Federal Register / Vol. 86, No. 148 / Thursday, August 5, 2021 / Notices 42925 

33 17 CFR 240.19b–4(f)(6). 

34For purposes only of waiving the 30-day 

operative delay, the Commission also has 

considered the proposed rule’s impact on 

efficiency, competition, and capital formation. See 

15 U.S.C. 78c(f). 35 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3See Exchange Act Release No. 90527 (Nov. 27, 

2020), 85 FR 78540 (Dec. 4, 2020) (File No. SR– 

FINRA–2020–041) (‘‘Notice’’). 

4See letter from Michael Garawski, Associate 

General Counsel, OGC Regulatory Practice and 

Policy, FINRA, to Daniel Fisher, Branch Chief, 

Division of Trading and Markets, Commission, 

dated January 12, 2021. This letter is available at 

https://www.finra.org/sites/default/files/2021-01/ 

SR-FINRA-2020-041-Extension1.pdf. 

5See letter from Michael Garawski, Associate 

General Counsel, Office of General Counsel, FINRA, 

to Vanessa Countryman, Secretary, Commission, 

dated March 4, 2021 (‘‘FINRA March 4 Letter’’). The 

FINRA March 4 Letter is available at https://

www.sec.gov/comments/sr-finra-2020-041/ 

srfinra2020041-8445557-229759.pdf. 

6See Exchange Act Release No. 91258 (Mar. 4, 

2021), 86 FR 13780 (Mar. 10, 2021) (File No. SR– 

FINRA–2020–041) (‘‘Order Instituting 

Proceedings’’). The Order Instituting Proceedings is 

available at https://www.sec.gov/rules/sro/finra/ 

2021/34-91258.pdf. 

7See letter from Michael Garawski, Associate 

General Counsel, Office of General Counsel, FINRA, 

to Daniel Fisher, Branch Chief, Division of Trading 

and Markets, Commission, dated May 7, 2021. This 

letter is available at https://www.finra.org/sites/ 

default/files/2021-05/sr-finra-2020-041- 

extension2.pdf. 

8Amendment No. 1 is available at https://

www.finra.org/sites/default/files/2021-05/sr-finra2020-041-amendment1.pdf. FINRA has made a 

technical correction to the definition of ‘‘Member 

Firm Pending Events’’ in proposed Rule 

4111(i)(4)(E). In the initial filing of the proposed 

rule change, proposed Rule 4111(i)(4)(E)(ii) 

included ‘‘a pending investigation by a regulatory 

authority’’ reportable on the member’s Uniform 

Registration Forms as among the Member Firm 

Pending Events. The Uniform Registration Forms, 

however, do not contain disclosure questions or 

Continued 

become operative prior to 30 days after 

the date of the filing. However, pursuant 

to Rule 19b–4(f)(6)(iii),33 the 

Commission may designate a shorter 

time if such action is consistent with 

protection of investors and the public 

interest. The Exchange has asked the 

Commission to waive the 30-day 

operative delay so that the proposed 

rule change may become operative upon 

filing. The Exchange’s proposal does not 

raise any new or novel issues. 

Therefore, the Commission believes that 

waving the 30-day operative delay is 

consistent with the protection of 

investors and the public interest. 

Accordingly, the Commission 

designates the proposed rule change to 

be operative on upon filing.34

At any time within 60 days of the 

filing of the proposed rule change, the 

Commission summarily may 

temporarily suspend such rule change if 

it appears to the Commission that such 

action is necessary or appropriate in the 

public interest, for the protection of 

investors, or otherwise in furtherance of 

the purposes of the Act. If the 

Commission takes such action, the 

Commission shall institute proceedings 

to determine whether the proposed rule 

should be approved or 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– 

NASDAQ–2021–059 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–NASDAQ–2021–059. This 

file number should be included on the 

subject line if email is used. To help the 

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 the 

filing also will be available for 

inspection and copying at the principal 

office of the Exchange. 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–NASDAQ–2021–059 and 

should be submitted on or before 

August 26, 2021. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.35

J. Matthew DeLesDernier, 

Assistant Secretary. 

[FR Doc. 2021–16676 Filed 8–4–21; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–92525; File No. SR–FINRA– 

2020–04] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Order Approving a 

Proposed Rule Change, as Modified by 

Amendment No. 1 and Amendment No. 

2, To Adopt FINRA Rule 4111 

(Restricted Firm Obligations) and 

FINRA Rule 9561 (Procedures for 

Regulating Activities Under Rule 4111) 

July 30, 2021. 

I. Introduction 

On November 16, 2020, Financial 

Industry Regulatory Authority, Inc. 

(‘‘FINRA’’) filed with the Securities and 

Exchange Commission (‘‘SEC’’ or 

‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Exchange Act’’) 1 and Rule 

19b–4 thereunder,2 a proposed rule 

change to amend FINRA’s rules to help 

further address the issue of associated 

persons with a significant history of 

misconduct and the broker-dealers that 

employ them. The proposed rule change 

was published for comment in the 

Federal Register on December 4, 2020.3

On January 12, 2021, FINRA consented 

to extend until March 4, 2021, the time 

period in which the Commission must 

approve the proposed rule change, 

disapprove the proposed rule change, or 

institute proceedings to determine 

whether to approve or disapprove the 

proposed rule change.4 On March 4, 

2021, FINRA responded to the comment 

letters received in response to the 

Notice.5 On March 4, 2021, the 

Commission filed an order instituting 

proceedings to determine whether to 

approve or disapprove the proposed 

rule change.6 On May 7, 2021, FINRA 

consented to an extension of the time 

period in which the Commission must 

approve or disapprove the proposed 

rule change to July 30, 2021.7 On May 

14, 2021, FINRA filed an amendment to 

the proposed rule change (‘‘Amendment 

No. 1’’).8 On July 20, 2021, FINRA filed 


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Disclosure Reporting Pages (‘‘DRP’’) fields about 

pending investigations by a regulatory authority 

concerning firms. Amendment No. 1 proposes 

deleting ‘‘a pending investigation by a regulatory 

authority’’ from the proposed definition of Member 

Firm Pending Events. Because Amendment No. 1 to 

the proposed rule change is technical in nature and 

does not materially alter the substance of the 

proposed rule change or raise any novel regulatory 

issues, it is not subject to notice and comment. 

9Amendment No. 2 is available at https://

www.finra.org/sites/default/files/2021-07/SRFINRA-2020-041-Amendment2.pdf. In the initial 

filing of the proposed rule change, proposed Rule 

4111 included several references to the requirement 

that a Restricted Firm (defined below) ‘‘maintain’’ 

a deposit in a segregated account. Amendment No. 

2 proposes several changes to, among other things, 

eliminate the word ‘‘maintain’’ from proposed Rule 

4111 and clarify that a firm is not required to 

deposit additional funds or qualified securities 

where the initial deposit consists of qualified 

securities that have declined in value, nor is it 

permitted to withdraw any such funds or securities 

merely because the value of such qualified 

securities increased in value. It further clarifies that 

if FINRA thereafter re-designates a firm as a 

Restricted Firm in the following year, such firm 

would be required to deposit additional cash or 

qualified securities if necessary, at the appropriate 

time during that process, to meet the required 

deposit amount. Because Amendment No. 2 to the 

proposed rule change is technical in nature and 

does not materially alter the substance of the 

proposed rule change or raise any novel regulatory 

issues, it is not subject to notice and comment. 

10See letter from Michael Garawski, Associate 

General Counsel, Office of General Counsel, FINRA, 

to Vanessa Countryman, Secretary, Commission, 

dated July 20, 2021 (‘‘FINRA July 20 Letter’’). The 

FINRA July 20 Letter is available at https://

www.sec.gov/comments/sr-finra-2020-041/ 

srfinra2020041-9083092-246591.pdf. 

11As discussed more fully below, the proposed 

rule change would apply to firms who, based on 

statistical analysis of their prior disclosure events, 

including regulatory actions, customer arbitrations 

and litigations of brokers, are substantially more 

likely than similarly-sized peers to subsequently 

have a range of additional events indicating various 

types of harm or potential harm to investors. See 

Notice at 78565. 

12As described below, such ‘‘risk-related 

disclosures’’ encompass those items included 

within the ‘‘Preliminary Identification Metrics’’ 

found in proposed Rule 4111(i)(10). Higher levels 

of risk-related disclosures are hereinafter referred to 

as ‘‘outlier-level disclosure events’’ or ‘‘outlier-level 

risks.’’ 

13As described more fully below, a ‘‘Restricted 

Firm’’ is a firm identified through the proposed 

multi-step process to have a significantly higher 

level of risk-related disclosures than similarly sized 

peers and determined by FINRA to pose a high 

degree of risk to the investing public. See 

discussion infra Proposed Rule 4111 (Restricted 

Firm Obligations). 

14See Notice at 78540. 

15See Notice at 78542–78550. The proposed rule 

change would cover Capital Acquisition Brokers 

(‘‘CABs’’). FINRA is proposing to adopt CAB Rule 

412 (Restricted Firm Obligations), to clarify that the 

member firms that have elected to be treated as 

CABs would be subject to proposed FINRA Rule 

4111. The proposed rule change would not cover 

funding portals. According to FINRA, given its 

limited regulatory experience with funding portals, 

it is not clear that funding portals present the 

corresponding risks that FINRA is seeking to 

address with respect to broker-dealers. See Notice 

at 78550 note 46. Moreover, developing relevant 

metrics and thresholds for funding portals would 

require a separate effort and analysis because, 

unlike broker-dealers, 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) 

(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. See Notice at 78550 note 46. 

16See Notice at 78542. 

17 Id. at 78540. 

18 Id. at 78550. 19 Id. at 78550–51. 20See Notice at 78540 note 5 (In particular, 

FINRA cited to Hammad Qureshi & Jonathan 

Sokobin, Do Investors Have Valuable Information 

About Brokers? (OCE Working Paper, Aug. 2015) (a 

study showing that past disclosure events, 

including regulatory actions, customer arbitrations 

and litigations of registered representatives, have 

significant power to predict future investor harm) 

and Mark Egan, Gregor Matvos & Amit Seru, The 

Market for Financial Adviser Misconduct, J. Pol. 

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

evidence suggesting a higher rate of new 

disciplinary and other disclosure events is highly 

correlated with past disciplinary and other 

disclosure events that occurred in the previous nine 

years)). 

21 Id. at 78540. 

22 Id. at 78540–41. 

23 Id. at 78541. 

24 Id. 

25 Id. 

26 Id. 

a second amendment to the proposed 

rule change (‘‘Amendment No. 2’’),9 as 

well as a second response to the 

comment letters received in response to 

the Notice.10 This order approves the 

proposed rule change, as modified by 

Amendment No. 1 and Amendment No. 

2. 

II. Description of the Proposed Rule 

Change 

Background 

FINRA’s proposed rule change would 

adopt a new Rule 4111 to address the 

risks that can be posed to investors by 

broker-dealers and their associated 

persons with a history of misconduct.11

The proposal would impose new 

obligations on broker-dealers with 

significantly higher levels of risk-related 

disclosures (including, notably, salespractice related disclosure events) than 

other similarly sized peers based on 

numeric, threshold-based criteria.12

Specifically, FINRA is proposing to 

adopt FINRA Rule 4111 (Restricted Firm 

Obligations) to require member firms 

that are identified as ‘‘Restricted 

Firms’’ 13 to deposit cash or qualified 

securities in a segregated account, 

adhere to specified conditions or 

restrictions, or comply with a 

combination of such obligations.14

FINRA is also proposing to adopt 

FINRA Rule 9561 (Procedures for 

Regulating Activities) 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 4111.15 In particular, the 

proposed rule change would establish a 

process to give a Restricted Firm an 

opportunity to challenge the designation 

and the resulting obligations of that 

designation, as well as give the firm a 

one-time opportunity to avoid the 

imposition of obligations by voluntarily 

reducing its workforce.16

The proposed rule change is designed 

to protect investors and the public 

interest by strengthening tools available 

to FINRA to address the risks posed by 

member firms with a significant history 

of misconduct, including firms with a 

high concentration of individuals with a 

significant history of misconduct.17 The 

proposed rule 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.18

This proposal is designed to address 

persistent compliance issues that arise 

at some FINRA member firms that 

generally do not carry out their 

supervisory obligations to achieve 

compliance with applicable securities 

laws and regulations and FINRA rules, 

and act in ways that could harm their 

customers and erode confidence in the 

brokerage industry.19 According to 

FINRA, recent academic studies have 

found that some firms persistently 

employ registered representatives who 

engage in misconduct, and that 

misconduct can be concentrated at these 

firms.20 FINRA states that these studies 

also provide evidence that the past 

disciplinary history and other regulatory 

events associated with a firm or 

individual can be predictive of future 

events.21 While these firms may 

eventually be forced out of the industry 

through FINRA action or otherwise, 

FINRA observed that these compliance 

issues include a persistent, if 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.22

FINRA states that such firms expose 

investors to real risk.23 For example, 

FINRA states that it 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.24 FINRA has found that these 

firms generally have a retail business 

engaging in cold calling investors to 

make recommendations of securities, 

often to vulnerable customers.25 FINRA 

has also identified groups of individual 

representatives who move from one firm 

of concern to another firm of concern.26


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27 Id. 28 Id. 29 Id. 30 Id. 31 Id. 

32 Id. 

33 Id. 

34 Id. 

35 Id. 

36 Id. 

37 Id. 

38 Id. FINRA also states that temporary cease and 

desist proceedings can, but do not always, provide 

an effective remedy for potential ongoing harm to 

investors during the enforcement process. FINRA 

explains that it does not always permit rapid 

intervention because FINRA must be prepared to 

file the underlying disciplinary complaint at the 

same time it seeks a cease and desist order. See 

Notice at 78541. Moreover, temporary cease and 

desist proceedings are available only in narrowly 

defined circumstances. See FINRA Rule 9800 Series 

(Temporary and Permanent Cease and Desist 

Orders). 

39See Notice at 78541. 

40 Id. 

41See proposed Rule 4111(i)(15) (defining 

‘‘Restricted Deposit Requirement’’). 

42See Notice at 78542. 

43 Id. 

44 Id. 

45See Exhibit 2d to the text of FINRA’s proposed 

rule change for a diagram of the ‘‘funnel,’’ available 

at https://www.finra.org/sites/default/files/2020-11/ 

SR-FINRA-2020-041.pdf at p. 553. 

46See Notice at 78542. 

47 Id. 

48 Id. 

49See proposed Rule 4111(i)(14) (defining 

‘‘Restricted Deposit Account’’). 

