financial disclosures. 

FINRA decided to exclude financial 

disclosures because while financial 

events, such as bankruptcies, civil 

bonds, or judgments and liens, may be 

of interest to investors in evaluating 

whether or not to engage a broker or a 

firm, these types of events by 

themselves are not evidence of customer 

harm. 

In developing the Preliminary Criteria 

for Identification, FINRA also 

considered whether pending criminal, 

internal review, judicial and regulatory 

events should be excluded from the 

threshold test. Pending matters are often 

associated with an emerging pattern of 

customer harm and capture timely 

information of potential ongoing or 

recent misconduct. However, pending 

matters may include pending regulatory 

investigations and criminal proceedings 

that do not result in a finding.65 FINRA 

evaluated the impact of eliminating 

pending matters from the Preliminary 

Criteria for Identification. Specifically, 

FINRA identified the firms that would 

no longer meet the proposed criteria 

(had the criteria existed) during the 

evaluation period if pending-events 

categories were eliminated from the 

criteria, and examined the extent to 

which such firms were associated with 

‘‘new’’ Registered Person and Member 

Firm Events. As shown in Exhibit 3d, 

FINRA estimates that these firms had on 

average approximately 8.0–13.1 times 

more new disclosure events than other 

firms in the industry during the same 

period that would not have met the 

Preliminary Criteria for Identification.66

Accordingly, based on this review and 

other validations, FINRA decided to 

include pending matters in the 

proposed criteria because they are 

critical to identifying firms that pose 

greater risks to their customers. 

As with other categories, the proposed 

Preliminary Identification Metrics 

Thresholds for the relevant Preliminary 

Identification Metrics, including the 

Registered Person Pending Event Metric 

and the Member Firm Pending Event 

Metric, are intended to capture firms 

that are on the far tail of the 

distributions. Thus, firms meeting these 

thresholds have far more pending 

matters on their records than other firms 

in the industry that do not meet these 

thresholds. Nonetheless, FINRA 

recognizes that pending matters include 

disclosure events that may remain 

unresolved or that may subsequently be 

dismissed or concluded with no adverse 

action because they lack merit or 

suitable evidence.67 In order to ensure 

that a firm does not meet the 

Preliminary Criteria for Identification 

solely because of pending matters, 

FINRA has proposed the conditions 

that, to meet the criteria, the firm must 

meet or exceed at least two of the six 

Preliminary Identification Metrics 

Thresholds, and at least one of the 

thresholds for the Registered Person 

Adjudicated Event Metric, Member Firm 

Adjudicated Event Metric, or Expelled 

Firm Association Metric. 

In developing the Preliminary Criteria 

for Identification, FINRA also 

considered alternatives to the Expelled 

Firm Association Metric. For example, 

in Regulatory Notice 19–17, FINRA 

initially proposed the metric to be based 

on all registered persons who were 

previously associated with one or more 

previously expelled firms, at any time in 

their career and irrespective of their 

duration of association at the previously 

expelled firm. FINRA subsequently 

narrowed the Expelled Firm Association 

Metric by only including registered 

persons who were registered with a 

previously expelled firm within the 

prior five years (i.e., whose registration 

with a previously expelled firm 

terminated during the prior five years) 

and who were registered with the 

expelled firm for at least one year. 

FINRA selected this formulation to 

analyze because the five-year lookback 

is consistent with the lookback periods 

for the other proposed metrics in the 

proposal and, based on staff experience, 

78556 Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 

68Registered Persons In-Scope include all 

persons registered with the firm for one or more 

days within the one year prior to the Evaluation 

Date. 

69This also is consistent with the time period 

used for counting ‘‘specified risk events’’ in SR– 

FINRA–2020–011. 

70These alternatives would have identified 

approximately the same number of firms as meeting 

the Preliminary Criteria for Identification, during 

the review period. 

71For example, as discussed above, FINRA 

estimates that the firms identified by the proposed 

criteria (based on a five-year period for calculating 

the Expelled Firm Association Metric) had on 

average approximately 6.1–19.9 times more new 

disclosure events after their identification than 

other firms in the industry during the same period 

that would not have met the proposed criteria. 

FINRA believes that individuals who 

are more recently associated with 

previously expelled firms (e.g., in the 

last five years) and have longer tenures 

at expelled firms (e.g., a year or more, 

instead of a shorter employment 

duration) generally pose higher risk 

than other individuals. 

In developing the proposal, FINRA 

conducted several validations on the 

firms meeting the criteria, including the 

proposed Expelled Firm Association 

Metric, by reviewing the extent to which 

firms identified during 2013–2017 (had 

the criteria existed) were subsequently 

expelled, associated with unpaid 

awards, or identified by the Department 

as suitable candidates for additional 

obligations. As discussed above, FINRA 

also evaluated the extent to which firms 

that would have met the criteria during 

2013–2017 (had the criteria existed) and 

their brokers were associated with 

‘‘new’’ Registered Person and Member 

Firm Events after having met the 

criteria. As shown in Exhibit 3c, FINRA 

estimates that the identified firms had 

on average approximately 6.1–19.9 

times more new disclosure events after 

their identification than other firms in 

the industry during the same period that 

would not have met the Preliminary 

Criteria for Identification. Based on staff 

review and validations, FINRA believes 

that the proposed Expelled Firm 

Association Metric preserves the 

usefulness of the Preliminary Criteria 

for Identification (as originally proposed 

in Regulatory Notice 19–17) and 

continues to identify firms that pose 

greater risks to their customers. 

➢ Alternatives Associated With the 

Counting Criteria for the Proposed 

Criteria and Metrics 

FINRA considered a range of 

alternative counting criteria for the 

Preliminary Criteria for Identification. 

For example, FINRA considered 

whether the Preliminary Criteria for 

Identification should be based on firms 

meeting two or more Preliminary 

Identification Metrics Thresholds, or 

whether the number of required 

thresholds should be decreased or 

increased. Decreasing the number of 

required thresholds from two to one 

would increase the number of firms that 

would have met the Preliminary Criteria 

for Identification during the review 

period from 45–80 firms to 155–217 

firms, each year. Alternatively, 

increasing the number of required 

thresholds from two to three would 

decrease the number of firms that would 

have met the Preliminary Criteria for 

Identification from 45–80 firms to 11–20 

firms, each year. FINRA reviewed the 

list of firms identified under these 

alternative counting criteria and 

examined the extent to which they 

included firms that were subsequently 

expelled, associated with unpaid 

awards, or identified by the Department 

as suitable candidates for additional 

obligations. FINRA also paid particular 

attention to firms that would have been 

identified by these alternative criteria 

but subsequently were not associated 

with high-risk activity, as well as firms 

that would not have been identified by 

these alternatives that were associated 

with high-risk events. Based on this 

review, FINRA believes that the 

proposed approach—meeting two or 

more of the Preliminary Identification 

Metrics Thresholds—more 

appropriately balances these trade-offs 

between misidentifications than the 

alternative criteria. 

➢ Alternatives Associated With the 

Time Period Over Which the Metrics 

Are Calculated 

The proposed Preliminary 

Identification Metrics are based on two 

different time periods over which 

different categories of events and 

conditions are counted (‘‘lookback 

periods’’). Pending events, including the 

Registered Person Pending Events and 

the Member Firm Pending Events 

categories, are counted in the 

Preliminary Identification Metrics only 

if they are pending as of the Evaluation 

Date. Adjudicated events, including the 

Registered Person Adjudicated Events 

and the Member Firm Adjudicated 

Events categories, and Registered 

Persons Associated with Previously 

Expelled Firms are counted in the 

Preliminary Identification Metrics over 

a five-year lookback period.68

In developing the proposal, FINRA 

considered alternative criteria for the 

time period over which the disclosure 

events or conditions are counted. For 

example, FINRA considered whether 

adjudicated events should be counted 

over the individual’s or firm’s entire 

reporting period or counted over a more 

recent period. Based on its experience, 

FINRA believes that more recent events 

(e.g., events occurring in the last five 

years) generally pose a higher level of 

possible future risk to customers than 

other events. Further, counting events 

over an individual’s or firm’s entire 

reporting period would imply that 

brokers and firms would always be 

included in the Preliminary 

Identification Metrics for adjudicated 

events, even if they subsequently 

worked without being associated with 

any future adjudicated events. 

Accordingly, FINRA decided to include 

adjudicated events only in the more 

recent period (i.e., a five-year period).69

Similarly, FINRA also considered 

alternative limits on the time periods 

over which components of the Expelled 

Firm Association Metric would be 

calculated. For example, FINRA 

considered alternative metrics based on 

only firms that have been expelled 

within three to five years prior to the 

Evaluation Date. Further, FINRA 

considered alternatives where the 

individual broker’s association with the 

previously expelled firm was within a 

five-year window around the firm’s 

expulsion. In evaluating these 

alternatives, FINRA recalculated the 

underlying thresholds to capture firms 

that are on the far tail of the distribution 

for these alternative metrics.70 As with 

other alternatives, FINRA conducted 

several validations on alternative 

specifications of time periods for 

calculating the Expelled Firm 

Association Metric. These validations 

included reviewing the extent to which 

firms identified by alternative 

specifications of the proposed criteria 

were associated with ‘‘new’’ events after 

identification, subsequently expelled or 

associated with unpaid awards, or were 

identified by the Department as suitable 

candidates for additional obligations. 

Based on these validations, FINRA 

selected the proposed five-year period 

for calculating the Expelled Firm 

Association Metric as the alternative 

specifications did not result in any 

material change to the proposed 

criteria’s ability to identify firms that 

pose greater risk of customer harm.71

c. Alternatives to the Restricted Deposit 

Requirement 

In developing the proposal, FINRA 

considered alternative approaches to the 

Restricted Deposit Requirement. For 

example, FINRA considered increasing 

the capital requirements on identified 

firms, in lieu of the Restricted Deposit 

Requirement. A net capital approach 

would provide the identified firms 

Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 78557 

72See Exhibit 3e, which reflects the firms that 

would have met the Preliminary Criteria for 

Identification in 2019, had the criteria existed. 

73For purposes of this Form 19b–4, ‘‘high’’ 

arbitration awards, settlement amounts and 

revenues means the top tercile (above 66th 

percentile) of these awards, settlements and 

revenues among firms that would have met the 

proposed criteria, and ‘‘medium’’ and ‘‘low’’ 

arbitration awards, settlement amounts and 

revenues means the middle tercile (33rd–66th 

percentile) and bottom tercile (below the 33rd 

percentile). See Exhibit 3f, which reflects the firms 

meeting the Preliminary Criteria for Identification 

in 2019. 

74All references to commenters are to the 

comment letters as listed in Exhibit 2b. 

75CAI, Cambridge, Cetera, FSI, Massachusetts, 

MIRC, NASAA, PIABA, PIRC, SIFMA, St. John’s 

SOL. Supportive commenters also suggested ways 

in which the proposal could be modified or 

enhanced, which are discussed in more detail 

below. 

76Brooklight, Colorado FSC, Dempsey, FSI, IBN, 

Joseph Stone, Luxor, McNally, Moss & Gilmore, 

Westpark. 

greater flexibility and control over the 

assets. These firms would be able to use 

the assets for cash flow and operating 

expenses. As a result, an additional net 

capital charge would be associated with 

lower direct and indirect costs to these 

firms. However, there are several 

drawbacks with respect to economic 

incentives and anticipated impacts to 

relying upon a net capital approach as 

a tool for addressing the risks posed by 

firms with a significant history of 

misconduct. For example, the firm 

assets that would be maintained 

pursuant to an increased net capital 

requirement would not be deposited 

into a separate restricted account and 

may be fungible with other firm assets. 