50See proposed Rule 4111(i)(2) (defining Covered 

Pending Arbitration Claim as an investment-related, 

consumer-initiated claim filed against the member 

or its associated persons in any arbitration forum 

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). 

51See proposed Rule 4111(i)(7) would define 

‘‘Former Member’’ as an entity that has withdrawn 

or resigned its FINRA membership, or that has had 

Continued 

FINRA observed that such firms and 

their associated persons often have 

substantial numbers of reportable events 

on their Uniform Registration Forms.27

In such situations, FINRA closely 

examines the firms’ and registered 

representatives’ conduct, and where 

appropriate, FINRA will bring 

enforcement actions to bar or suspend 

the firms and individuals involved.28

However, FINRA states that 

individuals and firms with a history of 

misconduct can pose a particular 

challenge for FINRA’s existing 

examination and enforcement 

programs.29 Specifically, 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.30 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 continue activities that pose 

risk of harm to investors until they 

result in an enforcement action.31

FINRA states that enforcement actions 

in turn can only be brought after a rule 

has been violated and any resulting 

customer harm has already occurred.32

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 investors.33 Parties 

with serious compliance issues often 

will litigate enforcement actions brought 

by FINRA, which may involve a hearing 

and multiple rounds of appeals, 

forestalling the imposition of 

disciplinary sanctions for an extended 

period.34 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 Commission.35

Moreover, even when a FINRA Hearing 

Panel imposes a significant sanction, the 

sanction is stayed during appeal to the 

NAC.36 Many sanctions are also 

automatically stayed on appeal to the 

Commission, and can be stayed during 

an appeal to the courts.37 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.38 In such 

circumstances, the firm may also fail to 

pay arbitration awards owed to 

claimants, leaving investors 

uncompensated and diminishing 

confidence in the securities markets.39

Proposed Rule 4111 (Restricted Firm 

Obligations) 

Proposed Rule 4111 would establish 

numeric thresholds based on firm-level 

and individual-level disclosure events 

to identify member firms with a 

significantly higher level of risk-related 

disclosures as compared to similarly 

sized peers.40 Following a multi-step 

process of evaluating a member firm, 

FINRA’s Department of Member 

Regulation (‘‘Department’’) would be 

permitted to impose on member firms it 

determines pose a high risk to the 

investing public (i.e., a ‘‘Restricted 

Firm’’) a ‘‘Restricted Deposit 

Requirement,’’ 41 conditions or 

restrictions on the member firm’s 

operations that are necessary or 

appropriate to protect investors and the 

public interest, or both.42

According to FINRA, the proposed 

multi-step process includes features that 

narrowly focus the proposed obligations 

on the firms of most concern.43 FINRA 

describes this process as a ‘‘funnel.’’ 44

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 FINRA determines 

present high risks to the investing 

public.45

FINRA would conduct the process 

annually for each member firm, 

determining whether it should be 

designated (or re-designated) as a 

Restricted Firm and whether any such 

Restricted Firm should be subject to any 

obligations.46 Each member firm that is 

preliminarily identified based on its 

firm-level and individual-level 

disclosure events would have several 

ways to affect outcomes during 

subsequent steps in the evaluative 

process, including a one-time 

opportunity to terminate registered 

representatives with relevant disclosure 

events so as to no longer trigger the 

numeric thresholds.47 The member firm 

would also be able to explain to the 

Department why it should not be subject 

to a Restricted Deposit Requirement, or 

propose alternatives that would still 

accomplish FINRA’s goal of protecting 

investors, and could request a hearing 

before a FINRA Hearing Officer in an 

expedited proceeding to challenge a 

Department determination.48

The rule would subject the 

Department to certain presumptions 

when it assesses a previously designated 

Restricted Firm’s application for 

withdrawal from its Restricted Deposit 

Account.49 Specifically, the Department 

would be required to: (1) 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 50 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 the 

person was associated with the member 

firm; but (2) approve the application of 

a Former Member 51 when that Former 


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its membership cancelled or revoked. However, 

proposed rule 9561.01 would include former 

members as members for purposes of the proposed 

rule changes. To the extent a Restricted Member 

withdraws its membership applications with 

specified unpaid arbitration awards, the conditions 

for releasing funds from the restricted deposit 

would encourage the firm to use the released funds 

to pay those awards. See also Notice at 78542. 

52See Notice at 78547. 

53See proposed Rule 4111(i)(14) (defining 

‘‘Restricted Deposit Account’’). Proposed Rule 

4111(i)(14) would require that any Restricted 

Deposit Account be in the name of the member firm 

at a bank or at the member firm’s clearing firm. The 

account would need to 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 set-off, 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 firm; that if the 

member firm becomes a Former Member, the assets 

deposited in the Restricted Deposit Account to 

satisfy the Restricted Deposit Requirement shall be 

kept in the Restricted Deposit Account, and 

withdrawals will not be permitted without FINRA’s 

prior written consent; that FINRA is a third-party 

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. See Notice at 78547–8. 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. However, such 

funds and securities on deposit in the Restricted 

Deposit Account would not be held with respect to 

any particular claim, or class of claimants, against 

such firm. See Notice at 78548 note 39. 

54See Notice at 78542. 

55FINRA has also proposed adopting 

Supplementary Material .03 to proposed Rule 4111 

to provide member firms with a non-exhaustive list 

of examples of conditions and restrictions that the 

Department could impose on Restricted Firms. See 

Notice at 78458. 

56 Id. 

57 Id. 

58See FINRA March 4 Letter at 5–6. 

59See proposed Rule 4111(i)(4) (defining 

‘‘Disclosure Event and Expelled Firm Association 

Categories’’). The Disclosure Event and Expelled 

Firm Association Categories are all based on events 

or conditions disclosed through the Uniform 

Registration Forms with the exception of one event 

category (Member Firm Adjudicated Events), which 

includes events that are derived from customer 

arbitrations filed with FINRA’s dispute resolution 

forum. See Notice at 78542 note 17. 

60See proposed Rule 4111(i)(11) (defining 

‘‘Preliminary Identification Metrics Thresholds’’). 

61Specifically, member firms will be divided into 

seven size categories, ranging from firms with 1–4 

Registered Persons In-Scope to 500 or more 

Registered Persons In-Scope. See Notice at 78544. 

The term ‘‘Registered Persons In-Scope’’ means all 

persons registered with the firm for one or more 

days within the one year prior to the Evaluation 

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

62See Notice at 78543. As detailed further below, 

in each of these six categories, FINRA would 

identify all of the firm’s events or conditions within 

that category. The total number of these events or 

conditions in each category will then be divided by 

the number of Registered Persons In-Scope to 

identify the per capita number of events or 

conditions that the firm has, to enable comparison 

against similarly sized firms. This per capita 

number of events or conditions in each category 

will then be used to determine whether or not the 

firm has met or exceeded the threshold for that 

category, as set out below. Id. 

63 ‘‘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: 

(1) 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; (2) 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; (3) a final investment-related civil 

judicial matter that resulted in a finding, sanction 

or order; (4) a final regulatory action that resulted 

in a finding, sanction or order, and was brought by 

the Commission or Commodity Futures Trading 

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

agency, a state regulatory agency, a foreign financial 

regulatory authority, or a self-regulatory 

organization; or (5) 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. 

64 ‘‘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 

Uniform Registration Forms: (1) A pending 

investment-related civil judicial matter; (2) a 

pending investigation by a regulatory authority; (3) 

a pending regulatory action that was brought by the 

Commission or CFTC, other federal regulatory 

agency, a state regulatory agency, a foreign financial 

regulatory authority, or a self-regulatory 

organization; or (4) 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. 

65 ‘‘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: (1) A 

termination in which the registered person 

voluntarily resigned, was discharged or was 

permitted to resign from a previous member after 

allegations; or (2) 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. 

66 ‘‘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: (1) A final investment-related, 

consumer-initiated customer arbitration award in 

which the member was a named party; (2) a final 

investment-related civil judicial matter that resulted 

in a finding, sanction or order; (3) a final regulatory 

action that resulted in a finding, sanction or order, 

and was brought by the Commission or CFTC, other 

federal regulatory agency, a state regulatory agency, 

a foreign financial regulatory authority, or a selfregulatory organization; or (4) 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. 

Member commits in the manner 

specified by the Department to use the 

amount it withdraws to pay down its 

specified unpaid arbitration awards.52

General (Proposed Rule 4111(a)) 

Under the proposal, any member firm 

that is designated by the Department as 

a Restricted Firm would be required to 

establish a Restricted Deposit 

Account 53 and deposit cash or qualified 

securities with an aggregate value that is 

not less than the member firm’s 

Restricted Deposit Requirement, except 

in certain identified situations.54

Restricted Firms could also be subject to 

conditions or restrictions on their 

operations,55 as determined by the 

Department to be necessary or 

appropriate to protect investors and the 

public interest in addition or in the 

alternative to a Restricted Deposit 

Requirement.56

Annual Calculation by FINRA of the 

Preliminary Criteria for Identification 

(Proposed Rule 4111(b)) 

FINRA will announce for all member 

firms the date of the first annual 

evaluation (‘‘Evaluation Date’’) no less 

than 120 calendar days prior to the first 

Evaluation Date.57 Subsequent 

Evaluation Dates would be on the same 

month and day each year, whether that 

date certain falls on a business day, a 

weekend day, or a holiday.58

The Department would begin each 

member firm’s annual Rule 4111 review 

process by calculating specified 

‘‘Preliminary Identification Metrics’’ for 

each firm for each of six categories of 

events or conditions, collectively 

defined as the ‘‘Disclosure Event and 

Expelled Firm Association 

Categories.’’ 59 FINRA would use a 

formula to identify whether a firm has 

exceeded certain established 

thresholds,60 based on the firm’s size,61

for each of these six categories of events 

or conditions.62 The six categories are: 

(1) Registered Person Adjudicated 

Events; 63 (2) Registered Person Pending 

Events; 64 (3) Registered Person 

Termination and Internal Review 

Events; 65 (4) Member Firm Adjudicated 

Events; 66 (5) Member Firm Pending 


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67 ‘‘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. 68 ‘‘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 

would be 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 In-Scope’’). This proposed 

definition is narrower than the definition proposed 

in Regulatory Notice 19–17, which would have 

captured any registered person registered for one or 

more days within the year prior to the Evaluation 

Date with the firm, and who was associated with 

one or more previously expelled firms at any time 

in his/her career. 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. 

69See proposed Rule 4111(i)(9) (defining 

‘‘Preliminary Criteria for Identification’’). 

70See Notice at 78542. 

71 Id. 

72 Id. 

73 Id. at 78543. 

74 Id. 

75See proposed Rule 4111(i)(13). 

76See Notice at 78543. For the five ‘‘Registered 

Person and Member Firm Events’’ categories 

(Categories 1–5 above),76 the proposed standardized 

Preliminary Identification Metrics would be derived 

by dividing the sum of events from each category 

by the number of Registered Persons In-Scope to 

identify the average number of events per registered 

representative. For the Expelled Firm Association 

category (Category 6 above), the proposed 

Preliminary Identification Metric would be 

standardized by taking the number of Registered 

Persons Associated with Previously Expelled Firms 

and dividing it by the number of Registered Persons 

In-Scope to determine the percentage of the member 

firm’s registered representatives who meet the 

Registered Persons Associated with Previously 

Expelled Firms definition. See also proposed Rule 

4111(i)(12) (defining ‘‘Registered Person’’ and 

‘‘Member Firm Events’’). 

77Because 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. See Notice at 78544 note 29. 

78See Notice at 78543. 79 Id. 80See Notice at 78544. 81 Id. 82 Id. at 78544–45. 83 Id. at 78545. 84 Id. 

Events; 67 and (6) Registered Persons 

Associated with Previously Expelled 

Firms (also referred to as the Expelled 

Firm Association category).68 Based on 

this calculation, the Department would 

determine whether the particular 

member firm meets the ‘‘Preliminary 

Criteria for Identification.’’ 69

Several principles guided FINRA’s 

development of the proposed 

Preliminary Criteria for Identification 

and the proposed Preliminary 

Identification Metrics Thresholds.70 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 sales 

practice concerns that arise when firms 

appear to systemically perpetuate harm 

on investors leading up to and at the 

point-of-sale of securities products, that 

are motivating the proposal.71 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.72

To calculate each of the six categories’ 

Preliminary Identification Metrics, 

FINRA would first add the number of 

pertinent disclosure events.73 To 

calculate the Expelled Firm Association 

category, FINRA would count the 

number of Registered Persons 

Associated with Previously Expelled 

Firms.74 For purposes of these 

calculations: (1) Adjudicated disclosure 

events would include only those that 

were resolved during the prior five years 

from the date of the calculation; (2) 

pending events and pending internal 

reviews would include disclosure 

events that are pending as of the date of 

the calculation; and (3) Registered 

Person disclosure events (i.e., disclosure 

events of all persons registered with the 

member firm for one or more days 

within the one year prior to the 

calculation date, that is, Registered 

Persons In-Scope).75 The sum for each 

of the six categories would then be run 

through a standardization process to 

determine the member’s six Preliminary 

Identification Metrics, wherein the raw 

numbers of a firm’s relevant events in 

each category would be divided by the 

number of Registered Persons In-Scope 

at the firm, to enable more accurate, per 

person comparisons with other member 

firms.76

A firm’s six Preliminary Identification 

Metrics would be used to determine if 

the member firm meets the Preliminary 

Criteria for Identification. FINRA 

believes that the Preliminary 

Identification Metrics Thresholds in 

proposed Rule 4111(i)(11) represent 

member firms that present significantly 

higher risk than a large percentage of 

their similarly sized peers for the type 

of events in the category. There are 

numeric thresholds for seven different 

firm sizes, to provide that each member 

firm would be compared only to its 

similarly sized peers.77

To meet the Preliminary Criteria for 

Identification, a member firm would 

need to meet: (1) Two or more of the 

Preliminary Identification Metrics 

Thresholds set forth in proposed Rule 

4111(i)(11), at least one of which must 

be the Registered Person Adjudicated 

Event Metric, the Member Firm 

Adjudicated Event Metric, or the 

Expelled Firm Association Metric, and 

(2) two or more Registered Person and 

Member Firm Events (i.e., two or more 

events from Categories 1–5 above).78 If 

these conditions are met, the member 

firm would meet the Preliminary 

Criteria for Identification.79

Initial Department Evaluation (Proposed 

Rule 4111(c)(1)) 

The Department would then evaluate 

whether a member firm that has met the 

Preliminary Criteria for Identification 

warrants further review under Rule 

4111.80 FINRA’s evaluation would 

include consideration of: Whether nonhigh-risk disclosure events or other 

conditions should not have been 

included within the initial calculation 

of the firm’s Preliminary Identification 

Metric computations (e.g., events that 

were not sales-practice related, 

duplicative events involving the same 

customer and the same matter, or events 

involving compliance concerns best 

addressed by a different regulatory 

response by FINRA (e.g., enforcement 

actions; more frequent examination 

cycles; temporary cease and desist 

orders)); 81 whether the disclosure 

events pose risks to investors or market 

integrity, as opposed to violations of 

procedural rules; 82 and whether the 

member firm has already addressed the 

concerns signaled by the disclosure 

events or conditions, or has altered its 

business operations such that the 

threshold calculation no longer reflects 

the firm’s current risk profile.83 The 

Department would then either 

determine that further review would be 

necessary and continue the Rule 4111 

process, or, if the Department concluded 

that no further review would be 

warranted, close out that member firm’s 

Rule 4111 process for the year without 

imposing any restrictions or 

obligations.84

One-Time Opportunity To Reduce 

Staffing Levels (Proposed Rule 

4111(c)(2)) 

If the Department determines that a 

member firm warrants further review 

under Rule 4111, and such member firm 

would be meeting the Preliminary 

Criteria for Identification for the first 

time, the member firm would have a 


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85 Id. at 78544. 