As a result, these assets could be 

withdrawn by the identified firms at any 

time and these firms could employ the 

capital during the pendency of the 

restriction period. This suggests that the 

deterrent effect of an increased net 

capital approach would be much lower 

on a dollar-for-dollar basis than the 

proposed Restricted Deposit 

Requirement. An increased net capital 

approach also may not be sufficiently 

impactful in providing incentives to 

change firm behavior if a Restricted 

Firm already maintains substantial 

excess net capital. Further, considering 

that the identified firms could withdraw 

their assets at any time under a net 

capital approach, FINRA would not be 

able to ensure that any funds would be 

available for satisfying unpaid 

arbitration awards. In light of these 

considerations, FINRA decided to 

propose a Restricted Deposit 

Requirement approach, rather than 

changes to the capital requirements on 

identified firms. 

FINRA also considered whether the 

Restricted Deposit Requirement amount 

should be based on a formula or include 

a cap in order to provide greater 

transparency to the member firms. To 

assess the feasibility of a strict formula 

or cap in setting the Restricted Deposit 

Requirement, FINRA assessed the 

financial condition of the firms that 

would have been identified by the 

Preliminary Criteria for Identification in 

2019 (if the criteria had existed) and 

found significant variation across firms. 

These variations existed even across 

firms within the same size category. For 

example, FINRA found that the highest 

firm’s revenues were approximately 

1,750 times that of the firm with the 

lowest revenue when standardized by 

the number of registered persons at the 

firm. Within firm size categories, the 

corresponding difference in revenues 

per registered person was as high as 

over 80 times. Similarly, there was 

significant variation in the reported cash 

and ownership equity across these 

firms. The highest firm’s excess net 

capital was over 3,500 times that of the 

firm with the lowest excess net capital 

(standardized per registered person).72

The firm reporting the highest 

ownership equity was over 2,300 times 

that of the lowest firm’s ownership 

equity (standardized per registered 

person). Further, firms’ awards and 

settlements appear to be unrelated to 

their financial condition. For example, 

FINRA estimates that over 20% of the 

identified firms with high awards and 

settlement amounts have low or 

medium revenues (on a per registered 

person basis) or high revenues and low 

or medium awards and settlement 

amounts.73 Thus there appears to be no 

consistent relationship between firm 

size, and basic metrics of the financial 

condition of the firm, and potential 

obligations to harmed customers. Given 

these significant variations in 

quantitative factors and the qualitative 

nature of some of the factors for 

consideration (e.g., concerns raised 

during FINRA exams), FINRA decided 

to maintain the Department’s discretion 

for determining the Restricted Deposit 

Requirement, instead of proposing a 

formula or a cap. Additionally, FINRA 

believes that if the proposal were to 

include a precise formula, it may 

undermine the effectiveness of the rule 

by providing an opportunity for firms to 

take actions to minimize the expected 

restricted deposit. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

The proposed rule change was 

published for comment in Regulatory 

Notice 19–17 (May 2019). Thirty-two 

comments were received in response to 

the Regulatory Notice.74 Exhibit 2a is a 

copy of the Regulatory Notice. Exhibit 

2b is a list of commenters. Exhibit 2c 

contains copies of the comment letters 

received in response to the Regulatory 

Notice. Of the 32 comment letters 

received, 11 were generally in favor of 

the proposed rule change, and 18 were 

generally opposed. 

FINRA has considered the comments 

received. In light of some of those 

comments, FINRA has made some 

modifications to the proposal. The 

comments and FINRA’s responses are 

set forth in detail below. 

1. General Support for the Proposal 

Several commenters expressed 

general support for the proposed rule 

changes in Regulatory Notice 19–17.75

For example, NASAA commended 

FINRA’s attempt to strategically 

identify, and more strongly regulate, the 

limited number of member firms with 

histories of regulatory noncompliance, 

and stated that the proposal should 

increase investor protection while 

imposing minimal burdens on the 

brokerage industry. Massachusetts 

called the proposal a positive step 

toward protecting investors from the 

riskiest corners of the brokerage 

industry, and asserted that the proposal 

rightly places the burden of investor 

protection on the firms that hire bad 

brokers and ensures that investors have 

meaningful recourse when harmed. CAI 

likewise expressed support for how the 

proposal would enhance customer 

protection by imposing additional 

obligations on a targeted group of firms. 

SIFMA supported how the proposal fits 

into FINRA’s continuing efforts to help 

ensure that arbitration claims, awards, 

and settlements are paid in full. Cetera 

supported both the concept and manner 

in which FINRA has approached this 

effort. Cambridge agreed that an 

objective data assessment coupled with 

a comprehensive and transparent review 

of that data—which is the general 

structure of the proposed Restricted 

Firm Obligations Rule—will aid FINRA 

in identifying those high risk member 

firms and registered persons 

contemplated by this proposal. 

2. General Opposition to the Proposal 

Several commenters generally 

opposed proposed Rule 4111, on a 

variety of grounds. For example, several 

commenters wrote that the proposal 

would disproportionately affect small 

firms or reflected an attempt to put 

small firms out of business.76 PIRC, 

however, characterized industry 

78558 Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 

77See proposed Rule 4111(i)(15)(A) (including as 

factors, inter alia, the ‘‘nature of the firm’s 

operations and activities’’ and ‘‘the number of 

offices and registered persons,’’ and requiring that 

the Department determine a maximum Restricted 

Deposit Requirement that ‘‘would not significantly 

undermine the continued financial stability and 

operational capability of the firm as an ongoing 

enterprise over the next 12 months’’). 

78Brooklight, Dempsey, Joseph Stone, Westpark. 

79 Dempsey, Joseph Stone. 

80Brooklight, Dempsey, Joseph Stone. 

81See Securities Exchange Act Release No. 88600 

(April 8, 2020), 85 FR 20745 (April 14, 2020) 

(Notice of Filing of File No. SR–FINRA–2020–011). 

82See Rule 3170 (Tape Recording of Registered 

Persons by Certain Firms). The Taping Rule 

provides, in general, that a firm is a ‘‘taping firm’’ 

when specified percentages of its registered persons 

have been associated with one or more ‘‘disciplined 

firms’’ in a registered capacity within the last three 

years. 

83See Securities Exchange Act Release No. 17371 

(December 12, 1980), 45 FR 83707 (December 19, 

1980) (Order Approving File No. SR–NASD–78–3) 

(explaining that disparate treatment of differently 

situated parties is not necessarily either fair or 

unfair). 

84ASA, Dempsey, Joseph Stone, Luxor, PIABA, 

Rockfleet, Worden. 

85ASA, Better Markets. 

86Cetera, Dempsey, Luxor. 

objections that the proposed rule would 

disproportionately affect small firms as 

unwarranted noting that the rule 

accounts for different firm sizes in its 

threshold calculations. Each specific 

numeric threshold in the Preliminary 

Identification Metrics Thresholds grid 

(proposed Rule 4111(i)(11)) represents 

an outlier with respect to similarly sized 

peers. Moreover, the process of 

determining a Restricted Deposit 

Requirement would require the 

Department to consider several factors 

that relate to firm size and a parameter 

directly influenced by firm size.77 Thus, 

while the revised proposal includes 

several modifications that will lessen 

some of the original proposal’s burdens 

on all firms, the modifications are not 

specific to small firms. 

Some commenters generally opposed 

the proposal on the basis of its potential 

adverse impacts on individuals.78 For 

example, some commenters contended 

that many terminated individuals would 

have to uproot their lives and be unable 

to find a new broker-dealer.79

Brooklight commented that innocent 

representatives who associated with a 

firm expelled for firm-level issues 

would be marked with a ‘‘scarlet letter’’ 

that could end their careers. Westpark 

commented that the proposed rule 

would make it financially untenable for 

small firms to employ brokers with 

certain levels of disclosures, essentially 

making them unemployable. HLBS 

commented that the proposed rule will 

allow FINRA to grossly intrude on 

member firms’ recruiting and 

termination decisions. Some 

commenters expressed concern that the 

proposal would unfairly affect some 

persons who previously worked at 

disciplined firms and persons with any 

regulatory incidents regardless of their 

intent.80

FINRA notes, however, that between 

2013 and 2019, only one to two percent 

of registered persons in any year had 

any qualifying events in their regulatory 

records, which represents the most 

conservative estimate of the set of 

brokers who might be associated with 

the proposed rule. Further, 

approximately 98% of member firms 

would be able to employ individuals 

seeking employment in the industry— 

including ones who have some 

disclosures and ones who were 

terminated by Restricted Firms— 

without meeting the Preliminary 

Criteria for Identification. Moreover, 

under a separately proposed rule, a 

member firm could register an 

individual who has only one ‘‘specified 

risk event’’ in their record without 

having to request a materiality 

consultation.81

For these reasons, FINRA is not 

proposing to revise proposed Rule 4111 

to address these comments, except to 

narrow the scope of the Expelled Firm 

Association Metric. FINRA recognizes 

that proposed Rule 4111 could result in 

some firms declining to employ persons 

who have associated with a firm that 

has been expelled, even when it would 

not cause the firm to meet the 

Preliminary Criteria for Identification. 

FINRA does not believe this concern— 

which is similar to how some firms may 

respond to FINRA’s ‘‘Taping Rule’’ 82— 

warrants removing the Expelled Firm 

Association Metric from the Preliminary 

Criteria for Identification. Nevertheless, 

as explained more below, FINRA has 

narrowed the Expelled Firm Association 

Metric, to narrow its impact on 

individuals. 

Westpark commented that the 

proposal is inconsistent with Section 

15(b)(6) of the Exchange Act, which 

requires that FINRA rules not be 

designed to permit unfair 

discrimination between brokers or 

dealers, and Section 15A(b)(9) of the 

Exchange Act, which requires that 

FINRA rules not impose any burden on 

competition not necessary or 

appropriate in furtherance of the 

Exchange Act. Proposed Rule 4111, 

however, will allow FINRA to impose 

obligations only on the limited number 

of member firms that pose substantially 

higher risks to investors compared to 

their similarly sized peers, and only 

after a multi-step process that has 

numerous procedural protections, for 

the purpose of protecting investors and 

the public interest. Therefore, FINRA 

believes the proposal is an appropriate 

means of protecting investors and the 

public interest, and is not unfair.83

Several commenters predicted that, 

for a variety of reasons, the proposal 

will not achieve its intended goals 84 or 

commented that the proposal is 

insufficient.85 For example: (1) Some 

question the underlying premise of 

using disclosure data to predict future 

customer harm; 86 (2) Rockfleet 

suggested that when a Restricted 

Deposit Requirement would essentially 

shut a firm down, the firm would likely 

terminate its membership and ‘‘leav[e] 

FINRA in exactly the position it is 

seeking to avoid’’; (3) Joseph Stone 

commented that firms that dilute their 

concentration of brokers that meet the 

threshold criteria can still pose risks, 

and that the proposal will ‘‘force firm 

management to push quality and 

compliant representatives out of their 

firms’’; (4) Luxor commented that there 

is no evidence to prove that the 

proposal will cure the problem it is 

intended to solve; (5) Massachusetts 

wrote that the annual calculation is 

predictable and may provide an 

incentive for firms to comply only 

enough to remain just below the 

triggering thresholds; (6) Cambridge 

predicted that member firms without 

significant retained earnings would be 

given exceptions to the Restricted 

Deposit Requirement; (7) Network 1 

wrote ‘‘[t]here will always be ‘bad’ 

brokers’’; and (8) ASA commented that 

certain aspects of the proposal ‘‘do not 

go far enough to remove the most 

egregious actors from our industry’’ and 

would ‘‘marginally increase the 

financial obligations of bad actor firms 

and allow [them] to continue their abuse 

of Main Street investors.’’ 

The primary goal of the proposed rule 

change is to incentivize members with 

a significant history of misconduct 

relative to their peers to change 

behavior, and FINRA believes that the 

proposed rule change is reasonably 

designed to achieve that goal. The way 

the proposal identifies the affected firms 

is consistent with recent academic 

studies that analyzed correlations 

between disclosure data and risks to 

investors. The proposed rule change 

creates substantial, ongoing incentives 

for the firms that present the highest 

levels of risk to change behavior, and 

gives FINRA an important new tool to 

respond to those firms that continue to 

present outlier-level risks to investors. 

FINRA also believes that the most 

effective measure to incentivize such 

Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 78559 

87See Rule 1014(c)(2) (describing granting of 

applications for new membership subject to 

restrictions). 

88 17 CFR 240.15c3–1. 

89CAI, Cambridge, FSI, Sichenzia, Westpark. 

90CAI, Cambridge, FSI, Rockfleet, Sichenzia, 

Westpark, Whitehall. 

91CAI, Westpark, Whitehall. 

92FSI, Massachusetts, NASAA, PIRC, St. John’s 

SOL. 

93Massachusetts, MIRC, NASAA, St. John’s SOL. 

firms to change behavior is a financial 

restriction—including the mere 

potential for a financial restriction. 

Several commenters state that the 

proposal’s impacts are too broad to 

address the risks posed. For example, 

Brooklight expressed that instead of 

impacting just a ‘‘few bad actors,’’ the 

proposal imposes increased regulatory 

burdens on ‘‘every single member’’ and 

could ‘‘sweep in wholly innocent 

firms.’’ HLBS commented that the 

proposed rule would impose 

punishment based only on the mere 

suspicion of misconduct. Rockfleet 

commented that the burdens would be 

unwarranted, because unpaid 

arbitration awards are ‘‘not a 

widespread industry issue,’’ and the 

proposal would unfairly capture firms 

that only employ a single individual 

with numerous disclosure events. 

Sichenzia commented that reducing 

unpaid arbitration awards is better 

achieved through less onerous means. 

FSI expressed concern that the proposal 

does not provide adequate safeguards to 

protect against misidentification. 

FINRA believes, however, that the 

proposed rule change is reasonably 

designed to impact a relatively small 

number of firms posing outlier-level 

risks. The proposed Rule 4111 ‘‘funnel’’ 

process has numerous safeguards 

designed to protect against 

misidentification. Furthermore, 

although the proposal would have 

ancillary benefits for addressing unpaid 

arbitration awards, the proposal’s 

primary purpose is to create incentives 

for members that pose outlier-level risks 

to change behavior. 

Luxor commented that the proposal is 

inconsistent with the usual ‘‘causal 

relationship inherent in any regulatory 

schema’’ where misconduct precedes 

the sanctions imposed. Proposed Rule 

4111, however, is similar to other kinds 

of rules and regulations that impose 

requirements and restrictions based on 

a firm’s circumstances. For example, 

FINRA’s membership rules permit 

FINRA to impose restrictions on new 

member applicants that are reasonably 

designed to address specific concerns, 

including—besides disciplinary 

concerns—financial, operational, 

supervisory, investor protection, or 

other regulatory concerns.87 As another 

example, Exchange Act Rule 15c3–1,88

the Net Capital Rule, imposes different 

minimum net capital requirements 

based on the types of securities business 

the broker-dealer conducts. Moreover, 

the obligations that FINRA may impose 

pursuant to Rule 4111 are not 

‘‘sanctions’’ for violations; rather, they 

are obligations that relate directly to 

firm profiles that pose substantially 

more risk to investors than the profiles 

of the vast majority of other member 

firms of similar sizes. 

Some commenters opposed the 

proposal on the ground that it is 

unnecessary. For example, Rockfleet 

commented that FINRA’s membership 

program and examinations should be 

sufficient to deal with firms that have a 

poor supervisory structure and 

compliance culture. Likewise, Network 

1 wrote that FINRA’s enforcement 

program is a practical solution for 

addressing ‘‘bad brokers.’’ As explained 

above, however, while FINRA has a 

number of tools for identifying and 

addressing a range of misconduct by 

individuals and firms, and has 

strengthened these protections for 

investors and the markets, persistent 

compliance issues continue to arise in 

some member firms. Proposed Rule 

4111 reflects FINRA’s belief that more 

can be done to protect investors from 

firms with a significant history of 

misconduct. 

Notwithstanding that FINRA has 

generally retained the proposal as it was 

originally proposed, FINRA appreciates 

the concerns raised by the commenters 

about the potential impacts and 

effectiveness of proposed Rule 4111. If 

approved, FINRA plans to review 

proposed Rule 4111 after gaining 

sufficient experience under the rule, at 

which time it will assess the rule’s 

ongoing effectiveness and efficiency. 

3. Concerns That the Proposal Gives 

FINRA Too Much Discretion, and 

Requests for Increased Transparency 

Several commenters contended that, 

in numerous respects, the proposal 

gives FINRA too much discretion.89

Commenters pointed to how the 

proposal gives the Department 

discretion to decide: (1) In the initial 

Department evaluation stage, which 

firms require further review; (2) the 

maximum and actual Restricted Deposit 

Requirement; and (3) the types of 

conditions or restrictions that may be 

imposed.90 Some commenters further 

requested that the proposal provide 

more transparency on how FINRA 

would exercise its discretion. For 

example, Sichenzia suggested which 

kinds of disclosure events FINRA 

should eliminate from consideration 

during the initial Department 

evaluation, and some commenters 

requested that FINRA clarify how the 

Department would calculate a Restricted 

Deposit Requirement 91 and what kinds 

of conditions or restrictions could be 

imposed.92 Some commenters 

recommended specific conditions and 

restrictions that FINRA should 

impose.93

FINRA believes that the proposal 

contains numerous steps that are 

objective and do not involve the use of 

discretion or that limit or focus FINRA’s 

discretion. FINRA notes that the annual 

calculation—the first and most 

significant step that identifies member 

firms that are subject to the proposed 

rule—does not involve the use of 

discretion. The annual calculation uses 

objective, transparent criteria to identify 

outlier firms with the most significant 

history of misconduct relative to their 

peers (based on a review of the criteria 

as if it existed today, the number of 

member firms would be between 45–80 

firms). Following the annual 

calculation, the Department would 

conduct an evaluation to review 

whether it has information that a 

member firm’s calculation included 

disclosure events or conditions that 

should not have been included because 

they are not consistent with the purpose 

of the Preliminary Criteria for 

Identification and are not reflective of a 

firm posing a high degree of risk, 

whether the member has already 

addressed the concerns signaled by the 

disclosure events or conditions, or 

whether the member firm has altered its 

business operations such that the 

calculation no longer reflects the 

member firm’s current risk profile. 

During the Consultation, the 

Department would evaluate whether the 

member firm has demonstrated that the 

calculation included disclosure events 

that should not have been included 

(because they are duplicative or not 

sales-practice related). When the 

Department considers whether a 

member firm should be subject to the 

maximum Restricted Deposit 

Requirement, it will evaluate whether 

the maximum amount would impose an 

undue financial hardship and whether a 

lesser amount, or conditions and 

restrictions, would satisfy the objectives 

of the rule and be consistent with the 

protection of investors and the public 

interest. The ability to request a Hearing 

Officer’s review also would protect 

against overreaching. 

78560 Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 

94See, e.g., FSI, NASAA, PIRC. 

95Westpark. 

96Moss & Gilmore, Westpark. 

97AdvisorLaw, Cambridge, Cetera, HLBS, Joseph 

Stone, Luxor, Moss & Gilmore, Westpark, Worden. 

98Cambridge, Cetera, Westpark. Two of these 

commenters cautioned that including termination 

and internal review events could discourage firms 

from conducting internal reviews and filing 

appropriate termination disclosures on the Uniform 

Registration Forms, thereby reducing internal 

compliance procedures and potentially leading to 

underreporting of such events. Cetera, Westpark. 

99Cambridge, Cetera, Joseph Stone, Luxor, 

Network 1, Sichenzia, Westpark. 

100Cambridge, Joseph Stone, Luxor. 

101Cambridge. 

102Westpark. 

103Sichenzia. 

104Cambridge. 

105Westpark. 

106Luxor, Moss & Gilmore, Sichenzia. 

107Westpark. 

108HLBS, Moss & Gilmore, Westpark. 

109Cambridge, Westpark. 

110Worden. 

111Cambridge. 

112Better Markets. 

113Better Markets. 

114Massachusetts, NASAA. 

115Massachusetts. 

116Massachusetts. 

117MIRC, PIABA. 

118NASAA. 

119Rockfleet, Worden. 

120FINRA analyzed whether the revised Expelled 

Firm Association Metric still preserves its 

usefulness, and FINRA determined that it does, as 

explained in the Economic Impact Assessment. 

To ensure that the member firms 

identified as Restricted Firms are of the 

type motivating this proposal and 

incentivize Restricted Firms to reduce 

the risks posed to investors, however, 

the Department will need some degree 

of flexibility to identify, react and 

respond to different sources of risk. For 

this reason, the revised proposal retains 

the ability of the Department to make 

internal assessments during the 

evaluation and Consultation, including 

ones concerning the amount of the 

Restricted Deposit Requirement and the 

conditions and restrictions that may be 

imposed, to appropriately address the 

concerns indicated by the Preliminary 

Criteria for Identification. 

Nevertheless, FINRA agrees with 

commenters’ request for additional 

clarity regarding the conditions and 

restrictions that could be imposed under 

the proposed rule.94 For this reason, the 

revised proposal provides a nonexhaustive list of conditions and 

restrictions that could be imposed on 

Restricted Firms. Moreover, the 

proposed rule’s descriptions of the 

Department’s tasks and discretion are 

broad enough to allow FINRA to 

provide further guidance as it gains 

experience implementing the rule. For 

example, FINRA could provide 

additional guidance if it learns of 

categories of disclosure events that 

could be described as not consistent 

with the purpose of the Preliminary 

Criteria for Identification or not 

reflective of a firm posing a high degree 

of risk. FINRA also could provide 

further guidance on the kinds of 

conditions and restrictions that might be 

warranted in different contexts. 

4. Comments Concerning the 

Preliminary Criteria for Identification 

Numerous commenters suggested 

alternatives to several aspects of the 

Preliminary Criteria for Identification. 