86 Id. 

87 Id. at 78545. 

88The term ‘‘maximum’’ is used to indicate that 

a firm’s maximum Restricted Deposit Requirement 

will be the figure FINRA declares to the firm is the 

highest deposit requirement it may be subject to 

during that year’s Rule 4111 process. As discussed 

below, firms could then seek to demonstrate to 

FINRA why a lower deposit requirement would be 

more appropriate during the Consultation. See 

FINRA March 4 Letter supra note 5. 

89See Notice at 78545. 

90 Id. The proposed factors that the Department 

would consider when determining a maximum 

Restricted Deposit Requirement include revenues, 

net capital, assets, expenses, and liabilities, the 

firm’s operations and activities, number of 

registered persons, the nature of the disclosure 

events included 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. See proposed 

FINRA Rule 4111(i)(15)(A). 

91See Notice at 78545. 

92 Id. These would include, for example, events 

that are duplicative, involving the same customer 

and the same matter, or are not sales-practice 

related. Id. 

93 Id. Proposed Rule 4111(d)(3) provides guidance 

to member firms on what information the 

Department would consider during the 

Consultation, and guidance on how to attempt to 

overcome the 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). See Notice at 

78546. 

94See Notice at 78545. 

95See Notice at 78546. 

96 Id. As noted below, any request for a hearing 

would not stay the effectiveness of the Department’s 

decision, but, unless that firm was already 

operating as a Restricted Firm based on a prior 

year’s Department decision, it would temporarily 

lower the necessary Required Deposit Requirement 

for that member firm until the Office of Hearing 

Officers, or the NAC issues a final written decision. 

See proposed FINRA Rule 4111(e)(2). If the firm 

was already operating as a Restricted Firm based on 

a prior year’s Department decision, it would be 

required to keep in the Restricted Deposit Account 

the assets then on deposit therein until the Office 

of Hearing Officers or the NAC issues its final 

written decision in the expedited proceeding. Id. 

one-time opportunity to reduce its 

staffing levels to avoid meeting the 

Preliminary Criteria for Identification, 

within 30 business days after being 

informed by the Department that it met 

the Preliminary Criteria for 

Identification.85 The member firm 

would need to identify the terminated 

individuals to the Department and 

would be prohibited from rehiring any 

of those terminated persons, in any 

capacity, for one year.86

If the member firm reduces its staffing 

levels, and the Department then 

determines that the member firm no 

longer meets the Preliminary Criteria for 

Identification, the Department would 

close out the firm’s Rule 4111 process 

for the year without seeking to impose 

any restrictions or obligations on the 

firm. However, if the Department 

determines that the member firm still 

meets the Preliminary Criteria for 

Identification (or if the member firm did 

not opt to reduce staffing levels) the 

Department would determine the firm’s 

maximum Restricted Deposit 

Requirement, and the member firm 

would proceed to a ‘‘Consultation’’ with 

the Department.87

Determination of a Maximum Restricted 

Deposit Requirement (Proposed Rule 

4111(i)(15)) 

For firms still meeting the Preliminary 

Criteria for Identification, the 

Department would then determine the 

firm’s maximum Restricted Deposit 

Requirement,88 and the member firm 

would then proceed to a ‘‘Consultation’’ 

with the Department.89 The Department 

would seek to tailor a firm’s maximum 

Restricted Deposit Requirement amount 

to its size, operations and financial 

conditions, and determine the member 

firm’s maximum Restricted Deposit 

Requirement consistent with the 

objectives of the rule, while not 

significantly undermining the firm’s 

continued financial stability and 

operational capability as an ongoing 

enterprise over the next 12 months.90

Consultation (Proposed Rule 4111(d)) 

During the Consultation, the 

Department would 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.91 A member firm may 

overcome the presumption that it 

should be designated as a Restricted 

Firm by ‘‘clearly demonstrating that the 

Department’s calculation is inaccurate’’ 

because, among other things, it 

considered events that should not have 

been included.92 A member firm also 

may overcome the presumption that it 

should be subject to the maximum 

Restricted Deposit Requirement by 

clearly demonstrating that such an 

amount would cause significant undue 

financial hardship, and that a lesser 

deposit requirement would satisfy the 

objectives of Rule 4111; or that other 

operational conditions and restrictions 

on the member and its associated 

persons would sufficiently protect 

investors and the public interest.93 To 

the extent a member firm seeks to claim 

undue financial hardship, it would bear 

the burden of supporting that claim 

with documents and information.94

Department Decision and Notice 

(Proposed Rule 4111(e)); No Stays 

After the Consultation, the 

Department would be required to render 

a decision, pursuant to one of three 

paths: (1) If the Department determines 

that the member firm has rebutted the 

presumption that it should be 

designated a Restricted Firm, the 

Department would not designate the 

firm as a Restricted Firm that year; (2) 

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 shall be 

subject to the maximum Restricted 

Deposit Requirement, the Department 

would designate the member firm as a 

Restricted Firm, but would: (a) Either 

impose no Restricted Deposit 

Requirement on the member firm, or 

require it to promptly establish a 

Restricted Deposit Account, and deposit 

in that account a lower Restricted 

Deposit Requirement in such dollar 

amount as the Department deems 

necessary or appropriate; and (b) require 

the member firm to implement and 

maintain specified conditions or 

restrictions on the operations and 

activities of the member firm and its 

associated persons, as necessary or 

appropriate, to address the concerns 

identified by the Department, and 

protect investors and the public interest; 

or (3) if the Department determines that 

the member firm has rebutted neither 

presumption, the Department would 

designate the member firm as a 

Restricted Firm, require it to promptly 

establish a Restricted Deposit Account, 

deposit in that account the maximum 

Restricted Deposit Requirement, and 

implement and maintain specified 

conditions or restrictions on the firm’s 

operations and activities, and those of 

its associated persons, as necessary or 

appropriate to address the concerns 

identified by the Department, and 

protect investors and the public 

interest.95 Pursuant to proposed Rule 

4111(e)(2), the Department would 

provide the member firm with written 

notice of its decision no later than 30 

days from the date of FINRA’s letter 

scheduling the Consultation, stating any 

conditions or restrictions to be imposed, 

and the ability of the member firm to 

request a hearing with the Office of 

Hearing Officers in an expedited 

proceeding.96

Continuation or Termination of 

Restricted Firm Obligations (Proposed 

Rule 4111(f)) 

Proposed Rule 4111(f) would set forth 

the circumstances under which any 

obligations (including any Restricted 

Deposit Requirement, conditions, or 


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97See Notice at 78547. FINRA has indicated that 

there will 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.; see also FINRA 

proposed Rule 4111(f)(3). 98See Notice at 78547; see also definition of 

‘‘Former Member’’ in proposed Rule 4111(i)(7). 99See Notice at 78547. 100 Id. Proposed Rule 4111(f)(3) would require a 

member’s application requesting permission to 

withdraw any portion of its Restricted Deposit 

Requirement to include, among other things: (1) 

Evidence that there are no Covered Pending 

Arbitration Claims, unpaid arbitration awards or 

unpaid settlements relating to arbitrations 

outstanding against the member, the member’s 

Associated Persons or the Former Member, or (2) a 

detailed description of any existing Covered 

Pending Arbitration Claims, unpaid arbitration 

awards or unpaid settlements relating to 

arbitrations outstanding. The Department would be 

required to issue a notice of its decision within 30 

days from the date it receives the relevant 

application.; see also FINRA proposed Rule 9561. 

101See Notice at 78547. 

102 Id.; see also proposed Rule 4111(f)(3) 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 particular, the conditions for 

releasing funds from the restricted deposit include 

the former member having no specified unpaid 

arbitration awards. See supra note 51 and 

accompanying text. 

103See Notice at 78547; see also FINRA proposed 

Rule 4111(f)(3)(B). 

104See Notice at 78547. 

105Proposed 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. See Notice at 78548. 106See Notice at 78549. 107 Id. 

108 Id. at 78548–49. 

109 Id. at 78549. 

110 Id. 

111See FINRA Rule 4111(e)(2), as modified by 

Amendment No. 2. 

restrictions) that were imposed during 

the Rule 4111 process in one year are 

continued or terminated in that same 

year and in subsequent years. Pursuant 

to proposed Rule 4111(f)(1), a currently 

designated Restricted Firm would not be 

able to withdraw all or any portion of 

its Restricted Deposit Requirement, or 

seek to terminate or modify any 

Restricted Deposit Requirement, 

conditions, or restrictions that have 

been imposed pursuant to this Rule, 

without the prior written consent of the 

Department. Restricted Firms would 

only be permitted to seek to withdraw 

a portion of its Restricted Deposit 

Requirement, or terminate or modify 

any required deposit, conditions, or 

restrictions that have been imposed, 

during their annual Consultation, and 

any ensuing expedited proceedings after 

a Department decision; no interim 

termination or modification of any 

obligations would be permitted.97

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 98 either does not 

meet the Preliminary Criteria for 

Identification or should not be 

designated as a Restricted Firm, the 

member firm or former member firm 

would no longer be subject to any 

obligations previously imposed under 

proposed Rule 4111.99 There would be 

one exception from this removal of 

previously imposed obligations in the 

case of the Restricted Deposit 

Requirement: A former Restricted Firm 

would not be permitted to withdraw any 

portion of its Restricted Deposit 

Requirement without submitting an 

application in the manner specified 

under Rule 4111(f)(3)(A), and obtaining 

the Department’s prior written consent 

for the withdrawal.100 The rule would 

establish presumptions for the 

Department’s approval, or disapproval, 

of a withdrawal application. 

Specifically, the Department would 

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.101 In 

addition, the Department would 

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.102 By contrast, the Department 

would deny an application for 

withdrawal if: (1) 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 or unpaid 

arbitration awards, or (2) any of 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.103

Books and Records (Proposed Rule 

4111(g)) 

Member firms would also be obligated 

to maintain books and records that 

evidence their compliance with Rule 

4111 and any Restricted Deposit 

Requirement or other conditions or 

restrictions imposed under that rule, 

which the member firm would also need 

to provide to the Department upon 

request.104

Proposed Rule 9561 (Procedures for 

Regulating Activities Under Rule 4111) 

and Amendments to Rule 9559 To 

Implement the Requirements of 

Proposed Rule 4111 

Rule 9561 would establish new 

expedited proceedings that would: (1) 

Provide an opportunity to challenge any 

requirements the Department has 

imposed, including any Restricted 

Deposit Requirements, by requesting a 

prompt review of the Department’s 

decision in the Rule 4111 process; 105

and (2) address a member firm’s failure 

to comply with any requirements 

imposed under Rule 4111.106

Notices Under Proposed Rule 4111 

(Proposed Rule 9561(a)) 

Under new Rule 9561(a)(1), the 

Department would serve to the member 

firm a notice of the Department’s 

decision following the Rule 4111 

process that: (1) Provides the specific 

grounds and factual basis for the 

Department’s action; (2) states when the 

action would take effect; (3) informs the 

member firm that it may, within seven 

days after service of the notice, request 

a hearing in an expedited proceeding; 

and (4) explains the Hearing Officer’s 

authority.107 The proposed rule change 

would also provide that, if a member 

firm does not request a hearing, the 

decision would constitute final FINRA 

action.108

In general, a request for a hearing 

would not stay any of the Rule 4111 

Requirements imposed in the 

Department’s decision, which would be 

immediately effective.109 There is one 

exception: When a member firm 

requests review of a Department 

determination to impose a Restricted 

Deposit Requirement on the member, 

the firm would be required to deposit 

the lesser of 25% of its Restricted 

Deposit Requirement or 25% of its 

average excess net capital over the prior 

year, while the expedited proceeding is 

pending.110 This exception would not 

be available for a member firm that has 

been re-designated as a Restricted Firm, 

and is already subject to a previously 

imposed Restricted Deposit 

Requirement, which it would need to 

keep the assets on deposit in the 

Restricted Deposit account until the 

Office of Hearing Officers or NAC issues 

a written decision.111

Notice for Failure To Comply With the 

Proposed Rule 4111 Requirements 

(Proposed Rule 9561(b)) 

If a member firm fails to comply with 

any of the requirements imposed on it 

under Rule 4111, the Department would 

be authorized to serve a notice pursuant 

to proposed Rule 9561 stating that the 

member firm’s continued failure to 


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112See FINRA Rule 4111(b)(1)–(2). 

113See FINRA Rule 4111(b)(3). 

114See FINRA Rule 4111(b)(6). After a suspension 

has been imposed, a member firm may file a request 

under Rule 9561(b) to terminate the suspension on 

the ground of full compliance with the notice or 

decision, and the head of the Department will be 

permitted to grant relief for good cause shown. See 

Notice at 78549. 

115See Notice at 78549. Specifically, FINRA is: 

(1) Amending Rule 9559(d) and (n) to establish the 

authority of a Hearing Officer in expedited 

proceedings under Rule 9561; (2) amending Rule 

9559(f) to set out timing requirements for hearings 

conducted under Rule 9561(a) and (b); and (3) 

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

obligations that may be imposed under new Rule 

4111 within the content requirements of any 

decision issued by a Hearing Officer under the Rule 

9550 Series. See amended Rules 9559(d), (f), (n), 

and (p)(6). Additionally, during expedited 

proceedings conducted under new Rule 9561(a) to 

review a Department determination under proposed 

Rule 4111, a member firm would be permitted to 

seek to demonstrate that the Department incorrectly 

included disclosure events when calculating 

whether the member firm meets the Preliminary 

Criteria for Identification. However, the member 

firm would not be permitted to argue the 

underlying merits of the final actions underlying 

the disclosure events. See Notice at 78550. 