Some suggested narrower criteria, 

including, for example, requests to: (1) 

Exclude criminal events in which the 

registered person pled nolo 

contendere; 95 (2) exclude or narrow 

criteria based on final regulatory 

actions; 96 (3) remove or narrow criteria 

based on pending events or 

unadjudicated events; 97 (4) remove or 

modify the criteria based on 

terminations or internal reviews; 98 (5) 

remove or substantially narrow the 

Expelled Firm Association Metric; 99 (6) 

increase the $15,000 threshold for 

settlements 100 and establish a minimum 

threshold for awards and judgments; 101

(7) decrease the lookback period; 102 (8) 

distinguish between events by recidivist 

and non-recidivist brokers; 103 (9) 

exclude all matters that are not salespractice or investment-related 104 or that 

do not involve customer harm; 105 (10) 

address or remove ‘‘nuisance 

arbitrations . . . settled without 

admission of guilt’’ and ‘‘disclosure 

events . . . filed by a compensated nonattorney representative’’; 106 (11) narrow 

the term ‘‘Registered Persons In-Scope’’ 

to exclude persons who were registered 

with a member firm for only one day 

and include only those who have been 

employed with a member firm for at 

least 180 days; 107 (12) reconsider the 

inclusion in the criteria of settlements of 

arbitrations and regulatory actions,108

disclosure events against persons who 

were named due to their position within 

a chain of supervision,109 and 

‘‘allegation-driven’’ disclosures; 110 and 

(13) account for widespread product or 

market collapse that could result in a 

high number of new disclosure 

events.111

Some commenters suggested broader 

criteria, including requests to: (1) Lower 

the dollar threshold for settlements; 112

(2) increase the lookback period; 113 (3) 

include financial disclosures like 

judgments, liens, bankruptcies and 

compromises; 114 (4) include noninvestment related civil matters that 

involve dishonesty, deceit, or reckless 

or intentional wrongdoing; 115 (5) 

include internal reviews by other 

member firms; 116 (6) include a category 

based on specific products sold by the 

member firm; 117 and (7) include 

expunged Registered Person 

Adjudicated Events.118

Two commenters criticized or 

questioned how the metrics thresholds 

were based on firm size.119

In response to the comments about 

the proposed criteria’s underlying 

categories and metrics, FINRA made 

two modifications to the proposal in 

Regulatory Notice 19–17. First, as 

explained above, the revised proposal 

uses a narrower definition of Registered 

Persons Associated with Previously 

Expelled Firms. Instead of an unlimited 

lookback over a registered person’s 

entire career and no limitations based 

on the duration of the person’s 

registration with the expelled firm as 

originally proposed in Regulatory 

Notice 19–17, the revised proposal 

would include only those registered 

persons who were registered with a 

previously expelled firm for at least one 

year and within the five years prior to 

the date the Preliminary Criteria for 

Identification are calculated. Persons’ 

previous registrations with expelled 

firms (i.e., beyond the five-year 

lookback) would not be counted in this 

category or towards an employing 

member firm’s Expelled Firm 

Association Metric. Moreover, FINRA 

believes using a five-year lookback 

would be consistent with the lookback 

periods for the other metrics.120

Second, FINRA believes that the 

comments about the termination and 

internal review events demonstrated a 

need for clarification of the relevant 

metric. The revised proposal would 

make clear that termination and internal 

review disclosures concerning a person 

that a member firm terminated would 

not impact that member firm’s own 

Registered Person Termination and 

Internal Review Metric; rather, those 

disclosures would only impact the 

metrics of member firms that 

subsequently register the terminated 

individual. 

Otherwise, FINRA has decided to 

retain the rest of the Preliminary Criteria 

for Identification as originally proposed 

in Regulatory Notice 19–17. Many of the 

commenters’ other proposed alternative 

definitions and criteria comments 

concern issues that FINRA already 

considered and addressed in the 

economic assessment in Regulatory 

Notice 19–17, and the comments have 

not persuaded FINRA that any changes 

would be more efficient or effective at 

addressing the potential for future 

Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 78561 

121AdvisorLaw, Cambridge, Moss & Gilmore, 

Worden. 

122AdvisorLaw, Cambridge, Moss & Gilmore, 

Worden. 

123AdvisorLaw. 

124MIRC, NASAA, PIABA, PIRC. 

125MIRC, NASAA, PIABA, PIRC. 

126NASAA, PIABA. 

127Cambridge. 

128Cetera, PIRC, St. John’s SOL. 

129 Joseph S. Amundsen, Exchange Act Release 

No. 69406, 2013 SEC LEXIS 1148, at *41 (Apr. 18, 

2013), aff’d, 575 F. App’x 1 (D.C. Cir. 2014). 

130FINRA recently filed a proposed rule change 

that would amend the Codes of Arbitration 

Procedure for Customer and Industry Disputes 

(‘‘Codes’’) to modify the current process relating to 

requests to expunge customer dispute information. 

The proposed rule change would amend the Codes 

to: (1) Impose requirements on expungement 

requests filed either during an investment-related, 

customer-initiated arbitration or separate from a 

customer-initiated arbitration (‘‘straight-in 

requests’’); (2) establish a roster of arbitrators with 

enhanced training and experience from which a 

three-person panel would be randomly selected to 

decide straight-in requests; (3) establish procedural 

requirements for expungement hearings; and (4) 

codify and update the best practices of the Notice 

to Arbitrators and Parties on Expanded 

Expungement Guidance that arbitrators and parties 

must follow. See Securities Exchange Act Release 

No. 90000 (September 25, 2020), 85 FR 62142 

(October 1, 2020) (Notice of Filing of File No. SR– 

FINRA–2020–030); Notice to Arbitrators and Parties 

on Expanded Expungement Guidance, available at 

https://www.finra.org/arbitration-andmediation/ 

notice-arbitrators-and-parties-expandedexpungement-guidance). In addition, FINRA 

recently amended the Codes to apply minimum fees 

to requests to expunge customer dispute 

information. See Securities Exchange Act Release 

No. 88945 (May 26, 2020), 85 FR 33212 (June 1, 

2020) (Order Approving Filing of File No. SR– 

FINRA–2020–005); Regulatory Notice 20–25 (July 

2020). 

customer harm presented. As FINRA 

explained in Regulatory Notice 19–17, 

the primary benefit of the proposed rule 

change would be to reduce the risk and 

associated costs of possible future 

customer harm by member firms that 

meet the proposed criteria, by applying 

additional restrictions on firms 

identified as Restricted Firms and by the 

increased scrutiny that will likely result 

by these firms on their brokers. In 

developing this proposal, one of the 

guiding principles was to provide 

transparency regarding the proposal’s 

application, so that firms could largely 

identify with available data the specific 

set of disclosure events that would 

count towards the proposed criteria and 

whether the firm had the potential to be 

designated as a Restricted Firm. This is 

why—unlike many of the alternatives 

suggested by commenters—FINRA’s 

proposal is based on events disclosed on 

the Uniform Registration Forms, which 

are generally available to firms and 

FINRA. 

Several commenters expressed 

concern over how the Preliminary 

Criteria for Identification relies on data 

in the Uniform Registration Forms.121

Several commenters contended that 

there are underlying problems with the 

information disclosed through the 

Uniform Registration Forms, stemming 

primarily from the allegation-based 

disclosures that must be made and 

frivolous arbitrations.122 One 

commenter pointed to the number of 

expungements as evidence of the 

unreliability of the disclosure data.123

NASAA, PIABA, and some law school 

clinics raised a concern from a different 

perspective, writing that expungements 

are granted too frequently and will 

cause the annual calculation of the 

Preliminary Criteria for Identification to 

not identify all firms that pose the 

highest risks.124 Relatedly, several 

commenters suggested that the proposed 

Preliminary Criteria for Identification 

highlights problems with 

expungements, including that the 

proposal will incentivize even more 

expungement requests,125 that FINRA 

should simultaneously pursue 

meaningful expungement reform,126 or 

that FINRA should make it easier to 

expunge certain customer dispute 

information because Uniform 

Registration Form disclosures would 

now carry greater weight.127 Some 

commenters predicted that the proposal 

will create perverse incentives to avoid 

making required disclosures on the 

Uniform Registration Forms.128

FINRA believes, however, that the 

data reported on the Uniform 

Registration Forms is reliable enough on 

which to base proposed Rule 4111. 

FINRA rules require firms and 

individuals to make accurate 

disclosures, and they could be subject to 

disciplinary action and possible 

disqualification if they fail to do so. 

Regulators are the source of disclosures 

on Form U6. FINRA’s Department of 

Credentialing, Registration, Education 

and Disclosure conducts a public 

records review to verify the 

completeness and accuracy of criminal 

disclosure reporting. And although 

some commenters take issue with some 

of the specific events that must be 

disclosed on the Uniform Registration 

Forms, the SEC has taken the position 

that ‘‘essentially all of the information 

that is reportable on the Form U4 is 

material.’’ 129

FINRA recognizes that the number of 

expungement requests may increase as a 

result of this proposal. However, the 

existing regulatory framework and 

FINRA rules are designed to ensure that 

expungements are granted only after a 

neutral adjudicator (arbitrator or judge) 

concludes that expungement is 

appropriate. Furthermore, OCE has 

tested the proposed thresholds in 

several ways using the existing Central 

Registration Depository (‘‘CRD’’) data, 

including comparing the firms captured 

by the proposed thresholds to the firms 

that have recently been expelled, that 

have unpaid arbitration awards, that 

Department staff has identified as high 

risk for sales practice and fraud based 

on the Department’s own risk-based 

analysis, and that subsequently had 

additional disclosures after 

identification. Moreover, FINRA is 

actively engaged in efforts to address 

concerns with the current system of 

arbitration-based expungement of 

customer allegations from brokers’ 

records.130 FINRA’s planned review of 

proposed Rule 4111 would necessarily 

account for any future amendments to 

the expungement process and any 

associated impact on the underlying 

data in CRD. Accordingly, FINRA does 

not believe that the proposal would 

directly result in inappropriate 

expungements being granted or 

appropriate expungements being not 

granted, or that it would undermine the 

quality of the underlying CRD 

information used for the proposed 

metrics. 

5. Annual Calculation of the 

Preliminary Criteria for Identification 

Massachusetts contends that 

calculations of the Preliminary Criteria 

for Identification should occur more 

than annually. FINRA appreciates this 

suggestion, but believes that it should 

gain experience with an annual 

requirement before considering whether 

to conduct more frequent reviews. 

SIFMA requested that the proposal 

provide more transparency around the 

variables for the annual calculation of 

the Preliminary Criteria for 

Identification, so that firms can have the 

same ability as FINRA to calculate 

whether they meet the thresholds. For 

example, SIFMA explained that firms 

will need specific information about the 

Evaluation Date to make the 

calculations on their own. 

FINRA agrees that additional clarity 

should be provided regarding the timing 

of the calculation. Proposed Rule 4111 

is intended to be transparent enough so 

that member firms can understand 

whether they are at risk of being subject 

to additional obligations, and member 

firms will need to know the exact 

Evaluation Date to do their own 

calculations. FINRA would announce in 

a Regulatory Notice the first Evaluation 

Date no less than 120 days before the 

first Evaluation Date. FINRA also would 

announce that subsequent Evaluation 

78562 Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 

131Such a year-round worksheet could be a tool 

for member firms to monitor their status in relation 

to the Preliminary Criteria for Identification, but not 

a determinate one. Whether a member firm will 

meet the criteria could only be definitively 

established on the annual Evaluation Date. 

132See Securities Exchange Act Release No. 

88600 (April 8, 2020), 85 FR 20745 (April 14, 2020) 

(Notice of Filing of File No. SR–FINRA–2020–011). 

Dates would be on the same month and 

day each year, except when that date 

falls on a Saturday, Sunday, or federal 

holiday, in which case the Evaluation 

Date would be on the next business day. 

Some commenters requested that 

FINRA provide member firms with 

assistance in determining if they meet 

the Preliminary Criteria for 

Identification. For example, CAI 

requested clarification on whether 

FINRA would provide advance notice to 

firms that meet or come close to meeting 

the Preliminary Criteria for 

Identification. Cambridge wrote that 

FINRA should notify firms in advance 

that they meet the criteria and publish 

a list of expelled firms. SIFMA 

requested that FINRA provide an 

electronic worksheet, available year 

round. 

FINRA does not currently plan to 

provide member firms with advance 

notice about whether they would meet, 

or are close to meeting, the Preliminary 

Criteria for Identification, because the 

calculation under the proposal would 

occur annually, not on a rolling basis, 

and calculating the events included in 

the Preliminary Criteria for 

Identification based on an earlier date 

may lead to different results. Moreover, 

the proposed rule is designed to be 

transparent enough to allow member 

firms to perform their own calculations. 

FINRA agrees, however, that additional 

guidance and resources could facilitate 

member firms’ independent 

calculations, and FINRA will explore 

ways to provide helpful resources. For 

example, this could include mapping 

the Disclosure Event and Expelled Firm 

Association Categories to the relevant 

disclosure questions on the Uniform 

Registration Forms. It also could include 

making available, year round, a 

worksheet that member firms could 

populate with the number of Registered 

Persons In-Scope, the number of 

disclosure events in each category, and 

the number of Registered Persons 

Associated with Previously Expelled 

Firms to generate information about 

whether the member firm meets or is 

close to meeting the Preliminary Criteria 

for Identification.131 FINRA also would 

consider making available to member 

firms a list of expelled firms, if that 

information is burdensome for member 

firms to obtain on their own. 

6. One-Time Staffing Reduction 

Several comments addressed the 

proposal’s one-time staffing reduction 

opportunity. PIRC expressed support for 

the one-time staffing reduction 

opportunity, commenting that it will 

have the benefit of lowering the number 

of representatives who have repeatedly 

harmed investors. Joseph Stone 

commented that member firms should 

have several opportunities to reduce 

staff, not just one. Westpark stated that 

the one-time opportunity should renew 

after three years. HLBS called the 

staffing reduction opportunity the 

proposal’s ‘‘most alarming and punitive 

measure,’’ because member firms would 

‘‘conduct a mass termination not 

because of an independent business 

decision but because . . . failing to do 

so . . . would essentially result in 

financial ruin.’’ 

FINRA has retained the one-time 

staffing reduction opportunity as 

originally proposed. The one-time 

staffing reduction opportunity is 

intended to provide another procedural 

protection for member firms, because it 

would give a firm that meets the 

Preliminary Criteria for Identification 

one opportunity to reduce staff so as to 

fall below the criteria’s thresholds. It 

has been designed as only a single 

opportunity to deter member firms from 

resurrecting a high-risk business model 

after a staff reduction. Moreover, FINRA 

does not agree with HLBS’s assertion 

that the proposed staffing reduction 

opportunity removes member firms’ 

independence to make business 

decisions. FINRA believes that a 

member firm that meets the Preliminary 

Criteria for Identification, possibly 

inadvertently, in one year should have 

the choice of whether to exercise the 

staffing reduction option. Furthermore, 

a firm that chooses to exercise the 

staffing reduction option would have 

the independence to decide how to 

proceed going forward, with the 

knowledge that it has once met the 

Preliminary Criteria for Identification, 

that the preliminary criteria are fully 

transparent, and that it would not have 

another opportunity to reduce staff to 

avoid a review under Rule 4111. 

Better Markets stated that the staffing 

reduction opportunity needs to better 

protect investors, by prohibiting other 

high-risk firms from hiring terminated 

persons, prohibiting any firms from 

hiring the terminated persons for one 

year, or requiring that staff reductions 

commence with brokers with the 

highest number of disclosure events or 

with frequent and severe violations. 

FINRA is already pursuing, however, a 

separate proposal that would require a 

member firm to request a materiality 

consultation with FINRA staff when a 

person who has one final criminal 

matter or two ‘‘specified risk events’’ 

seeks to become an owner, control 

person, principal or registered person of 

the member.132 That related proposal 

would potentially impact persons 

terminated pursuant to the staffing 

reduction opportunity. 

7. Consultation 

Westpark commented that proposed 

Rule 4111 does not give firms enough 

time to prepare for the Consultation. 

Because the proposed rule sets tight 

deadlines for the Department’s decision, 

FINRA agrees that the proposed 

deadlines for the Consultation would 

also be tight. For this reason, FINRA has 

revised proposed Rule 4111(d)(2) to 

require that the letter scheduling the 

Consultation provide at least seven 

days’ notice of the Consultation date, 

and also give the member firm the 

opportunity to request a postponement 

of the Consultation for good cause 

shown. Postponements would not 

exceed 30 days unless the member firm 

establishes the reasons a longer 

postponement is necessary. 

Other comments about the 

Consultation did not prompt FINRA to 

make revisions. For example, FSI 

commented that the Consultation 

should be an opportunity for FINRA to 

work collaboratively with the identified 

firm. FINRA believes the Consultation is 

already intended to give member firms 

an opportunity to meet with FINRA and 

demonstrate why the calculation of the 

Preliminary Criteria for Identification 

should not include certain events or 

provide a rationale as to why the firm 

should not be required to maintain the 

maximum Restricted Deposit 

Requirement. As such, FINRA does not 

believe further revisions are necessary. 

Chiu and Luxor wrote that although 

proposed Rule 4111 would allow 

members during the Consultation to 

request a waiver of the maximum 

Restricted Deposit Requirement for 

financial hardship reasons, member 

firms will not do so because it would 

deter recruitment and cause brokers to 

leave. Allowing member firms to 

demonstrate undue financial hardship, 

however, is consistent with the intent of 

the Restricted Deposit Requirement that 

it not significantly undermine the 

member firm’s continued financial 

stability and operational capability as an 

ongoing enterprise over the next 12 

months. Moreover, FINRA anticipates 

Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 78563 

133Cambridge. 

134Cambridge. 

135Cambridge. 

136Westpark. 

137Rockfleet. 

138Chiu. 

139Brooklight. 

140Moss & Gilmore. 

141Moss & Gilmore. 

142Chiu, IBN, Whitehall. Whitehall also wrote 

that the proposal entails ‘‘FINRA . . . demanding 

funds for itself’’ and ‘‘using [members] as bank 

accounts to expand’’ FINRA’s activities. Nothing in 

the proposal, however, results in FINRA receiving 

any assets from firms. At all times, a Restricted 

Firm would continue to own the assets that it 

maintains in a Restricted Deposit Account. 

143Whitehall. 

144See proposed Rule 4111.01. 

145Westpark commented that proposed Rule 4111 

is inconsistent with Section 15A(b)(5) of the 

Exchange Act, which requires that FINRA’s rules 

‘‘provide for the equitable allocation of reasonable 

dues, fees, and other charges among members.’’ The 

proposed Restricted Deposit Requirement, however, 

is not a due, fee or charge. Assets that a member 

maintains in a Restricted Deposit Account would 

remain the member’s assets; they would not be 

provided to, used by, or owned by FINRA. 

that member firms subject to the 

requirement will not be deterred from 

asserting that a Restricted Deposit 

Requirement would cause an undue 

financial hardship, given that such 

arguments could lead to a reduced 

Restricted Deposit Requirement or no 

deposit requirement at all. Moreover, 

the proposal would not make public any 

such assertions by a member firm. 

In a comment related to the 

Consultation, FSI commented that firms 

should not shoulder the risk of 

misidentification, and that FINRA 

should have to demonstrate its reasons 

for continuing the review process for 

firms preliminarily identified as high 

risk. Proposed Rule 4111 only places 

burdens of proof on the small number 

of firms that meet the Preliminary 

Criteria for Identification and that the 

Department determines, after 

conducting its initial evaluation, 

warrants further review. Each of these 

firms would have the opportunity to 

overcome the presumption that it 

should be designated as a Restricted 

Firm and subject to the maximum 

Restricted Deposit Requirement. Under 

the proposed rule, the affected firms 

would initiate this process because they 

would be in the best position to provide 

the relevant information. For example, 

proposed Rule 4111(d)(1)(A) would 

provide that a member firm may 

overcome the presumption that it 

should be designated as a Restricted 

Firm by clearly demonstrating that the 

Department’s calculation included 

events that should not have been 

included because, for example, they are 

duplicative, involving the same 

customer and the same matter, or are 

not sales practice related. The member 

firm, not Department staff, is in the best 

position to provide that kind of 

information about the disclosure data. 

Likewise, the member firm would be in 

the best position to demonstrate, 

pursuant to proposed Rule 

4111(d)(1)(B), that it would face undue 

financial hardship if it were required to 

maintain the maximum Restricted 

Deposit Requirement. 

8. Restricted Deposit Requirement 

FINRA also received general 

comments concerning the proposed 

Restricted Deposit Requirement 

concept. Some commenters were 

generally opposed to the proposed 

requirement. Their reasons include: (1) 

A deposit requirement may trigger 

unintended consequences which result 

in harm to the investing public; 133 (2) 

a deposit requirement may lead to 

competitive disadvantages, because 

members without significant retained 

earnings may receive exceptions, while 

members with greater working capital 

would not; 134 (3) the only members 

likely to be able to satisfy a deposit 

requirement would be ones that do not 

anticipate being subject to the rule; 135

(4) a deposit requirement would 

‘‘result[ ] in cash flow problems, 

increased borrowing, and layoffs’’ 136

and a ‘‘devastating economic impact’’ 

on the broker-dealer and its employees, 

customers, vendors, and 

counterparties; 137 (5) restricted funds 

could be better used for other 

purposes; 138 (6) there is little evidence 

why restricted deposits are 

necessary; 139 (7) requiring ‘‘up front 

financing of uninsured claims, many of 

which are specious, would have 

negative net capital implications’’; 140

(8) any assertion that unpaid arbitration 

awards is rampant and justifies the 

deposit requirement is false; 141 (9) a 

deposit requirement would put small 

firms out of business and result in less 

choice for investors; 142 and (10) many 

members do not have sufficient cash to 

hold as restricted deposits.143

Other commenters were generally 

supportive of the Restricted Deposit 

Requirement concept. PIRC said that 

Restricted Deposit Requirements should 

help deter misconduct and also help 

FINRA ‘‘rein in Restricted Firms that 

shut down and reconstitute themselves 

in an attempt to avoid paying 

settlements and awards.’’ SIFMA opined 

that the proposal ‘‘appropriately 

embraces the ‘front-end’ approach’’ to 

addressing unpaid awards by ‘‘seeking 

to identify those small number of firms 

with an extensive history of misconduct 

and/or relevant disclosure events, and 

as appropriate, requiring [them] to set 

aside cash deposits or qualified 

securities that could be applied to . . . 

unpaid awards.’’ 

FINRA’s proposal continues to 

provide that the Department could 

impose a Restricted Deposit 

Requirement on Restricted Firms. 