116See FINRA March 4 Letter at 4. FINRA set a 

180-day timeline for the effective date based on 

comments requesting that FINRA provide 

additional resources to facilitate member firms’ 

compliance with proposed Rule 4111. FINRA 

stated, however, that while it intends to develop 

and provide additional tools to member firms, such 

tools may not be determinative, because ‘‘whether 

a member firm will meet the Preliminary Criteria 

for Identification could only be definitely 

established as of the annual Evaluation Date.’’ Id. 117 In approving this rule change, the Commission 

has considered the rule’s impact on efficiency, 

competition, and capital formation. See 15 U.S.C. 

78c(f). 118 15 U.S.C. 78o–3(b)(6). 119FINRA 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. For example, the annual 

calculation that identifies member firms that are 

subject to the proposed rule would use objective, 

transparent criteria to identify outlier firms with the 

most significant history of misconduct relative to 

their peers. See Notice at 78559. 

120For example, during the Consultation, the 

Department would evaluate whether the member 

firm has demonstrated that the annual calculation 

included disclosure events that should not have 

been included (because they are duplicative or not 

sales-practice related). Id. 

121See Letter from Ruben Huertero, Legal Intern, 

and Christine Lazaro, Director of the Securities 

Arbitration Clinic and Professor of Clinical Legal 

Education, St. John’s University School of Law, 

dated December 28, 2020 (The Clinic indicating its 

support for the adoption of Rule 4111 requiring 

member firms with a high degree of risk towards 

the investing public to be subject to a deposit from 

which withdrawals would be restricted). 

122See Letter from Kevin M. Carroll, Managing 

Director and Associate General Counsel, Securities 

Industry and Financial Markets Association, dated 

December 28, 2020 (‘‘SIFMA Letter’’) (SIFMA was 

supportive of the proposal ‘‘to the extent it has the 

ancillary effect of incentivizing firms and their 

associated persons to comply with their regulatory 

obligations and to pay their arbitration awards.’’); 

Letter from David P. Meyer, President, Public 

Investors Advocate Bar Association, dated 

December 28, 2020 (‘‘PIABA Letter’’) (PIABA 

indicated it supports the proposal ‘‘in general’’ and 

is ‘‘a firm supporter of FINRA’s efforts to enhance 

its programs to address the risks posed to investors 

by individual brokers and member firms that have 

a history of misconduct.’’); letter from Lisa Hopkins, 

President, General Counsel and Senior Deputy 

Commissioner of Securities, West Virginia, North 

American Securities Administrators Association, 

Inc., dated December 28, 2020 (‘‘NASAA Letter’’) 

(NASAA ‘‘commends the Commission and FINRA 

for expanding controls over high-risk firms’’ and 

indicated the proposal has the potential to ‘‘better 

protect investors from high-risk firms, which is a 

goal that NASAA supports.’’). 

123See Letter from Lev Bagramian, Senior 

Securities Policy Advisor, and Michael J, Hughes, 

Program & Research Assistant, Better Markets, dated 

December 28, 2020 (‘‘Better Markets Letter’’) (Better 

Markets indicated that the proposal is ‘‘better than 

doing nothing, [but] it is nonetheless grossly 

insufficient.’’); Letter from Andrew R. Harvin, 

Doyle, Restrepo, Harvin & Robbins, L.L.P., dated 

December 21, 2020 (‘‘Harvin Letter’’) (Harvin 

indicated that the proposal is a ‘‘rule proposal 

looking for a problem.’’); Letter from Richard J. 

Carlesco Jr., CEO, IBN Financial Services, Inc., 

dated December 15, 2020 (‘‘IBN Letter’’) (IBN 

indicated that the proposal is just one of a ‘‘throng 

of new regulations that are burying small firms.’’). 

124See PIABA Letter; Better Markets Letter; and 

NASAA Letter. 

comply within seven days of service of 

the notice would result in a suspension 

or cancellation of membership.112 The 

notice would need to: (1) Identify the 

requirements with which the member 

firm is alleged to have not complied; (2) 

specify the facts involved in the alleged 

failure; state when the action will take 

effect; (3) explain what the member firm 

would be required to do to avoid the 

suspension or cancellation; (4) inform 

the member firm that it may file a 

request for a hearing in an expedited 

proceeding within seven days after 

service of the notice under Rule 9559; 

and (5) explain the Hearing Officer’s 

authority.113 If a member firm does not 

request a hearing, the suspension or 

cancellation would become effective 

seven days after service of the notice.114

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 

also adopting several amendments to 

Rule 9559 specific to hearings requested 

pursuant to new Rule 9561.115

Effective Date 

The effective date will be 180 days 

after the Regulatory Notice announcing 

this Commission approval.116

III. Discussion and Commission 

Findings 

After careful review of the proposed 

rule change, as modified by Amendment 

No. 1 and Amendment No. 2, the 

comment letters, and FINRA’s responses 

to the comments, the Commission finds 

that the proposed rule change, as 

modified by Amendment No. 1 and 

Amendment No. 2, is consistent with 

the requirements of the Exchange Act 

and the rules and regulations 

thereunder that are applicable to a 

national securities association.117

Specifically, the Commission finds that 

the proposed rule change is consistent 

with Section 15A(b)(6) of the Exchange 

Act, which requires, among other 

things, that FINRA rules 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.118

Proposed Rule 4111 (Restricted Firm 

Obligations) 

The proposal to establish a process in 

new Rule 4111 to identify member firms 

that present a high degree of risk to the 

investing public, based on numeric 

thresholds of firm-level and individuallevel disclosure events, and then impose 

a Restricted Deposit Requirement, 

conditions or restrictions on the 

member firm’s operations, or both, will 

help protect investors and encourage 

such member firms to change their 

behavior. FINRA has designed the 

proposed rule change to establish an 

annual, multi-step process to determine 

whether a member firm raises investor 

protection concerns substantial enough 

to require the imposition of additional 

obligations,119 while allowing identified 

firms several means of challenging 

FINRA’s decisions and affecting the 

ultimate outcome.120 The annual review 

process, and the ability to impose added 

obligations on firms presenting a 

significantly higher degree of risk to 

investors, should encourage firms to 

alter their behavior, ultimately to the 

benefit and protection of investors. 

One commenter expressed general 

support for the proposal, without calling 

for any amendments.121 Three 

commenters expressed general support 

for the proposal, while also suggesting 

changes to the proposal to ease firms’ 

compliance burdens, and to help 

achieve the intended purpose of both 

incentivizing improved behavior from 

member firms and better protecting 

investors.122 Finally, three other 

commenters expressed general 

opposition to the proposal.123

Disclosure of Restricted Firms 

Three commenters advocated for 

some form of public disclosure of 

Restricted Firms identified by FINRA 

during the Rule 4111 process.124 Two of 

those commenters expressed concerns 

that withholding publication of this 

information would limit investors’ 


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125See PIABA Letter at 3–4; Better Markets Letter 

at 17–18. 

126See Better Markets Letter at 18. The 

Commission finds that this suggestion is also 

beyond the scope of the proposed rule change. 

127See NASAA Letter at 5. 

128 Id. at 4. 

129 Id. 

130See FINRA March 4 Letter at 16–17 (listing the 

one-time staff reduction as an example of a means 

to get removed from the Restricted Firms list). 

131 Id. at 12. 

132 Id. at 16. 

133 Id. at 17. FINRA believes that information 

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

restricted deposit it is subject to, could become 

publicly available through existing sources or 

processes, such as 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. See Notice at 

78567 note 159. 

134See FINRA July 20 Letter. 

135 Id. at 3. 

136See FINRA July 20 Letter. 

137 Id. 

138See SIFMA Letter; Harvin Letter. 

139See SIFMA Letter at 2. 

140See Harvin Letter at 1–3. 

141See FINRA March 4 Letter at 4. 

142 Id. 

ability to make informed decisions 

when selecting a brokerage firm.125 One 

argued that ‘‘at a minimum, FINRA 

must prominently publicize the names 

of the firms that have been twicedesignated as high-risk’’ and those of 

newly formed firms where at least 20% 

of the associated persons were affiliated 

previously with twice-designated highrisk firms.126 One commenter also 

criticized the lack of required disclosure 

on Form BD or Form CRS, noting that 

firms are unlikely to make such 

disclosures voluntarily.127 The other 

commenter asserted that, ‘‘at a 

minimum, the names of Restricted 

Firms should be provided to state 

securities regulators’’ to assist such 

authorities with regulatory oversight 

and risk analyses of the firms.128 This 

commenter stated that the lack of 

disclosure to state securities regulators 

was particularly concerning, because it 

could ‘‘skew an examiner’s review of 

the firm’s compliance with net capital 

requirements due to the restricted funds 

not being readily available to meet 

creditor’s calls or liquidity 

requirements.’’ 129

In its initial response, FINRA pointed 

out that the purpose of proposed Rule 

4111 is to address the risks posed by 

Restricted Firms through appropriate 

operational restrictions, while giving 

them opportunities and an incentive to 

remedy those risks, but that it intends 

to explore how it can appropriately 

share identified risks presented by 

certain firms with both the public and 

state securities regulators, while 

remaining consistent with the purpose 

of proposed Rule 4111.130 FINRA stated 

that the proposed rule change is 

designed to incentivize members that 

pose outlier-level risks, when compared 

to all similarly sized firms by 

headcount, to change behavior and 

could have an ancillary benefits for 

addressing unpaid arbitration 

awards.131 FINRA expressed concern 

that publicly disclosing a firm’s 

Restricted Firm status may potentially 

interfere with those purposes.132

However, FINRA recognized the 

potential value to investors of public 

disclosure of a member’s status as a 

Restricted Firm and intends to consider 

employing it and other approaches 

during its planned review of Rule 4111 

after it has gained ‘‘sufficient experience 

with the rule.’’ 133

In further consideration of the matter, 

FINRA filed a second response to 

comments, wherein it indicated that the 

FINRA Board of Governors has 

authorized the filing of proposed 

amendments to Rule 8312 (FINRA 

BrokerCheck Disclosure) that would 

require FINRA to identify on 

BrokerCheck those member firms or 

former member firms that are designated 

as Restricted Firms pursuant to 

proposed Rules 4111 and 9561.134

FINRA indicated that public disclosure 

on BrokerCheck of those firms that it 

designates as a Restricted Firm should 

‘‘help investors make informed choices 

about the member firms with which 

they do business.’’ 135 FINRA stated that 

if the Commission approves the 

proposed rule change, FINRA would 

promptly thereafter file with the 

Commission the proposed amendments 

to Rule 8312.136 Additionally, FINRA 

committed to working with individual 

state securities regulators to share 

relevant information concerning 

whether firms that operate within their 

jurisdictions have been designated as 

Restricted Firms, along with 

information pertaining to the obligations 

that it has imposed on such firms 

pursuant to proposed Rules 4111 and 

9561.137

The Commission finds that the 

incentives it provides to encourage 

firms’ remediation of high-risk 

behaviors would be an important step in 

furtherance of the protection of 

investors from broker-dealers with risk 

profiles indicative of potential future 

harm. The Commission finds that the 

proposed rule change is reasonable and 

is designed to enhance investor 

protection by incentivizing brokerdealers and brokers that pose higher 

risks to investors to change their 

behavior. For these reasons, the 

Commission finds the proposed rule 

change as presented is consistent with 

Section 15A(b)(6) of the Act in that it is 

in the public interest. The Commission 

further supports FINRA’s commitment 

to working with individual state 

securities regulators to share relevant 

information and observes its 

commitment to further consider public 

disclosure of a firm’s designation as a 

Restricted Firm by filing proposed 

amendments to Rule 8312 that would 

require FINRA to identify on 

BrokerCheck those member firms or 

former member firms that are designated 

as Restricted Firms pursuant to 

proposed Rules 4111 and 9561. 

Resources To Assist Member Firms 

With Compliance 

Two commenters advocated for 

greater clarity on how firms can 

independently replicate FINRA’s 

calculation of the Preliminary 

Identification Metrics, due to the 

burdens firms may face in complying 

with proposed Rule 4111.138 One 

suggested that FINRA commit to: (1) 

Providing resources that ‘‘map the 

Disclosure Event and Expelled Firm 

Association Categories to the relevant 

questions on Uniform Registration 

Forms’’; (2) giving firms a worksheet to 

track their status based on disclosure 

events and previous firm associations of 

their Registered Persons In-Scope; and 

(3) providing firms with a list of all 

expelled firms.139 The other commenter 

suggested FINRA should advise each 

member firm ‘‘in writing annually what 

its six Preliminary Identification Metrics 

are,’’ and pointed out that without 

further assistance from FINRA, firms 

would need to review each of their 

registered representative’s BrokerCheck 

reports to track the Registered Persons 

Associated With Previously Expelled 

Firms metric.140 FINRA indicated that it 

appreciates the potential compliance 

burdens, and understands the need and 

expressed its commitment to provide 

more guidance and resources.141

Further, FINRA indicated it will explore 

the feasibility of providing each member 

firm with notice of its status with 

respect to the Preliminary Criteria for 

Identification, including whether such 

notice would be useful for firms if 

calculated at any point other than on 

their annual Evaluation Date.142 As 

noted above, due to these concerns and 

the need to develop resources to assist 

firms with compliance, FINRA has 

extended the effective date for the 

proposed rule change to no later than 

180 days after publication of a 


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143 Id. 

144See Harvin Letter; Better Markets Letter; and 

PIABA Letter. 

145See Better Markets Letter at 16. 

146See Notice at 78556. 

147See High Risk Broker Approval Order at 

81547. 

148 Id. 

149 Id. 

150See FINRA March 4 Letter at 10; see also 

proposed Rule 4111(i)(4), including, among other 

things, criminal matters, regulatory actions, and 

terminations as disclosure events. 

151See Notice at 78542. 

152 Id. at 78561. FINRA also stated that this desire 

to provide transparency is why it based proposed 

Rule 4111 on ‘‘events disclosed on the Uniform 

Registration Forms, which are generally available to 

firms and FINRA.’’ As noted above, FINRA remains 

aware that even though these data would be 

available to firms by accessing the BrokerCheck 

reports of each of their registered representatives, 

FINRA could ease firms’ compliance burdens by 

providing additional tools. With this in mind, 

FINRA has committed to providing firms with 

additional guidance and resources to help facilitate 

member firms’ independent calculations, and has 

extended the effective date following the 

Commission’s approval in order to have sufficient 

time for development of such resources. See FINRA 

March 4 Letter at 4. 