FINRA believes that a financial 

requirement is the measure most likely 

to motivate Restricted Firms to change 

behavior. As such, the Restricted 

Deposit Requirement is an essential 

feature of the proposal to protect 

investors, with the possible secondary 

benefit of helping to address the issue 

of unpaid arbitration awards. Moreover, 

the proposal attempts to counteract 

firms’ preemptively withdrawing capital 

by instructing the Department to 

consider several financial factors—not 

just net capital—when determining a 

Restricted Deposit Requirement. In 

addition, FINRA believes the 

implications of a Restricted Deposit 

Requirement on a member firm’s net 

capital levels—that a member firm 

would have to deduct deposits in 

Restricted Deposit Accounts in 

determining the firm’s net capital 144— 

is one reason why the proposal would 

incentivize member firms to avoid 

becoming Restricted Firms, not a reason 

to abandon the Restricted Deposit 

Requirement concept. Finally, the 

proposal contemplates that the 

Restricted Deposit Requirement should 

correlate to the financial realities at the 

member firm, and allows the firm to 

attempt to demonstrate that it would 

impose undue financial burdens.145

9. Calculating a Restricted Deposit 

Requirement 

FINRA received several comments 

about the Department’s determination of 

a Restricted Deposit Requirement. CAI 

expressed support for some of the 

proposed factors that the Department 

would consider when calculating the 

Restricted Deposit Requirement. In 

addition, CAI endorsed the proposed 

limitation in proposed Rule 4111(i)(15) 

that the maximum Restricted Deposit 

Requirement be an amount that would 

not significantly undermine the 

continued financial stability and 

operational capability of the firm as an 

ongoing enterprise over the next 12 

months. 

Several commenters expressed 

concerns about the proposed factors that 

the Department would consider when 

calculating the Restricted Deposit 

Requirement. For example, Sichenzia 

called the factors ‘‘arbitrary’’; some 

commenters opposed the inclusion of, 

or requested modifications to, the 

78564 Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 

146Moss & Gilmore, Network 1, Sichenzia, 

Westpark. 147Moss & Gilmore. 

148Network 1, Sichenzia. 149Network 1, Rockfleet. 150MIRC, PIABA, PIRC. 

‘‘Covered Pending Arbitration Claims’’ 

factor; 146 Network 1 commented that 

the Restricted Deposit Requirement 

should not consider ‘‘bona fide nuisance 

claims brought in arbitration’’; 

Cambridge objected to the ‘‘gross 

revenues’’ factor, on the grounds that 

that factor would not contemplate the 

firm’s contractual obligations for which 

the revenues have already been 

allocated; and Moss & Gilmore objected 

to considering ‘‘concerns raised during 

FINRA exams’’ on the grounds that 

‘‘novice examiners . . . [often] conduct 

the front-line examinations.’’ 147

Some commenters believed that the 

list of factors should be expanded. For 

example, two commenters requested 

that FINRA account for instances in 

which the firm has insurance coverage 

for arbitration claims.148 MIRC 

commented that the Covered Pending 

Arbitration Claims factor should be 

expanded to include other kinds of 

pending claims that could lead to 

unpaid awards, not just ones limited to 

the arbitration setting. PIABA requested 

that the Restricted Deposit Requirement 

calculation also take into account the 

nature and extent of harm that the 

Restricted Firm has done in the past. 

As explained above, FINRA has made 

several revisions to the factors that the 

Department would consider when 

determining a maximum Restricted 

Deposit Requirement. The ‘‘annual 

revenues’’ and ‘‘net capital 

requirements’’ factors proposed in 

Regulatory Notice 19–17 have been 

modified to ‘‘revenues’’ and ‘‘net 

capital,’’ and ‘‘assets,’’ ‘‘expenses,’’ and 

‘‘liabilities’’ have been added as factors. 

In addition, FINRA has clarified that 

unpaid arbitration awards against a 

member firm’s Associated Persons is 

one relevant factor. FINRA believes this 

modified and expanded list of factors 

would lead to a more complete 

consideration of the firm’s financial 

situation. 

FINRA has retained the other 

proposed factors, however, because they 

appropriately and accurately describe 

the factors, financial and otherwise, that 

would be most relevant to the 

Department when calculating a 

Restricted Deposit Requirement. This 

includes the Covered Pending 

Arbitration Claims factor. Because one 

purpose of the Restricted Deposit 

Requirement is to preserve some of a 

Restricted Firm’s assets for potential 

payment of arbitration awards, FINRA 

believes that purpose is served by 

allowing the Department to consider 

Covered Pending Arbitration Claims 

when determining a Restricted Deposit 

Requirement. At the same time, the 

revised proposed rule also adds as a 

factor the member’s ‘‘insurance coverage 

for customer arbitration awards or 

settlements.’’ FINRA believes that if 

Restricted Firms were able to procure 

errors and omissions insurance policies 

or other kinds of insurance coverage for 

some or all of the kinds of claims that 

customers typically bring in 

arbitrations, at meaningful coverage 

amounts, that could warrant a reduced 

Restricted Deposit Requirement and 

would be behavior to encourage. 

Two commenters contended that 

because potential liabilities relating to 

pending arbitrations must be accrued on 

financial statements, a Restricted 

Deposit Requirement that is based in 

part on Covered Pending Arbitration 

Claims (which would be a nonallowable asset) would ‘‘double[ ] the 

net capital impact.’’ 149 While there 

would not usually be a double impact— 

accruals of contingent liabilities based 

on pending arbitrations usually reflect 

only a small percentage of the potential 

liability—a member firm’s net capital 

level could be impacted by a Restricted 

Deposit Requirement based in part on 

Covered Pending Arbitration Claims and 

a member firm’s accruals of potential 

liabilities stemming from the same 

pending arbitration claims. For this 

reason, the Department’s consideration 

of Covered Pending Arbitration Claims 

could take into account whether any 

liability accruals for those same claims 

warrant a reduction in the Restricted 

Deposit Requirement. It should be 

noted, however, that the purposes of 

accruing a liability on a financial 

statement are different from the 

purposes of the proposed Rule 4111 

requirement to deposit money in a 

Restricted Firm’s segregated, restricted 

account. 

In addition to comments about the 

specific factors that the Department 

would consider, some commenters 

requested that the proposal describe 

with more specificity how the Restricted 

Deposit Requirement would be 

calculated or establish caps. CAI, for 

example, requested that FINRA develop 

specific limitations such as caps and a 

formula that focuses on the correlation 

between revenues that may give rise to 

unpaid arbitration awards (e.g., penny 

stock sales) and unpaid arbitration 

award amounts. FSI suggested that 

FINRA use published guidelines to 

provide transparency. Westpark 

suggested that the proposal should cap 

the Restricted Deposit Requirement at a 

specified percentage of required net 

capital amounts or a percentage of 

average net income over a three-year 

lookback period. Whitehall asked 

whether FINRA would have a formula 

for calculating the Restricted Deposit 

Requirement. MIRC suggested that 

FINRA should impose Restricted 

Deposit Requirements that are sufficient 

to meet all unpaid awards and pending 

claims related to products and product 

types. 

FINRA has not proposed a uniform 

formulaic approach for calculating the 

Restricted Deposit Requirement because 

of the range of relevant factors and 

differences in member firms’ business 

models, operations, and financial 

conditions. In addition, although 

formulas do provide objective, 

transparent methodologies, here they 

would allow member firms the 

opportunity to manipulate their revenue 

numbers during the calculation periods. 

For these reasons, FINRA has retained 

the factor-based, principles-based 

approach to determining a Restricted 

Deposit Amount. 

10. Impact on Unpaid Arbitration 

Awards 

PIABA contended that the proposal 

will not solve the issue of unpaid 

arbitration awards, because there is no 

indication that the Restricted Deposit 

Requirements will be sufficient to cover 

anticipated arbitration awards. 

Relatedly, several commenters 

requested that the proposal also provide 

more clarity on how the Restricted 

Deposit Requirement could be used to 

pay investor claims.150

Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 78565 

151See FINRA Rule 9554. Under FINRA rules, 

unless a respondent has specified defenses to nonpayment, the respondent must pay a monetary 

award within 30 days of receipt. See FINRA Rule 

12904(j). In addition, firms with unpaid awards 

cannot re-register with FINRA and individuals 

cannot register as representatives of any member 

firm, without paying or discharging the outstanding 

award. 

152See proposed Rule 4111(f)(1) and 

(f)(3)(B)(ii)(a). 

With respect to the relationship 

between proposed Rule 4111 and 

unpaid arbitration awards, FINRA notes 

that FINRA rules currently prohibit 

member firms or registered 

representatives who do not pay 

arbitration awards in a timely manner 

from continuing to engage in the 

securities business under FINRA’s 

jurisdiction.151 As to proposed Rule 

4111, it was designed to address a 

broader range of investor protection 

concerns posed by firms and 

individuals with a significant history of 

misconduct, including but not limited 

to unpaid arbitration awards. The Rule 

would apply to firms who, based on 

statistical analysis of their prior 

disclosure events, are substantially more 

likely than their peers to subsequently 

have a range of additional events 

indicating various types of harm or 

potential harm to investors. 

Nevertheless, FINRA believes 

proposed Rule 4111 may have important 

ancillary effects in addressing unpaid 

customer arbitration awards. In 

particular, the Rule may deter behavior 

that could otherwise result in unpaid 

arbitration awards, by incentivizing 

firms to reduce their risk profile and 

violative conduct in order to avoid 

being deemed a Restricted Firm and 

becoming subject to the Restricted 

Deposit Requirement (or other 

conditions or restrictions). In addition, 

firms may be incentivized to obtain 

insurance coverage for potential 

arbitration awards, because such 

coverage would be taken into account in 

determining any Restricted Deposit 

Requirement. Moreover, and as 

explained above, the proposed rule 

includes several presumptions, 

applicable to the Department’s 

assessment of an application by a firm 

previously designated as a Restricted 

Firm for a withdrawal from a Restricted 

Deposit, that would further incentivize 

the payment of arbitration awards. 

FINRA has made several revisions to 

proposed Rule 4111(f) to make more 

clear the process that would guide the 

Department’s evaluation of a request for 

a withdrawal from a Restricted Deposit 

Account. As explained above, these 

include several presumptions of 

approval or denial that set forth how 

Covered Pending Arbitration Claims or 

unpaid arbitration awards would impact 

the Department’s evaluation. The 

presumptions of denial that would 

apply when a Restricted Firm or 

previously designated Restricted Firm 

applies for a withdrawal from a 

Restricted Deposit would still apply 

when the firm seeks to use the funds to 

satisfy unpaid arbitration awards; unless 

the presumption of denial can be 

overcome, those firms would generally 

need to satisfy unpaid arbitration 

awards using funds other than those in 

a Restricted Deposit Account.152 There 

would be a separate presumption that a 

request by a former member firm 

previously designated as a Restricted 

Firm to access its Restricted Deposit 

would be approved when it commits in 

the manner specified by the Department 

to use the amount it seeks to withdraw 

from its Restricted Deposit to pay the 

former member’s specified unpaid 

arbitration awards. 

PIABA also raised the concern that 

thinly capitalized firms would have 

smaller Restricted Deposit 

Requirements. A member’s thin 

capitalization at the time of the 

Consultation, however, would be only 

one factor of many that the Department 

would consider when determining a 

Restricted Deposit Requirement, and 

would not necessarily result in a lower 

requirement. 