153See FINRA March 4 Letter at 10. 154See Better Markets Letter at 10. 155 Id. at 16. 156See FINRA March 4 Letter at 11; see also 

Notice at 78560. 157See FINRA March 4 Letter at 11. 158 Id. at 10. 159 Id. at 11–12. 

Regulatory Notice announcing this 

Commission approval.143

Providing firms with increased clarity 

as to how the Preliminary Identification 

Metrics apply to their own situation 

would further assist in FINRA’s goal to 

incentivize better behaviors from firms. 

The Commission thus supports FINRA’s 

decision to extend the effective date of 

proposed Rule 4111 to develop certain 

compliance tools, and would encourage 

FINRA to provide resources and 

guidance for firms as is feasible. 

Preliminary Criteria for Identification 

Three commenters expressed various 

concerns regarding the scope of events 

included in the proposed Preliminary 

Criteria for Identification.144

One commenter urged FINRA to 

amend the Preliminary Identification 

Metrics to use ‘‘more stringent criteria 

in identifying high risk firms,’’ 

including (1) expanding the look-back 

review period for disclosure events from 

five to ten years; (2) decreasing the 

settlement size threshold for 

investment-related, consumer-initiated 

customer arbitration awards and civil 

judgments from $15,000 to $5,000; and 

(3) expanding the scope of disclosure 

events to cover events that are harmful 

to investors, even where not consumerinitiated.145

FINRA responded that it already 

considered these alternative definitions 

and criteria among many others. For 

instance, FINRA stated that it 

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 (i.e., events 

occurring in the last five years) 

generally pose a higher level of possible 

future risk to customers than other 

events. Further, FINRA believes that 

counting events over an individual’s or 

firm’s entire reporting period would 

imply that associated persons 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.146

Similarly, FINRA’s use of the $15,000 

settlement threshold is consistent with 

its approach in the High Risk Broker 

Approval Order. In that filing, FINRA 

established metrics based, in part, on 

complaints that led to an award against 

a broker or settled above a de minimis 

threshold of $15,000 because it wanted 

to ‘‘focus its analysis on outcomes that 

are more likely associated with material 

customer harm.’’ 147 FINRA also stated 

that the $15,000 mark represents the 

current CRD settlement threshold for 

reporting customer complaints on 

Uniform Registration Forms.148 Thus, by 

lowering the threshold to $5,000, FINRA 

‘‘would not have useful information 

. . . from which to make its objective 

analysis,’’ because the additional events 

that would be captured by this change 

from the proposed rule would not be 

reportable.149

Finally, FINRA also disputed the 

assessment that the proposed rule is 

‘‘limited to only events that are 

‘consumer-initiated,’ ’’ as disclosure 

events are only qualified by the term 

‘‘consumer-initiated’’ in the proposal 

where that distinction is made in 

disclosure questions in the Uniform 

Registration Forms.150

The Commission finds that the 

standards proposed by FINRA are 

reasonable and are designed to better 

enable FINRA to initially identify firms 

for potential designation as a Restricted 

Firm through objective criteria—one of 

FINRA’s stated goals in initially 

proposing the rule.151 Further, this 

approach conforms to another of 

FINRA’s ‘‘guiding principles’’ in 

developing the proposal, to provide 

member firms with transparency 

regarding how proposed Rule 4111 

would operate, such 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.’’ 152 In addition, the 

proposed disclosure events covered by 

the proposed rule would not be limited 

to customer initiated events but would 

include, among other things, criminal 

matters, regulatory actions, and 

terminations.153 FINRA’s proposed 

definition of disclosure events would 

capture the types of activities FINRA 

believes are indicative of future investor 

protection concerns. For these reasons, 

the Commission finds FINRA’s 

approach is designed to protect 

investors and the public interest. 

With respect to expanding the fiveyear lookback, the same commenter 

objected to FINRA’s proposed rule 

change establishing a maximum lookback period for the Registered Persons 

Associated with Previously Expelled 

Firms metric at five years, asserting it 

was based on ‘‘overblown’’ concerns 

that an unlimited look-back period 

would discourage firms from hiring 

registered representatives who may not 

themselves have violated any rules, thus 

resulting in unfair punishment.154

Alternatively, the commenter suggested 

that this lookback period be extended to 

ten years.155

In response, FINRA explained that it 

avoided proposing an unlimited 

lookback period over a registered 

person’s entire career and added a fiveyear look back to be consistent with the 

lookback periods for the other proposed 

metrics.156 FINRA further reasoned that 

it added the requirement that the 

individual was registered at the nowexpelled firm for a year or more 

because, in its experience, registered 

persons with more recent associations 

and longer tenures with expelled firms 

‘‘generally pose higher risk than other 

individuals.’’ 157 Finally, FINRA stated 

that it believes the Expelled Firm 

Association Metric and Expelled Firm 

Association Metrics Thresholds 

‘‘appropriately serve[] the goal of 

preliminarily identifying firms that 

present a higher risk.’’ 158 To help 

ensure the Expelled Firm Association 

Metric continues to serve its intended 

purposes, FINRA indicated it examined 

the Expelled Firm Association Metric 

and related thresholds and validated 

that they continue to serve the intended 

purpose of identifying firms posing a 

greater risk to customers.159

The Commission finds that FINRA 

has reasonably tailored its proposal and 

its related thresholds to identify those 

firms that present such a risk. In 


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160 If FINRA proposes to amend these rules in the 

future, FINRA would be required to file the 

proposed rule change with the Commission along 

with a concise general statement of the basis and 

purpose of the proposed rule change. The 

Commission would then publish a notice in 

connection with the proposed rule change in the 

Federal Register and post it on its public website 

to give interested persons an opportunity to 

comment on the proposed rule change. See 

Exchange Act Section 19(b)(1) and Rule 19b-4 

promulgated thereunder. 

161See PIABA Letter at 6. 

162 Id. 

163See FINRA March 4 Letter at 9; see also supra 

note 66 (noting that one of the event categories, 

Member Firm Adjudicated Events, includes events 

that are derived from customer arbitrations filed 

with FINRA’s dispute resolution forum). 

164 Id. 

165 Id.; see also 4111(i)(15). 

166See Harvin Letter at 2. 

167See FINRA March 4 Letter at 7. 

168 Id. 

169 Id. at 8. 

170 Id. at 7–8. 

171 Id. at 8. 

172See proposed Rule 4111(i)(4)(D)(i). 

173See Harvin Letter at 2. 

174See FINRA March 4 Letter at 8. 

175See Harvin Letter at 2; see also proposed Rule 

4111(i)(4)(E)(ii) and (iii). 

particular, the Commission finds 

FINRA’s conclusion reasonable that a 

registered representative’s association 

with an expelled firm that is more 

recent, and/or longer-term is more likely 

to pose a higher risk than those 

relationships that are further removed, 

or of a shorter-duration. The 

Commission encourages FINRA to 

regularly reassess the appropriateness of 

the related metrics and thresholds for 

identifying firms to help ensure these 

definitions accurately identify the 

highest risk firms.160 For these reasons, 

the Commission finds FINRA’s 

approach to identify firms that may pose 

a higher risk to investors is designed to 

protect investors and the public interest. 

Finally, one commenter suggested 

that the proposed Preliminary Criteria 

for Identification Metrics could be 

improved by considering the nature and 

extent to which certain securities are 

sold by firms. In particular, this 

commenter expressed concern that 

‘‘high-risk firms will often focus a large 

percentage of their business on selling, 

for example, non-publicly traded 

investment products.’’ 161 In the event 

that such a product fails, these firms’ 

investors can be left without recourse if 

a firm collapses.162 FINRA responded 

that the proposed Preliminary Criteria 

for Identification are intended to be 

‘‘replicable, objective and transparent,’’ 

and are thus ‘‘almost entirely based on 

disclosures on the Uniform Registration 

Forms’’ that do not distinguish 

disclosures associated with product 

failures from any other disclosures 

made by the firm.163 However, FINRA 

indicated it could account for the types 

of securities sold by a firm (including 

‘‘product failures’’) when making its 

initial determination in the Rule 4111 

process, or through the Consultation.164

Further, FINRA stated that proposed 

Rule 4111(i)(15) requires that any 

determination of a Restricted Firm’s 

Restricted Deposit Requirement would 

be required to consider, among other 

items, ‘‘the nature of the firm’s 

operations and activities.’’ 165

As previously noted, the Commission 

supports FINRA setting Preliminary 

Criteria for Identification in as 

transparent, replicable, and objective a 

manner as possible by reference to the 

Uniform Registration Forms. While the 

comment focuses on securities that may 

be riskier for investors, such as nonpublicly traded securities, FINRA has 

demonstrated that the proposed 

‘‘funnel’’ process affords the 

opportunity for FINRA to account for 

the types of securities sold by a firm. 

While not included in the Preliminary 

Criteria for Identification Metrics that 

serve as the threshold analysis, FINRA 

can identify and consider a firm’s 

propensity to offer riskier securities 

during the Consultation process and in 

setting a Restricted Deposit Requirement 

and imposing appropriate conditions 

and restrictions on such a firm. For 

these reasons, the Commission finds 

FINRA’s approach is designed to protect 

investors and the public interest. 

One commenter suggested that 

proposed Rule 4111 should directly 

reference the ‘‘specific disclosure 

questions or items’’ in the Uniform 

Registration Forms that align to the 

Preliminary Criteria for Identification, 

rather than using alternative language 

for the definitions of each of the rule’s 

categories.166 FINRA responded that the 

definitions of the six categories of the 

Preliminary Criteria for Identification 

capture disclosures from multiple 

Uniform Registration Forms.167 As such, 

FINRA believes that listing each of the 

questions from each such relevant form 

would ‘‘be more confusing in the rule 

text and could lead to ongoing 

amendments to the definition as the 

[Uniform Registration Forms] are 

amended.’’ 168 Instead, FINRA has 

elected to use substantive descriptions 

of the included disclosure events in 

proposed Rule 4111 with a ‘‘plainEnglish approach’’ that summarizes and 

describes disclosure events from the 

Uniform Registration Forms to make the 

definitions easier to read, understand, 

and use.169 FINRA also stated that this 

approach is consistent with a related 

filing that was recently approved by the 

Commission (SR–FINRA–2020–011), 

where it elected not to include 

questions from the Uniform Registration 

Forms to avoid confusion and the need 

for ongoing amendments to the 

proposed rule change when these forms 

are revised in the future.170 Although 

FINRA did not take this commenter’s 

suggestion, it stated it is considering 

providing guidance that would map the 

Registered Person and Member Firm 

events to the relevant disclosure 

questions on the Uniform Registration 

Forms to help firms self-monitor their 

metrics.171

The same commenter stated that 

while the proposed definition of 

‘‘Member Firm Adjudicated Events’’ 

includes ‘‘[a] final investment-related, 

consumer-initiated customer arbitration 

award in which the member was a 

named party,’’ 172 publicly available 

summary information on arbitration 

awards found on BrokerCheck and 

Arbitration Awards Online do not 

identify awards as ‘‘investment-related’’ 

or ‘‘consumer-initiated.’’ 173 FINRA 

agreed that additional clarity is 

warranted, and confirmed that this 

prong of the Member Firm Adjudicated 

Events definition is ‘‘intended to 

capture all BrokerCheck disclosures of 

arbitration awards against firms,’’ but 

stopped short of amending the rule text 

to make direct references to 

BrokerCheck. Due to the concerns over 

the potential for added confusion noted 

above, FINRA stated it was not 

appropriate to make such amendment in 

light of its plain-English approach.174

The Commission finds that FINRA’s 

choice to provide a ‘‘plain-English’’ 

approach is reasonable and designed to 

provide clarity regarding what events 

would and would not be included in the 

Preliminary Identification Metrics. For 

these reasons, the Commission finds 

FINRA’s approach is designed to protect 

investors and the public interest. 

The same commenter also raised a 

question about the definition of Member 

Firm Pending Events, and whether there 

is a distinction between a ‘‘pending 

investigation by a regulatory authority’’ 

and 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.’’ While Forms U4 and U5 

require disclosure of pending 

‘‘investigations,’’ the commenter 

observed that Form U6 refers to a matter 

as an action and does not mention 

‘‘investigation.’’ 175 FINRA stated that 

the proposed inclusion of ‘‘pending 

investigations by a regulatory authority’’ 


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176See FINRA March 4 Letter at 9; see also 

proposed Rule 4111(i)(4)(B)(ii). 177See FINRA March 4 Letter at 9. 178See Better Markets Letter; PIABA Letter. 179See Better Markets Letter at 17. 

180See PIABA Letter at 7. 

181See FINRA March 4 Letter at 21. 

182 Id. at 21–22. 

183 Id. at 22 note 60. 

184 Id. at 22; see also Notice at 78562. 

185See Better Markets Letter at 16–17. In its letter, 

Better Markets also suggested—as an alternative to 

their suggestion that FINRA adopt an order for the 

employees to be terminated—that FINRA could 

require would be that firms ‘‘terminate or lay-off 

those brokers who would have had a harmful 

combination of frequent and severe violations of 

FINRA and SEC rules that have a direct impact on 

investors.’’ Better Markets Letter at 16. 

186See Exchange Act Release No. 90635 (Dec. 10, 

2020), 85 FR 81540 (Dec. 16, 2020) (File No. 

FINRA–2020–011) (‘‘High Risk Broker Approval 

Order’’). Pursuant to FINRA Rule 1017, any brokerdealer seeking to add a natural person who: (1) Has, 

in the prior five years, one or more final criminal 

matters or two or more specified risk events and (2) 

seeks to become an owner, control person, 

principal, or registered person of the member must 

submit a written request seeking a materiality 

consultation for the contemplated activity so that 

FINRA can determine whether a the firm must file 

a continuing member application. 

187See Better Markets Letter at 17. 

188See FINRA March 4 Letter at 22–23. 

189Prior to making certain changes to its 

ownership, control, or business operations, a 

FINRA member firm must file a Form Continuing 

Membership Application or ‘‘Form CMA,’’ and 

obtain FINRA’s pre-approval to do so. See FINRA 

Rule 1017(a) (Application for Approval of Change 

in Ownership, Control, or Business Operations). 

190See FINRA March 4 Letter at 22–23. 

191 Id. at 23; see proposed Rule 4111.03(1), which 

sets out that FINRA may impose ‘‘limitations on 

business expansions, mergers, consolidations, or 

changes in control,’’ among the examples of 

potential conditions or restrictions that may be 

placed on Restricted Firms. 

192See FINRA March 4 Letter at 22; see also High 

Risk Broker Approval Order at 81544–45. 

within the Member Firm Pending 

Events definition was intended to 

parallel a similar provision in the 

proposed Registered Person Pending 

Events definition.176 However, FINRA 

stated that, from a technical perspective, 

‘‘Form BD contains no disclosure 

questions or DRP fields about pending 

investigations by a regulatory authority 

concerning firms.’’ 177 As a result, 

FINRA filed Amendment No. 1 to make 

a technical correction to the definition 

of Member Firm Pending Events in 

proposed Rule 4111(i)(4)(E) by deleting 

‘‘a pending investigation by a regulatory 

authority’’ reportable on the member’s 

Uniform Registration Forms, as the 

relevant forms contain no such 

disclosure question or DRP fields. 

One-Time Opportunity To Reduce 

Staffing Levels 

Two commenters urged FINRA to add 

further conditions to the one-time staff 

reduction option afforded to those firms 

identified the first time the Rule 4111 

process is used.178 One commenter 

asked FINRA to require that any 

terminations would need to begin with 

those persons with the highest number 

of disclosure events or those that ‘‘pose 

the greatest risk to investors,’’ and that 

in all circumstances, firms should be 

prohibited from retaining certain 

persons ‘‘due to their position within 

the firm or the amount of revenue they 

generate.’’ 179 The other commenter 

criticized the allowance of a one-time 

staff reduction as incentivizing member 

firms to merely ‘‘discharge ‘low hanging 

fruit’ and continue business as usual,’’ 

rather than effectively monitor and 

supervise their registered 

representatives.180

FINRA responded that it agrees with 

the investor protection objectives of 

these two comments, but that the 

proposed rule change achieves these 

objectives.181 For instance, FINRA 

believes that firms would have a strong 

incentive to use the staff-reduction 

option to avoid being subject to a 

Restricted Deposit Requirement or other 

conditions and restrictions for a 

significant period of time, and to use 

this option they would need to 

terminate representatives who have the 

kinds of disclosures captured by the 

rule and in sufficient numbers that 

cause the firm to fall below the stated 

thresholds.182 FINRA also stated that 

prohibiting the firm from rehiring any 

terminated employees for one-year 

prevents a firm from evading the 

objectives of the proposed rule change 

since any member firm that seeks to hire 

such persons would need to also 

consider and comply with FINRA Rule 

9522 (Initiation of Eligibility 

Proceeding; Member Regulation 

Consideration) to the extent that any 

such persons are subject to a ‘‘statutory 

disqualification’’ as defined in Section 

3(a)(39) of the Exchange Act.183

Additionally, FINRA stated that since a 

firm would not be able to use the staffreduction option a second time, it 

would deter firms from thereafter hiring 

individuals with a record of disciplinary 

issues after a staff reduction and 

incentivize those firms to improve 

compliance going forward to avoid a 

Restricted Firm designation in the 

future.184

The Commission finds that the onetime staff reduction option, along with 

a one-year restriction on rehiring by the 

firm from which those employees were 

terminated, as proposed, is a reasonable 

means to materially reduce the current 

risk to investors and to incentivize firms 

to improve compliance over a longerterm period to avoid both a Restricted 

Firm designation the first time they 

meet the Preliminary Criteria for 

Identification, and also being reidentified in a subsequent Rule 4111 

evaluation. For these reasons, the 

Commission finds that FINRA’s 

approach is designed to protect 

investors and the public interest. 

One of the commenters also called on 

FINRA to amend the proposal to 

prohibit those employees who are laid 

off during the Consultation process from 

being ‘‘hired by other firms for at least 

one year, and never by another high-risk 

firm.’’ 185 While FINRA stated that a 

separate rulemaking (amending FINRA 

Rule 1017), recently approved by the 

Commission, may also help deter firms 

from hiring recidivist registered 

representatives recently fired by other 

firms,186 the commenter argued this rule 

change is insufficient, as it ‘‘does not 

prohibit the hiring [of such terminated 

employees], but merely requires that the 

hiring firm impose an additional 

supervisory regime over troublesome 

brokers.’’ 187

FINRA disagreed, noting that under 

the approved changes to Rule 

1017(a)(7), member firms must submit a 

written request to FINRA seeking a 

materiality consultation whenever a 

person ‘‘seeks to become an owner, 

control person, principal or registered 

person of the member’’ who has one 

‘‘final criminal matter’’ or two 

‘‘specified risk events’’ within the past 

five years.188 During this materiality 

assessment, the Department may then 

require the firm make a Form CMA 

filing 189—and obtain FINRA’s approval 

thereafter—before such person may be 

hired.190 Further, FINRA stated that one 

of the examples provided in proposed 

Rule 4111.03 of the conditions and 

restrictions the Department may impose 

on a Restricted Firm is ‘‘limitations on 

business expansions,’’ which FINRA has 

indicated ‘‘could include limitations on 

the kinds of persons that a Restricted 

Firm may hire.’’ 191 Separately, FINRA 

also stated that the Commission recently 

approved rule changes that will 

potentially impact employees 

terminated under proposed Rule 

4111(c)(2) when seeking to join another 

firm.192

The Commission finds that the 

incentives created by the one-time staff 

reduction option, as proposed, 

reasonably align with FINRA’s stated 

purpose to incentivize firms to reduce 

their risk profile and improve their 

compliance. For these reasons, the 

Commission finds FINRA’s approach is 

designed to protect investors and the 

public interest. While the Commission 

recognizes that FINRA’s recent 

amendments to the materiality 


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193See Better Markets Letter at 19. 

194 Id. Better Markets argued that the rationale for 

this remedy is that firms that have been twicedesignated, but not significantly improved their 

compliance culture have ‘‘prove[d] that they are 

irredeemable, and they do not deserve to be 

permitted to serve, or more likely, harm any 

additional investors.’’ Id. 

195See FINRA March 4 Letter at 26. 

196 Id. at 26–27; see also Exchange Act Section 

15A(b)(8) (Requiring that FINRA’s rules, in general, 

‘‘provide a fair procedure for the disciplining of 

members and persons associated with members, the 

denial of membership to any person seeking 

membership therein, the barring of any person from 

becoming associated with a member thereof, and 

the prohibition or limitation by the association of 

any person with respect to access to services offered 

by the association or a member thereof.’’). 

197FINRA plans to conduct a review of the 

effectiveness of proposed Rule 4111 after gaining 

sufficient experience with its operation. See Notice 

at 78548. Among other things, FINRA would review 

whether the Preliminary Identification Metrics 

Thresholds are sufficiently targeted and effective at 

identifying member firms that pose higher risks. Id. 

198See PIABA Letter; Harvin Letter. As noted 

above, proposed Rule 4111(i)(2) defines Covered 

Pending Arbitration Claim as an investment-related, 

consumer-initiated claim filed against the member 

or its associated persons in any arbitration forum 

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. 

199See PIABA Letter at 7. 

200See FINRA March 4 Letter at 23. FINRA also 

stated that other of its 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.’’ Id. at 23 note 65; see 

also proposed Rule 4111(f) and (i)(15). 

201See PIABA Letter at 7. 

202See FINRA March 4 Letter at 24. 

203See Harvin Letter at 3; see also Notice at 78541 

note 10 (FINRA has stated that the ‘‘claim amount’’ 

only includes claimed compensatory loss amounts 

and not those for pain and suffering, punitive 

damages or attorney’s fees. The claim amount shall 

be the maximum amount that the member or 

associated person 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.). 

204 Id. at 5. Specifically, Harvin pointed to 

Financial Accounting Standards Board (FASB) 

Accounting Standards Codification (ASC) Topic 

450–20 (Loss Contingencies), ASC 450–20–25 

(Recognition), ASC 450–20–25–2, ASC–450–20 

(Glossary), and ASC 450–20–55–13. Id. at 3–5. 

consultation process noted above, could 

provide an additional layer of 

deterrence to firms’ hiring of recidivist 

representatives terminated by other 

firms, it finds that the critique of 

previously approved Rule 1017(a)(7) is 

beyond the subject matter of this 

proposed rule change and therefore is 

beyond the scope of this filing. 

Calls To Expel Restricted Firms That 

Fail To Improve 

One commenter argued that proposed 

Rule 4111 should be amended so that if 

a firm is designated a Restricted Firm in 

one year, and does not improve to avoid 

re-designation in either of the next two 

years, FINRA should ‘‘expel the firm, 

and de-license and bar all current 

brokers who were employed by the firm 

at the time of initial designation.’’ 193

Further, this commenter argued the 

expulsion order ‘‘should not be 

appealable and should take immediate 

effect.’’ 194 FINRA responded that this 

request would essentially broaden the 

statutory definition of ‘‘disqualified 

persons,’’ ‘‘which is not within FINRA’s 

jurisdiction to do.’’ 195 Additionally, 

FINRA asserted that the call for 

expulsion without a right to appeal 

would be ‘‘inconsistent with the fair 

procedure requirements in Section 

15A(b)(8) of the Securities Exchange Act 

of 1934.’’ 196

The Commission agrees with FINRA 

that the expulsion of a firm without 

right to appeal the decision would be 

inconsistent with the fair disciplinary 

procedures that member firms are to be 

afforded pursuant to Section 15A(b)(8). 

Moreover, the Commission finds that 

proposed Rule 4111 adopts a reasonable 

set of conditions and restrictions on 

firms with outlier-level disclosure 

events, and incentivizes such firms to 

improve their behavior for the 

protection of the investing public. Still, 

the Commission encourages FINRA to, 

after gaining sufficient experience posteffectiveness, to review whether 

proposed Rule 4111 is adequately 

meeting its intended goals or if further 

amendments would be appropriate.197

For these reasons, the Commission does 

not believe that it is necessary to 

address whether, as FINRA states, the 

commenter’s proposal would 

impermissibly broaden the definition of 

‘‘statutory disqualification’’ under the 

Exchange Act. 

Concerns About the Definition of 

‘‘Covered Pending Arbitration Claim’’ 

and the Restricted Deposit Account 

Two commenters expressed concerns 

regarding the proposed definition of a 

‘‘Covered Pending Arbitration 

Claim.’’ 198 One commenter argued that 

adopting a definition to only cover 

claims if they exceed a firm’s excess net 

capital ‘‘improperly excludes claims 

that are less than a firm’s excess net 

capital yet may still remain unpaid by 

the firm.’’ 199 In response, FINRA stated 

that the term ‘‘Covered Pending 

Arbitration Claim’’ excludes final 

arbitration matters that have resulted in 

either an award or settlement, and that 

‘‘regardless of a firm’s excess net capital, 

if a final arbitration award or settlement 

is unpaid, that would be a factor for 

FINRA to consider when determining a 

Restricted Deposit Requirement and 

reviewing a firm’s request for a 

withdrawal from a Restricted 

Deposit.’’ 200 The same commenter also 

argued that because FINRA will assess 

each firm based on a fixed point in time, 

this definition will enable firms to 

‘‘manipulate whether an arbitration 

claim is covered simply by adjusting its 

excess net capital while FINRA is 

determining the Restricted Deposit 

Requirement.’’ 201 FINRA responded 

that although its assessment of a firm 

will occur on a fixed date, proposed 

Rule 4111(i)(15) would require the 

Department to review a firm’s financial 

factors, including its net capital levels 

‘‘for relevant periods,’’ enabling the 

Department to detect material changes 

in a firm’s net capital levels during or 

in anticipation of a possible review 

under Rule 4111 and to ‘‘take into 

account attempts by a firm to 

manipulate financial-related 

factors.’’ 202

The Commission finds that it is 

reasonable to exclude final arbitration 

matters that have resulted in an award 

or settlement from a definition designed 

to capture only pending claims. Further, 

the Commission agrees that proposed 

Rule 4111 has provided a mechanism 

for FINRA to account for such unpaid 

arbitration awards or settlements 

resulting from a final arbitration in 

crafting a Restricted Firm’s Restricted 

Deposit Requirement, and in evaluating 

any request to withdraw funds from its 

Restricted Deposit Account. The 

Commission also finds that the design of 

proposed Rule 4111, which would 

require FINRA to evaluate each firm’s 

financial factors across ‘‘relevant 

periods,’’ should be allow FINRA to 

detect potential manipulation of a firm’s 

net capital amounts. For these reasons, 

the Commission finds FINRA’s 

approach is designed to protect 

investors and the public interest. 

Another commenter asserted that the 

term ‘‘claim amount’’ should be 

removed from the definition of a 

‘‘Covered Pending Arbitration Claim,’’ 

arguing there is no support for the 

proposition that the ‘‘claim amount’’ 

stated in an arbitration claim has ‘‘any 

basis in reality.’’ 203 Instead, this 

commenter suggested that the definition 

of ‘‘Covered Pending Arbitration Claim’’ 

be revised to refer to the accounting 

standards pertaining to loss 

contingencies as adopted by the 

Financial Accounting Standards Board, 

so as to account for the probability that 

a pending arbitration claim results in a 

loss, and whether that potential loss can 

be reasonably estimated.204


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205See FINRA March 4 Letter at 24. 

206 Id. FINRA also stated that, in this regard, firms 

would not be precluded during the Consultation 

from asserting that the Covered Pending Arbitration 

Claims factor should be evaluated by the 

Department ‘‘in relation to the probability that those 

pending claims would evolve into actual liabilities 

and that the size of such actual liabilities would be 

less than the stated amount of the claims.’’ 

207 Id. See supra note 90 (detailing a series of 

proposed factors the Department would consider 

when determining a Restricted Firm’s maximum 

Restricted Deposit Requirement). 

208See Notice at 78545. 

209See Harvin Letter at 5–7. 

210See FINRA March 4 Letter at 13; see also 

Notice at 78541 (stating FINRA believes that the 

‘‘direct financial impact of a restricted deposit is 

most likely to change [a] member firms’ behavior— 

and therefore protect investors.’’). 

211See Harvin Letter at 7. 

212See FINRA March 4 Letter at 14. 

213 Id. at 13. 

214 Id. at 13–14; see also Notice at 78545–46. 

215See Notice at 78545. 

FINRA responded that it is necessary 

that all Covered Pending Arbitration 

Claims be considered within the 

requirements, because based on its 

experience, firms do not necessarily 

recognize a ‘‘loss contingency’’ for such 

a claim before concluding a 

proceeding.205 FINRA also indicated it 

believes that proposed Rule 4111(i)(15) 

‘‘is already flexible enough to address’’ 

the commenter’s concerns regarding loss 

contingencies.206 Finally, FINRA 

clarified that while the commenter 

seemed to ‘‘presume [ ] that the 

Restricted Deposit Requirement amount 

would establish a floor based on the 

amount of the firm’s Covered Pending 

Arbitration Claims,’’ the amount of such 

claims will serve merely as one factor, 

among many others, considered when 

FINRA crafts a firm’s Restricted Deposit 

Requirement.207

The Commission finds it is reasonable 

for FINRA to retain the term ‘‘claim 

amount’’ within the proposed definition 

of a Covered Pending Arbitration Claim. 