11. Custodians of the Restricted Deposit 

Account 

Some commenters expressed concern 

about how proposed Rule 4111 would 

require the Restricted Deposit Account 

to be maintained with a bank or clearing 

firm. Rockfleet predicted that it will be 

unlikely that banks or clearing firms 

will create new policies and procedures 

for the small amount of Restricted 

Deposit Accounts that would result 

from the proposal. SIFMA commented 

that a number of clearing firms believe 

it would be problematic to custody a 

Restricted Deposit Account ‘‘given the 

clearing firm’s unique role in the 

relationship between an introducing 

broker and its clients,’’ and how the 

proposed rule would impose additional 

duties and responsibilities that are not 

now part of clearing firms’ systems and 

procedures. SIFMA also stated that 

custody by a clearing firm of the 

Restricted Deposit Requirement likely 

would not provide FINRA with the level 

of transparency that FINRA would want. 

The revised proposal retains the 

option for Restricted Firms to establish 

Restricted Deposit Accounts with 

clearing firms. FINRA believes that 

member firms have an existing 

relationship with their clearing firms 

and should be permitted to establish the 

Restricted Deposit Account with them if 

the parties choose. Nothing in the 

proposal requires clearing firms to 

establish Restricted Deposit Accounts. 

Where a clearing firm is unwilling or 

unable to establish these accounts, the 

proposal would permit Restricted Firms 

to establish such accounts at banks. 

SIFMA also commented that the 

proposal should be revised to expressly 

allow trust companies to maintain the 

accounts. FINRA believes that the 

original proposal includes many trust 

companies and so gives members 

sufficient options and flexibility. 

12. Comments Concerning Proposed 

Expedited Proceedings 

As originally proposed in Regulatory 

Notice 19–17, proposed Rule 9561(a) 

would have provided that any of the 

Rule 4111 Requirements imposed in a 

notice issued under proposed Rule 

9561(a) would be immediately effective; 

that, in general, a request for a hearing 

would not stay those requirements; and 

that, if a member firm requests a hearing 

of a Department determination that 

imposes a Restricted Deposit 

Requirement for the first time, the 

member firm would be required to 

deposit, while the expedited proceeding 

was pending, the lesser of either 50% of 

its Restricted Deposit Requirement or 

25% of its average excess net capital 

during the prior calendar year. Westpark 

commented that the expedited 

proceedings would not be meaningful 

because obligations would not be 

stayed. Luxor commented that the 

requirement to deposit a percentage of 

the Restricted Deposit Requirement 

would be ‘‘devastating.’’ 

78566 Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 

153See FINRA Rule 9559(d) (providing that 

Hearing Officers preside over, and act as the sole 

adjudicator for, proceedings initiated under Rules 

9553 (failures to pay FINRA dues, fees and other 

charges), 9554 (failures to comply with arbitration 

awards or related settlements or orders of 

restitution or settlements providing for restitution), 

and 9556(h) (subsequent proceedings for failures to 

comply with temporary or permanent cease and 

desist orders)). 

154Brooklight, Luxor, Network 1, Rockfleet, 

Westpark. 

155The right to have a Hearing Officer’s decision 

reviewed by the SEC would be governed by Section 

19 of the Exchange Act. 

156Some commenters (Network 1, Westpark) 

asserted that the proposed rule change would be 

unconstitutional, for a variety of reasons. FINRA, 

however, is not a state actor. 

In general, FINRA has retained the nostay provisions as originally proposed. 

FINRA believes that the proposed nostay provisions are a fundamental part 

of how the proposed rules would 

protect investors. Requiring Restricted 

Firms to comply with obligations 

imposed during the short pendency of 

an expedited proceeding would afford 

more immediate protections to investors 

from firms that pose outlier-level risks. 

Moreover, requiring immediate 

compliance with the Department’s 

decision would be similar to other 

situations in which firms and 

individuals posing substantial risks 

must abide by FINRA decisions before 

underlying proceedings are resolved, 

such as when disciplinary respondents 

must abide by temporary cease and 

desist orders before an underlying 

disciplinary proceeding is complete or 

comply with FINRA-imposed bars while 

an SEC appeal is pending. Nonetheless, 

FINRA believes that one aspect of the 

proposed no-stay provisions could be 

less burdensome without compromising 

its intended purpose. Accordingly, 

FINRA has revised the proposed rules to 

lower the proposed partial-deposit 

requirement to the lesser of 25% of the 

Restricted Deposit Requirement or 25% 

of the firm’s average excess net capital 

during the prior calendar year. 

Cetera commented that the hearings 

should be conducted by a Hearing Panel 

that includes two industry members and 

one Hearing Officer, because Hearing 

Officers are viewed as ‘‘not as 

objective.’’ FINRA has retained, 

however, the proposal to have Hearing 

Officers preside over the new expedited 

proceedings. Hearing Officers preside 

over several kinds of proceedings.153

And here, FINRA believes the need for 

swift proceedings as a result of the 

proposed no-stay provisions and to 

protect investors works in favor of the 

efficiency of Hearing Officer-only 

proceedings. Moreover, FINRA believes 

there are additional protections for the 

firms in the proposal, given that the 

Hearing Officer’s authority will be 

circumscribed and that the NAC’s 

Review Subcommittee will have the 

right to call the proceeding for review. 

Cetera commented that the proposed 

rule would require hearings to be held 

in expedited proceedings in an 

unreasonably short time after the firm 

receives notice of its Restricted Firm 

status. FINRA believes, however, that 

the proposed rule offers reasonable time 

limits and an opportunity to seek 

extensions. Under proposed Rules 

9561(a)(5) and 9559(f)(5), a member 

would be required to request a hearing 

within seven days after service of a 

notice of a determination that a firm is 

a Restricted Firm, and a hearing would 

be required to be held within 30 days 

after the member files that hearing 

request. In addition, under an existing 

provision in Rule 9559, the Hearing 

Officer could extend the time limits for 

holding the hearing for good cause 

shown or with the consent of all the 

parties. 

PIABA commented that under 

proposed Rule 9561(b), which would 

establish an expedited proceeding to 

address a member firm’s failure to 

comply with any requirements imposed 

pursuant to proposed Rule 4111, FINRA 

should be required to immediately 

suspend a non-compliant firm and 

should not have the discretion not to 

act. Although FINRA expects that noncompliant Restricted Firms would be a 

high priority for the Department of 

Enforcement, the revised proposal 

retains FINRA’s prosecutorial discretion 

to ensure that FINRA can use its best 

judgments about how to deploy its 

limited resources. 

Rockfleet commented that the 

proposed Rule 9561(b) expedited 

proceeding is counterintuitive, because 

canceling a Restricted Firm’s 

membership would result in FINRA 

losing any control over the firm. FINRA 

respectfully disagrees and believes that 

proposed Rule 4111 must provide a tool 

for FINRA to compel the immediate 

compliance with obligations that have 

been imposed pursuant to the rule. 

12. Procedural Protections 

Several commenters contended that 

the proposal is an attempt to impose the 

equivalent of sanctions while avoiding 

the fair-process requirements that would 

be present in a disciplinary proceeding, 

and to ban persons who are not 

statutorily disqualified.154 The proposed 

Rule 4111 process, however, is neither 

a disciplinary nor an eligibility 

proceeding, and the obligations that 

could be imposed pursuant to proposed 

Rule 4111 would not be sanctions 

imposed for violations. Furthermore, 

FINRA believes the proposal gives 

affected member firms substantial 

procedural protections. These include 

providing notice that a member has met 

the Preliminary Criteria for 

Identification and of the maximum 

Restricted Deposit Requirement; a onetime staffing reduction opportunity for 

firms that meet the Preliminary Criteria 

for Identification for the first time; a 

Consultation, which will allow affected 

firms to attempt to show why they 

should not be deemed Restricted Firms 

or be subject to the maximum Restricted 

Deposit Requirement; and the right to 

seek an expedited hearing before a 

Hearing Officer.155 These procedural 

protections are in addition to the 

Preliminary Criteria for Identification, 

which would be fully transparent and 

enable firms to monitor whether they 

are at risk of meeting the threshold 

criteria. 

Moreover, the proposal is neither 

intended nor designed to expel member 

firms and persons that are not 

statutorily disqualified. In this regard, 

FINRA notes that the rule text contains 

express language that the Department 

determine a maximum Restricted 

Deposit Requirement that ‘‘would not 

significantly undermine the continued 

financial stability and operational 

capability of the firm as an ongoing 

enterprise over the next 12 months,’’ 

and also contemplates situations in 

which Restricted Firms remain member 

firms for years. Furthermore, persons 

terminated pursuant to the Rule 4111 

staffing reduction opportunity would be 

permitted to seek employment with any 

other member firm and allowed to apply 

to re-associate with the Restricted Firm 

after one year.156

13. Unintended Consequences 

Rockfleet expressed concern that 

clearing firms will terminate clearing 

agreements for firms deemed to be 

Restricted Firms, and that firms using 

tri-party clearing agreements could be 

impacted through no fault of their own. 

CAI raised a concern that being deemed 

as a Restricted Firm could have 

ramifications for firms that are parties to 

selling agreements. FINRA appreciates 

that proposed Rule 4111 may have 

potential unintended consequences, and 

plans to examine issues like those when 

FINRA reviews proposed Rule 4111 

after gaining sufficient experience under 

the rule. 

14. Public Disclosure Issues 

Several commenters addressed 

whether there should be public 

disclosure of a firm’s status as a 

Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 78567 

157Cetera, FSI. 

158Better Markets, Massachusetts, NASAA, 

SIFMA, St. John’s SOL. 

159 It should be noted that information about a 

firm’s status as a Restricted Firm, and any restricted 

deposit it must maintain, could become publicly 

available through existing sources or processes. 

Such disclosures could occur, for example, through 

Form BD, Form CRS, or financial statements, or 

when a Hearing Officer’s decision in an expedited 

proceeding is published pursuant to FINRA’s 

publicity rule. 

160See supra note 5. 

Restricted Firm. Some opposed any 

disclosure at all, warning that disclosure 

could adversely impact the affected 

firms, and would make it more likely 

the firm would fail.157 Several 

commenters, particularly regulators and 

public advocacy groups, argue that 

FINRA should disclose the names of 

Restricted Firms to the public or, at 

least, to other regulators or clearing 

firms.158

FINRA believes the aim of the 

proposal is to address the risks posed by 

Restricted Firms by imposing 

appropriate restrictions on them and, at 

the same time, providing them with 

opportunities and incentives to remedy 

the underlying concerns (e.g., the onetime staff reduction, the opportunity to 

roll off the Restricted Firms list). 

Because requiring FINRA to publicly 

disclose a firm’s Restricted Firm status 

may potentially interfere with those 

purposes, FINRA is not proposing to 

require the public disclosure of a firm’s 

status as a Restricted Firm at this time. 

FINRA believes that it is necessary to 

gain meaningful experience with the 

proposed rule to evaluate the impact of 

creating an affirmative disclosure 

program.159

15. Economic Impact Assessment 

Rockfleet commented that the 

proposal appears to be reverse 

engineered to target firms that FINRA 

has already chosen. As discussed above, 

the proposed Preliminary Criteria for 

Identification are based on metrics that 

are replicable and transparent to FINRA 

and the affected member firms, and are 

intended to identify firms that pose far 

greater risks to their customers than 

other firms. One identifier of these types 

of firms is that they and their brokers 

generally have substantially more 

Registered Person and Member Firm 

Events compared to their peers. This is 

consistent with a growing academic 

literature that provides evidence on past 

disciplinary and other regulatory events 

associated with a firm or individual 

being predictive of similar future 

events.160 These patterns indicate a 

persistent, albeit limited, population of 

firms with a history of misconduct that 

may not be acting appropriately as a 

first line of defense to prevent customer 

harm by their brokers. Accordingly, the 

proposed rule is intended to strengthen 

FINRA’s toolkit to respond to these 

firms and brokers with a significant 

history of misconduct based on a 

proposed criteria that relies on 

regulatory and other disclosure events, 

similar to those used in the literature. 