To operationalize Rule 4111, FINRA 

will need to be able to utilize consistent 

metrics that provide for comparable data 

across firms of similar sizes. The 

Commission agrees that the lack of 

consistency in firms recognizing ‘‘loss 

contingencies’’ for pending claims 

would undermine the usefulness of 

such figures in making initial 

identifications of those firms with 

outlier-level disclosure events relative 

to similarly sized peers. Further, the 

Commission agrees that proposed Rule 

4111, and specifically the proposed 

definition of a Restricted Deposit 

Requirement, provides flexibility to 

enable FINRA to account for loss 

contingencies when thereafter 

determining an appropriate deposit 

requirement for Restricted Firms. 

Finally, pursuant to proposed Rule 

4111(d), a firm would have an 

opportunity to demonstrate that it 

should not be required to be subject to 

the maximum Restricted Deposit 

Requirement by arguing that that certain 

Covered Pending Arbitration Claims 

were improperly considered in 

determining its restricted status.208 For 

these reasons, the Commission finds 

FINRA’s approach is designed to protect 

investors and the public interest. 

Concerns About the Calculation of a 

Firm’s Maximum Restricted Deposit 

Requirement 

One commenter stated that as one of 

the purposes of proposed Rule 4111 is 

to ‘‘give FINRA another tool to 

incentivize member firms to . . . pay 

arbitration awards,’’ imposing a 

Restricted Deposit Requirement on any 

firm that lacks Covered Pending 

Arbitration Claims or other unpaid 

arbitration awards would be 

unnecessary and that calculation of the 

Restricted Deposit in these 

circumstances would be arbitrary.209

FINRA disagreed, asserting that the 

primary purpose of proposed Rule 4111 

is to incentivize member firms with 

outlier-level risks to change their 

behavior, and therefore confirmed that 

under the proposal the Department 

could impose a Restricted Deposit 

Requirement on a Restricted Firm 

regardless of whether it has any unpaid 

arbitration awards or Covered Pending 

Arbitration Claims.210

The same commenter criticized 

FINRA’s failure to include in proposed 

Rule 4111(i)(15) the ‘‘average total 

revenue paid out in the past five years 

in arbitration and customer settlements 

and litigation’’ as a factor for 

determining a firm’s maximum 

Restricted Deposit Requirement.211

According to the commenter, the 

‘‘average total revenue paid’’ would 

represent a more accurate metric than 

the average amount of arbitration and 

customer settlements paid because the 

latter is not indicative of a firm having 

difficulty paying arbitration awards. 

FINRA questioned the commenter’s 

assumption, stating that even if a 

Restricted Firm has a recent history of 

paying arbitration awards and 

settlements, it does not mean that a 

Restricted Deposit Requirement would 

not be an appropriate step to address the 

risks such firm poses to investors.212

FINRA responded that in general, it 

believes the factors included in the rule 

are both specific enough to be relevant 

for the Department in determining a 

firm’s maximum Restricted Deposit 

Requirement, and also flexible enough 

to allow the Department to weigh those 

factors against all relevant facts and 

circumstances for a given firm.213

Moreover, the Consultation process 

would provide an opportunity for a firm 

to present why the maximum Restricted 

Deposit Requirement amount does not 

properly account for any particular 

factor in the rule, including by 

presenting the firm’s average total 

revenue paid out in the past five years 

in arbitration and customer settlements 

and litigation.214

The Commission finds that the 

proposed rule change to enable FINRA 

to impose a Restricted Deposit 

Requirement on Restricted Firms is a 

reasonable component of proposed Rule 

4111 and is reasonably designed to 

address the proposed rule’s goal of 

improving member firm behavior for the 

protection of the investing public. Even 

where a firm lacks Covered Pending 

Arbitration Claims or other unpaid 

arbitration awards, the imposition of a 

Restricted Deposit Requirement is a 

reasonable means of accomplishing the 

proposal’s primary purpose. Moreover, 

the Commission agrees that the 

flexibility afforded by proposed Rule 

4111(i)(15) should enable FINRA to 

account for such factors as the ‘‘average 

total revenue paid out in the past five 

years in arbitration and customer 

settlements and litigation’’ when 

determining the appropriate deposit 

requirement for a firm. 

Further, the Commission disagrees 

with the assertion that the calculation of 

a firm’s Restricted Deposit Requirement 

would be arbitrary. FINRA has laid out 

numerous factors in proposed Rule 

4111(i)(15) to discern an appropriate 

maximum Restricted Deposit 

Requirement for Restricted Firms that 

will incentivize improved behavior 

without undermining that firm’s 

financial stability. Moreover, the 

proposed rule’s Consultation process 

provides firms an opportunity to discuss 

the imposition of a lower Restricted 

Deposit Requirement.215 As FINRA has 

stated, the Consultation process is 

designed to specifically account for the 

disparities in risk presented by each 

firm initially identified through the 

Preliminary Identification Criteria, and 

to thereafter enable the Department to 

craft a Restricted Firm’s Restricted 

Deposit Requirement in light of 

discussions with that firm, and to 

account for that firm’s ‘‘unique 

characteristics.’’ Further, FINRA stated 

it will ‘‘tailor the member firm’s 

maximum Restricted Deposit 

Requirement amount to its size, 

operations and financial conditions . . . 


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216 Id. 

217See PIABA Letter at 3. 

218 Id. at 4. 

219See FINRA March 4 Letter at 18. 

220 Id. Specifically, FINRA indicated that 

proposed Rule 4111 would cover those firms that, 

‘‘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.’’ See Notice at 

78565. 

221 Id. In particular, FINRA thinks that proposed 

Rule 4111 may incentivize firms to reduce their risk 

profile and scope of violative conduct to avoid 

being deemed a Restricted Firm in the first place. 

FINRA further believes that proposed Rule 4111 

may also incentivize firms to obtain insurance for 

potential arbitration awards because the proposed 

rule would account for this type of insurance 

coverage in determining any firm’s Restricted 

Deposit Requirement. See Rule 4111(i)(15)(A) and 

the discussion about FINRA’s determination of a 

Maximum Restricted Deposit Requirement, supra 

note 90. Finally, FINRA argued that proposed Rule 

4111 includes a number of presumptions as to the 

Department’s assessment of any previously 

designated Restricted Firm’s application to 

withdraw from its Restricted Deposit, ‘‘that would 

further incentivize the payment of arbitration 

awards.’’ 

222See PIABA Letter at 3. 

223 Id. 

224See FINRA March 4 Letter at 19. 

225 Id. 

226 Id. 

227See PIABA Letter at 4. In particular, PIABA 

indicated that proposed Rule 4111 should address 

how an investor may access funds from a firm’s 

restricted deposit in the case of Former Members ‘‘if 

the former firm refuses to apply for a withdrawal, 

or if no one from the former firm is available to 

make such a request on behalf of the investor.’’ Id. 

228See FINRA March 4 Letter at 19–20. 

229See Notice at 78565 note 151 and 

accompanying text; see also FINRA March 4 Letter 

at 7 note 15 and accompanying text. 

[to] be consistent with the objectives of 

the rule, but [without] significantly 

undermin[ing] the continued financial 

stability and operational capability of 

the member firm as an ongoing 

enterprise over the next 12 months’’ 216

The Commission finds this process is a 

reasonable means of establishing an 

appropriate Restricted Deposit 

Requirement for individual Restricted 

Firms that affords those firms with 

sufficient opportunity to affect the 

outcome of FINRA’s determination. For 

these reasons, the Commission finds 

FINRA’s approach is designed to protect 

investors and the public interest. 

Unpaid Arbitration Awards and 

Settlements 

One commenter asserted that 

proposed Rule 4111 does not explicitly 

address unpaid arbitration awards and 

settlements.217 In particular, this 

commenter criticized proposed Rule 

4111’s failure to require or incentivize 

Restricted Firms to pay unpaid 

arbitration awards and settlements in 

connection with imposing a Restricted 

Deposit Requirement.218

FINRA responded that firms are 

already required to pay unpaid 

arbitration awards and settlements, and 

that any Restricted Deposit Requirement 

will serve only as an additional, 

mandatory obligation—with each 

requirement serving an ‘‘important, but 

different, regulatory purpose.’’ 219

FINRA also stated it currently suspends 

member firms and their registered 

representatives from membership or 

association where they do not timely 

pay arbitration awards, and that 

proposed Rule 4111 is designed to 

address investor protection concerns 

beyond unpaid awards.220 Further, 

FINRA stated it believes that proposed 

Rule 4111 ‘‘may have important 

ancillary effects in addressing unpaid 

customer arbitration awards.’’ 221

The same commenter asserted that as 

unpaid and anticipated arbitration 

awards are part of the proposed criteria 

used to determine whether a firm 

should be designated as a Restricted 

Firm, and thereafter, to determine its 

maximum Restricted Deposit 

Requirement, it is ‘‘axiomatic’’ that the 

maximum deposit FINRA ultimately 

imposes should ‘‘at the very least’’ cover 

such awards.222 However, the 

commenter also stated that proposed 

Rule 4111, in limiting what FINRA may 

require in the way of a restricted deposit 

to avoid ‘‘significantly undermin[ing] 

the continued financial stability and 

operational capability of the member as 

an ongoing enterprise over the next 12 

months,’’ may result in more thinly 

capitalized firms not being subject to a 

Restricted Deposit Requirement 

sufficient to cover all outstanding 

arbitration awards and settlements, ‘‘let 

alone ‘Covered Pending Arbitration 

Claims.’’’ 223

In response, FINRA stated that a key 

reason why FINRA proposed a factorbased approach to determining a 

Restricted Deposit Requirement rather 

than a formulaic one is because it is less 

susceptible manipulation by firms.224

Accordingly, nothing in proposed Rule 

4111 would establish a floor for the 

amount of a Restricted Deposit 

Requirement.225 Nevertheless, FINRA 

reiterated that proposed Rule 4111 

would ‘‘not absolve firms from paying 

unpaid arbitration awards,’’ and that a 

member’s ‘‘thin capitalization at the 

time of the Consultation would be only 

one factor’’ that the Department 

considers during that firm’s 

Consultation process, and would ‘‘not 

necessarily result in a lower’’ Restricted 

Deposit Requirement.226

Finally, this commenter also 

suggested that proposed Rule 4111 

should be amended to address how 

those investors owed unpaid arbitration 

awards might access funds from a 

Restricted Firm’s restricted deposits to 

pay themselves.227 FINRA responded 

that although it understands the 

purpose of the request, proposed Rule 

4111 is intended to ‘‘address the risks 

posed to investors by individual brokers 

and member firms that have a history of 

misconduct,’’ and while the rule has 

features to incentivize payment of 

unpaid arbitration awards, ‘‘it is not 

intended to alter how aggrieved 

investors currently may collect on an 

arbitration award.’’ 228

The Commission finds it is reasonable 

for FINRA to adopt the Restricted 

Deposit Requirement as a separate 

obligation, distinct from a Restricted 

Firm’s existing obligations on member 

firms to satisfy unpaid arbitration 

awards. As FINRA stated, its rules 

already include comprehensive 

obligations on member firms that owe 

unpaid arbitration awards, and impose 

significant penalties on those firms that 

fail to do so.229 The Commission thus 

finds that structuring proposed Rule 

4111’s Restricted Deposit Requirement 

to instead primarily address investor 

protection concerns more broadly, with 

the possibility of reducing the number 

of unpaid customer arbitration awards 

as a potential ancillary benefit, is 

reasonable. Moreover, the Commission 

finds that FINRA’s proposed use of the 

Consultation process—taking a fulsome 

view of a firm’s capitalization, including 

the potential effect of any unpaid 

arbitration awards—when determining 

its Restricted Deposit Requirement, 

provides a reasonable safeguard for 

evaluating the application of the 

proposed rule to thinly capitalized 

firms. This approach should enable 

FINRA to both further the intended goal 

of proposed Rule 4111 to incentivize 

better behavior from firms without 

undermining their financial stability, 

while also taking into account their preexisting obligations to satisfy unpaid 

arbitration awards. Finally, as the 

Restricted Deposit Requirement is 

intended to provide an obligation on 

Restricted Firms distinct from their preexisting obligations to satisfy unpaid 

arbitration awards, the Commission 

finds the issue of collecting unpaid 

arbitration awards by investors is 

beyond the subject matter of this 

proposed rule change and therefore, is 

beyond the scope of this filing. 

Another commenter stated that 

FINRA’s data on unpaid arbitration 

awards do not justify its establishment 

of ‘‘an elaborate system of additional 


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230See Harvin Letter at 5. 

231See FINRA March 4 Letter at 12. 

232 Id. 

233See FINRA March 4 Letter at 18 note 52 (citing 

FINRA, Discussion Paper—FINRA Perspectives on 

Customer Recovery, at pp. 1, 19 (Feb. 8, 2018), 

available at https://www.finra.org/sites/default/ 

files/finra_perspectives_on_customer_recovery.pdf). 

234 Id. 

235See PIABA Letter at 4–5. 

236 Id. at 4. 237 Id. 238See FINRA March 4 Letter at 20. FINRA also 

stated that the source of disclosures on Form U6 are 

regulators, and that FINRA’s Department of 

Credentialing, Registration, Education and 

Disclosure ‘‘conducts a public records review to 

verify the completeness and accuracy of criminal 

disclosure reporting.’’ Id. (citing Notice at 79561). 239 Id. 

240Specifically, FINRA asserted it believes the 

use of existing CRD data in conjunction with the 

criteria proposed under the proposed rule 

effectively identifies higher risk firms. FINRA bases 

this assertion on its comparison of firms captured 

by the proposed thresholds to the firms that had 

recently been expelled, that had unpaid arbitration 

awards, that Department staff had identified as high 

risk for sales practice and fraud based on its own 

risk-based analysis, and that subsequently had 

additional disclosures after FINRA had made these 

preliminary identifications. See FINRA March 4 

Letter at 20–21. 

241 Id. 

242 Id.; see Exchange Act Release No. 90000 (Sep. 

25, 2020), 85 FR 62142 (Oct. 1, 2020) (FINRA No. 

SR–FINRA–2020–030). FINRA temporarily 

withdrew this rule filing from Commission 

consideration so that they can further consider 

whether modifications to the filing are appropriate. 

See FINRA Statement on Temporary Withdrawal of 

Specialized Arbitrator Roster Rule Filing (May 28, 

2021). 