FINRA also conducted several 

validations on the firms meeting the 

criteria, by reviewing the extent to 

which firms identified were 

subsequently expelled, associated with 

unpaid awards, or were associated with 

‘‘new’’ Registered Person and Member 

Firm Events. For example, these 

validations showed that the identified 

firms had on average approximately 

6.1–19.9 times more new disclosure 

events after their identification than 

other firms in the industry during the 

same period that would not have met 

the Preliminary Criteria for 

Identification. This suggests that the 

proposed criteria is effective in 

identifying firms that may be associated 

with additional events after 

identification, which is consistent with 

the literature’s finding on regulatory 

events being predictive of similar future 

events. 

Better Markets commented that the 

Economic Impact Assessment did not 

quantify the harm to investors when 

firms with a significant history of 

misconduct are permitted to continue 

engaging with investors. The proposed 

rule is intended to place additional 

restrictions on identified firms and 

increase scrutiny by these firms on their 

brokers. As a result, FINRA anticipates 

that the proposed rule will reduce the 

risk and associated costs of possible 

future customer harm and lead to 

improvements in the compliance 

culture, relative to the economic 

baseline of the current regulatory 

framework. The proposed rule is 

intended to create incentives for firms 

and brokers to limit or end practices 

that result in customer harm and 

provide increasing restrictions on those 

that choose not to alter their activities. 

Nonetheless, it is difficult to predict or 

quantify, before the proposed rule is 

implemented, the extent to which firms 

may continue to engage in harmful 

activities despite any additional 

restrictions imposed. However, FINRA 

plans to review the proposed rule after 

gaining sufficient experience with it, at 

which time FINRA will assess the rule’s 

ongoing effectiveness and efficiency. 

Westpark wrote that FINRA should 

analyze how many brokers who are 

currently licensed and in good standing 

would become ‘‘unemployable’’ if the 

proposed rule were approved. FINRA’s 

Economic Impact Assessment of the 

proposed rule includes the economic 

impacts on firms hiring and registered 

persons seeking employment. For 

example, as discussed above, FINRA 

estimates that during the 2013–2019 

review period only one to two percent 

of the registered persons had any 

qualifying events in their regulatory 

records. Accordingly, 98%–99% of the 

registered persons (with no qualifying 

events) should have no adverse 

economic impacts associated with their 

employment opportunities. Further, the 

vast majority of member firms, 

approximately 98%, would likely be 

able to employ most of the individuals 

seeking employment in the industry— 

including ones who have some 

disclosures—without coming close to 

meeting the Preliminary Criteria for 

Identification. Accordingly, FINRA 

believes that these anticipated economic 

impacts would likely be limited to a 

small proportion of registered persons 

and member firms, particularly in cases 

where registered persons with 

disclosures are seeking employment at 

firms at or near the Preliminary Criteria 

for Identification. 

Westpark commented that FINRA 

should back-test the impact of the 

proposed rule to cover a period that was 

not a bull market. The economic impact 

assessment evaluated the proposed 

criteria over the 2013–2019 period. 

Because of the criteria’s 5-year lookback 

period for adjudicated events, the 

evaluation included events that reached 

a resolution between 2009 and 2019, 

which includes the period of the global 

financial crisis. 

16. Suggested Alternatives or Additional 

Measures 

Several comments suggested 

alternatives to proposed Rule 4111. For 

example, several commenters suggested 

that FINRA improve how it uses its 

existing rules and programs. For 

example, Network 1 commented that 

FINRA’s enforcement program is 

already a practical solution for 

addressing ‘‘bad brokers.’’ Brooklight 

suggested that FINRA try to solve for 

any gaps in its enforcement authority 

and processes that prevent FINRA from 

dealing with the ‘‘few bad actors’’ 

motivating the proposal. ASA wrote that 

FINRA should pursue the expulsion of 

firms that do not carry out their 

supervisory obligations and act in ways 

that harm customers, and impose 

immediate lifetime bans on those who 

engage in certain egregious acts, such as 

theft of customer funds. ASA further 

commented that FINRA ‘‘has an 

obligation to penalize and, if necessary, 

revoke the licenses of bad actors,’’ and 

78568 Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 

161The Exchange Act includes fair procedure 

requirements for various SRO actions, including the 

disciplining of members and persons associated 

with members, and sets out the types of misconduct 

that presumptively exclude brokers from engaging 

in the securities business (identified as statutory 

disqualifications or ‘‘SDs’’). The Exchange Act and 

SEC rules thereunder also establish a framework 

within which FINRA evaluates whether to allow 

individuals who are the subject of a statutory 

disqualification. In addition, FINRA’s review of 

many SD applications is governed by the standards 

set forth in Paul Edward Van Dusen, 47 SEC. 668 

(1981), and Arthur H. Ross, 50 SEC. 1082 (1992). 

These standards provide that, in situations where 

an individual’s misconduct has already been 

addressed by the SEC or FINRA, and certain 

sanctions have been imposed for such misconduct, 

FINRA should not consider the individual’s 

misconduct when it evaluates an SD application. 

162Brooklight, Cetera, Rockfleet. 

163PIRC. 

164Sichenzia. 

165ASA. 

166PIRC. 

167Better Markets. 

168Better Markets. 

169St. John’s SOL. 

170Better Markets. 

171Better Markets. 

172Better Markets, Brooklight, Cambridge, Cetera, 

Luxor, Massachusetts, MIRC, PIRC. 

173See 15 U.S.C. 78c(a)(39) (defining ‘‘statutory 

disqualification’’). 

174Chiu. 

175AdvisorLaw. 

176Moss & Gilmore. 

177 17 CFR 200.30–3(a)(12). 

that ‘‘[i]f FINRA believes it lacks the 

authority or the tools necessary to stop 

the most egregious abuses, . . . then it 

should work with the . . . SEC, 

Congress and the industry to correct the 

problem.’’ Joseph Stone commented that 

FINRA should continue focusing on 

firms’ supervisory systems. 

As explained above, FINRA has a 

number of current programs through 

which it strives to prevent and deter 

misconduct by member firms and the 

individuals they hire. These tools have 

been effective in identifying and 

addressing a range of misconduct by 

individuals and firms, and FINRA has 

continued to strengthen them. Despite 

FINRA’s efforts, however, persistent 

compliance issues continue to arise in 

some member firms, as explained above. 

Thus, while FINRA continues to explore 

whether additional enhancements to 

existing programs, including relevant 

statutory or regulatory changes,161

would help FINRA target firms or 

individuals that engage in serious 

misconduct with greater speed and 

effectiveness, FINRA believes there 

remains a strong need to equip FINRA 

with authority to address more 

proactively the current risks posed by 

the limited population of firms with a 

significant history of misconduct. 

Some commenters proposed that, 

instead of a Restricted Deposit 

Requirement, FINRA should impose 

insurance or performance bond 

requirements,162 create a national 

investor recovery pool funded from 

fines that FINRA receives 163 or a 

restitution fund,164 or impose additional 

capital requirements on identified 

firms.165 FINRA believes these 

alternatives present challenges and is 

continuing to propose a Restricted Firm 

Obligations Rule that would authorize 

the imposition of Restricted Deposit 

Requirements. 

Some commenters proposed other 

alternatives for FINRA’s consideration. 

Chiu wrote that FINRA should instead 

focus attention on investor education 

and encouraged the creation of more 

tools like the Senior Helpline. Colorado 

FSC recommended that FINRA assign 

‘‘disciplinary training and behavior 

restructuring’’ to address disclosure 

related issues. FINRA does not believe, 

however, that the suggested alternatives 

would be as effective as the proposed 

Restricted Firm Obligations Rule at 

addressing firms with a significant 

history of misconduct and encouraging 

such firms to modify their behavior and 

risk profile. 

Several commenters proposed steps 

that FINRA should take in addition to 

the proposal. These included: (1) 

Requiring firms to provide BrokerCheck 

reports to customers; 166 (2) expelling 

firms that are Restricted Firms for two 

consecutive years; 167 (3) ‘‘de-licensing’’ 

all current brokers who worked at such 

firms when they were initially 

designated as Restricted Firms; 168 (4) 

disclosing more information on 

BrokerCheck, such as the percentage of 

brokers at a firm with disclosures and 

the average number of brokers’ and 

firm’s disclosures,169 or which brokers 

have a demonstrable pattern of violating 

the law; 170 and (5) explaining to 

investors the methods that ‘‘recidivist’’ 

firms employ.171 Several commenters 

also suggested that FINRA give more 

consideration to proposing a rule like 

Investment Industry Regulatory 

Organization of Canada (IIROC) 

Consolidated Rule 9208, which is a 

terms and conditions rule.172

FINRA appreciates receiving 

suggestions on additional steps it might 

take to address firms with a significant 

history of misconduct, and FINRA will 

continue to explore ways to address 

firms with a significant history of 

misconduct. As FINRA explained in 

Regulatory Notice 19–17, this includes 

continuing to consider whether to 

propose a terms and conditions rule. 

FINRA notes, however, that some of 

Better Markets’ suggestions essentially 

request that FINRA broaden the 

statutory definition of disqualified 

persons, which is not within FINRA’s 

jurisdiction to do.173

17. Miscellaneous Comments Outside 

the Scope of the Proposal 

Some commenters raised concerns 

regarding issues that are not directly 

related to the proposal, such as whether 

barring ‘‘rogue brokers’’ or firms is 

effective,174 whether the Uniform 

Registration Forms should request 

disclosure of unsubstantiated 

allegations or unadjudicated alleged 

rule violations,175 and whether FINRA 

Hearing Officers are impartial.176 FINRA 

believes, however, that these comments 

are outside the scope of the proposal. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 45 days of the date of 

publication of this notice in the Federal 

Register or within such longer period (i) 

as the Commission may designate up to 

90 days of such date if it finds such 

longer period to be appropriate and 

publishes its reasons for so finding or 

(ii) as to which the self-regulatory 

organization consents, the Commission 

will: 

(A) By order approve or disapprove 

such proposed rule change, or 

(B) institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

FINRA–2020–041 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–FINRA–2020–041. This file 

number should be included on the 

subject line if email is used. To help the 

Federal Register / Vol. 85, No. 234 / Friday, December 4, 2020 / Notices 78569 

177 17 CFR 200.30–3(a)(12). 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

internet website (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for website viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE, 

Washington, DC 20549, on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. Copies of such 

filing also will be available for 

inspection and copying at the principal 

office of FINRA. All comments received 

will be posted without change. Persons 

submitting comments are cautioned that 

we do not redact or edit personal 

identifying information from comment 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR–FINRA– 

2020–041 and should be submitted on 

or before December 28, 2020. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.177

J. Matthew DeLesDernier, 

Assistant Secretary. 

[FR Doc. 2020–26594 Filed 12–3–20; 8:45 am] 

BILLING CODE 8011–01–P