243See Harvin Letter at 7. 

244 Id. 

245See FINRA March 4 Letter at 12. 

246 Id.; see also Notice at 78556–57. FINRA stated 

that maintaining the firm’s assets under an 

increased net capital requirement would not be 

isolated to a restricted account and thus ‘‘may be 

fungible with other firm assets,’’ potentially 

resulting in such assets being withdrawn and used 

by the firm during the restricted period. Thus, 

FINRA determined that such an approach would 

likely provide a much lower deterrent effect on 

firms than the Restricted Deposit Requirement 

under proposed Rule 4111. Similarly, FINRA 

believes that using an increased net capital 

requirement, rather than the Restricted Deposit 

Requirement, may not sufficiently incentivize 

behavioral changes from those Restricted Firms that 

already were carrying substantial excess net 

capital.). See Notice at 78557. 

regulation to address the issue.’’ 230 In 

response, FINRA stated that addressing 

the issue of unpaid arbitration awards 

was not the primary purpose of the 

proposed rule change. Specifically, 

FINRA stated that the proposed rule 

change’s primary purpose is ‘‘to create 

incentives for members that pose 

outlier-level risks to change 

behavior.’’ 231 At the same time, FINRA 

believes that the proposed rule change 

‘‘may have important ancillary effects in 

addressing unpaid customer arbitration 

awards [including deterring] behavior 

that could otherwise result in unpaid 

arbitration awards by incentivizing 

firms to reduce their risk profile and 

violative conduct to avoid being deemed 

a Restricted Firm and becoming subject 

to a Restricted Deposit Requirement or 

other conditions or restrictions for a 

year or more.’’ 232 FINRA stated that it 

has ‘‘long been concerned about nonpayment of arbitration awards’’ 233 and 

hopes to continue the dialogue about 

‘‘addressing the challenges of customer 

recovery across the financial services 

industry.’’ 234

FINRA has clarified that the primary 

purpose of the proposed rule change is 

to incentivize better behavior from firms 

without undermining their financial 

stability. While the Restricted Deposit 

Requirement may also reduce the 

number of unpaid customer arbitration 

awards as a potential ancillary benefit, 

the Commission finds that the issue of 

collecting unpaid arbitration awards by 

investors is beyond the subject matter of 

this proposed rule change and therefore, 

is beyond the scope of this filing. 

Expungement Concerns and 

Undercounting Arbitrations 

One commenter expressed concern 

about the ‘‘pervasive nature of 

expungement of customer disputes’’ and 

how that might undermine FINRA’s 

ability to determine whether a firm 

should be deemed a Restricted Firm 

under proposed Rule 4111.235 This 

commenter asserted that FINRA’s 

inability to review the ‘‘full breadth of 

relevant disclosures’’ due to certain 

events being expunged from the record 

will likely lead to it overlooking 

recidivist firms and registered 

representatives that should be 

designated as Restricted Firms.236 As a 

result, the commenter argued that 

proposed Rule 4111 incentivizes 

member firms and registered 

representatives to ‘‘sanitize their 

records’’ by pursuing expungement of 

customer complaints.237

FINRA responded that its rules 

require accurate disclosures of member 

firms and individuals, who are ‘‘subject 

to disciplinary action and possible 

disqualification if they fail to do so.’’ 238

Further, FINRA stated that even if 

expungement requests rise due to 

proposed Rule 4111, that does not mean 

that there will be a corresponding 

increase in expungements that are 

granted, as such approvals may only be 

provided ‘‘after a court of competent 

jurisdiction has entered an order 

directing expungement or confirming an 

arbitration award containing 

expungement relief.’’ 239 FINRA also 

explained in its Response that its Office 

of the Chief Economist has tested the 

proposed thresholds under proposed 

Rule 4111 based on existing CRD 

data,240 and believes that the existing 

CRD data and proposed criteria using 

these data are ‘‘effective at identifying 

firms that pose greater risks to 

customers.’’ 241 Finally, FINRA also 

pointed out that although proposed Rule 

4111 is not intended to address the 

expungement process, it has undertaken 

a prior separate rulemaking to 

‘‘substantially strengthen’’ this 

process.242

Given that the proposed rule change 

does not affect FINRA’s expungement 

process, the Commission finds 

recommendations to amend it are 

outside the scope of the proposed rule 

change. 

The Restricted Deposit Requirement and 

a Member Firm’s Net Capital 

Requirement 

One commenter argued that, although 

proposed Rule 4111 requires deposits in 

the Restricted Deposit Account to be 

deducted when determining a member 

firm’s net capital under Exchange Act 

Rule 15c3–1 and FINRA Rule 4110 

(Capital Compliance), the actual effect 

of the rule is to require additional net 

capital of the firm.243 This commenter 

argued that, under Rule 4110(a), FINRA 

may already prescribe greater net capital 

or net worth requirements on carrying 

or clearing members, which the 

commenter stated would appear to 

provide FINRA ‘‘ample authority’’ to 

address the issue of unpaid customer 

arbitration awards.244 FINRA responded 

by noting that proposed Rule 4111’s 

primary purpose is incentivizing 

member firms to engage in less risky 

behaviors, and the extent to which the 

rule change addresses unpaid 

arbitration awards, this is merely an 

ancillary benefit.245 Further, FINRA 

stated that it had considered the 

alternative of applying increased capital 

requirements on Restricted Firms, but 

determined this approach would be 

accompanied by ‘‘several drawbacks 

with respect to economic incentives and 

anticipated impacts.’’ 246

The Commission finds the use of a 

separate and distinct deposit 

requirement is reasonable and designed 

to accomplish the separate purpose of 

incentivizing Restricted Firms to engage 

in less risky behaviors. The Commission 

anticipates that FINRA members will 

include in their decision-making the 

possibility of having their funds held in 

an account with significant withdrawal 

restrictions when making certain 

business determinations, which should 

reduce their propensity to engage in 


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247See IBN Letter. 248See FINRA March 4 Letter at 5. 249 Id. 250 Id. 251 Id. 252 Id. 253See IBN Letter. 254See FINRA March 4 Letter at 6. 

255 Id. The Registered Persons Associated with 

Previously Expelled Firms category only includes 

any Registered Person In-Scope who was registered 

with the previously expelled firm (1) for at least one 

year; and (2) ‘‘whose registration with the 

previously expelled firm terminated during the 

Evaluation Period’’ (limiting this to the prior five 

years from the current firm’s Evaluation Date). See 

FINRA Rule 4111(i)(4)(F). The same commenter 

also referenced a registered representative with a 

‘‘financial disclosure’’ related to ‘‘medical losses’’ 

and expressed concerns about pending arbitrations. 

See IBN Letter. FINRA reiterated that neither a 

registered person’s ‘‘financial disclosures’’ (e.g., the 

compromises with creditors, bankruptcy petitions, 

bond-related questions, unsatisfied judgments, and 

unsatisfied liens found in Form U4, Questions 14K, 

14L, and 14M), nor pending arbitrations and written 

consumer-initiated complaints like those disclosed 

under Form U4 Question 14I are counted in the 

Preliminary Criteria for Identification. See FINRA 

March 4 Letter at 6–7. Only those ‘‘awards and 

settlements in specified investment-related, 

consumer initiated arbitrations and complaints’’ are 

counted within the Preliminary Criteria for 

Identification. See FINRA March 4 Letter at 7. 

256See PIABA Letter at 7. 

257 Id. 

258See FINRA March 4 Letter at 15. 

259 Id. 

260See Amendment No. 2 at 4. 

261 Id. See also Rule 4111(f)(2), as modified by 

Amendment No. 2. The firm would be required to 

make any necessary additional deposit promptly at 

the time of re-designation, or where a hearing is 

requested pursuant to Proposed Rule 9561, 

promptly after the Office of Hearing Officers or the 

NAC issues a written decision under Rule 9559. Id. 

risky behaviors that are not in their 

customers’ interests. For these reasons, 

the Commission finds FINRA’s 

approach is designed to protect 

investors and the public interest. 

Potential Harm to Small Firms 

One commenter asserted that 

proposed Rule 4111 will have 

unintended consequences for small 

firms including ‘‘increased costs to 

defend and reporting.’’ 247 FINRA 

responded that, although some reporting 

and defense costs may increase for a 

limited number of firms, this will 

impact firms of all sizes, and it does not 

believe proposed Rule 4111 imposes 

either disproportionate costs or impacts 

on small firms.248 These costs could 

include, for example, when a firm seeks 

to rebut the presumption that it is a 

Restricted Firm, which would involve 

added costs to collect and provide 

information to FINRA, and when a firm 

seeks review through the expedited 

proceeding proposed in Rule 9561.249

FINRA further indicated that proposed 

Rule 4111 is designed to impact a 

limited number of firms that pose 

significantly higher risk compared to 

similarly sized peers—across all firm 

sizes.250 The proposed ‘‘funnel’’ process 

proposed by FINRA includes 

subsequent review and a Consultation 

process provides safeguards designed to 

protect firms of all sizes against 

misidentification.251 Finally, FINRA 

reiterated that the rule requires FINRA 

to consider a firm’s size, among other 

things, when it determines to impose a 

Restricted Deposit Requirement or other 

conditions or restrictions, and thus 

should not have a disproportionate 

impact on small firms.252

In raising concerns about the impact 

on small firms, this commenter also 

provided a partial list of purported 

disclosure events applicable to the 

commenter’s firm, including that seven 

of the firm’s 70 representatives were 

previously at now-expelled firms 

‘‘during their career.’’ 253 FINRA stated 

that the list of disclosure events 

included in this commenter’s letter were 

broader than those covered by the 

Preliminary Criteria for Identification, 

and could not determine whether they 

would be captured by the proposed 

criteria without more information.254

For example, in reference to the 

individuals who had been at an 

expelled firm ‘‘during their careers,’’ 

FINRA stated that the Registered 

Persons Associated with Previously 

Expelled Firms category only covers a 

narrow scope of those registered 

representatives who were registered 

with an expelled firm for at least one 

year and whose registration with the 

previously expelled firm terminated 

during the Evaluation Period.255

The Commission finds that the 

proposal, which is designed to identify 

a limited number of firms with a 

significantly higher level of risk related 

disclosures than similarly situated peers 

with thresholds tailored to seven 

different firm sizes, takes a reasonable 

approach to identifying firms that pose 

the greatest risk to investors, without 

being unduly burdensome towards 

smaller firms. Further, FINRA’s 

commitment to tailoring any Restricted 

Deposit Requirement or other 

conditions or restrictions it imposes on 

any firm it designates as a Restricted 

Firm in a manner that accounts for the 

firm’s size and financial condition 

should help tailor the application of 

proposed Rule 4111 to the unique risks 

presented by particular firms. Finally, 

pursuant to proposed Rule 4111(d), a 

firm would have an opportunity to 

demonstrate that it should not be 

required to be subject to the maximum 

Restricted Deposit Requirement by 

arguing that that certain disclosures 

were improperly considered in 

determining its restricted status. For 

these reasons, the Commission finds 

FINRA’s approach is designed to protect 

investors and the public interest. 

Restricted Deposit Subject to Swings in 

Value 

One commenter asserted that 

proposed Rule 4111 fails to address 

fluctuations in the valuation of 

‘‘qualified securities’’ that a Restricted 

Firm may deposit into its Restricted 

Deposit Account as opposed to 

depositing cash.256 The commenter 

argued that as there is no guarantee that 

securities used for this purpose will 

retain sufficient value until they are 

redeemed to pay the firm’s outstanding 

debt, and proposed Rule 4111 lacks a 

‘‘mechanism . . . to ensure the 

Restricted Deposit Account maintains 

sufficient value between FINRA 

reviews,’’ the proposal should be 

amended to require account 

replenishment as necessary.257

FINRA has stated that proposed Rule 

4111(a) only permits a Restricted Firm 

to satisfy its Restricted Deposit 

Requirement with ‘‘a security issued by 

the United States or a security in respect 

of which the principal and interest are 

guaranteed by the United States.’’ 258

FINRA believes such securities possess 

a sufficiently stable value such that any 

post-deposit price fluctuation would not 

affect the financial impact of their use 

to satisfy the Restricted Deposit 

Requirement, nor the resulting incentive 

for the Restricted Firm to reform.259

Nevertheless, FINRA filed Amendment 

No. 2 to clarify that the proposed rule 

change would not require a Restricted 

Firm to make additional deposits in 

order to maintain continuously the 

original value of qualified securities in 

its Restricted Deposit Account, if such 

qualified securities have declined in 

value.260 Likewise, FINRA clarified that, 

if the aggregate value of the assets 

deposited by a member firm increases 

above the firm’s Restricted Deposit 

Requirement, that would not be a basis 

for the firm to request a withdrawal 

from its Restricted Deposit Account. 

Rather, if a firm is re-designated as 

Restricted Firm in the following year, it 

would need to deposit additional cash 

or qualified securities if needed to meet 

the Restricted Deposit Requirement at 

that time.261

The Commission finds that FINRA’s 

determination to not require a Restricted 

Firm to replenish a Restricted Deposit 

Account to address fluctuations in the 

value of qualified securities is 

reasonable. Securities included within 

the ‘‘qualified securities’’ definition, 


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262See Better Markets Letter at 20. 

263 Id. See Notice at 78548, providing in 

Supplementary Material .03 to proposed Rule 4111, 

Examples of Conditions and Restrictions that 

FINRA may impose on Restricted Firms other than 

a Restricted Deposit Requirement. 

264See Better Markets Letter at 20. 

265See FINRA March 4 Letter at 15. 

266 Id. at 15–16. 

267 Id. at 16. 

268 Id. FINRA also stated that it is separately 

proposing the adoption of Rule 9561(b) to permit 

it to bring expedited proceedings against any firm 

that fails to comply with any of the Rule 4111 

requirements—and also to seek the imposition of a 

suspension or cancellation of that firm’s 

membership. Id. 

269See Better Markets Letter at 19–20. Better 

Markets further indicated that, to prevent the 

gaming of Preliminary Identification Metric 

Thresholds, it will support ‘‘any reasonable and 

appropriate amendments or future proposals that 

will allow FINRA to address firms with substantial 

compliance issues that cannot be captured by the 

proposed numerical framework.’’ See Better 

Markets Letter at 19–20. As part of the proposal, 

FINRA considered an approach similar to the 

Investment Industry Regulatory Organization of 

Canada’s (‘‘IIROC’’) ‘‘terms and conditions’’ rule to 

identify a limited number of firms with significant 

compliance failures using non-public information 

from FINRA’s examination and monitoring process 

and impose appropriate terms and conditions to 

encourage these firms’ increased compliance. 

However, it elected not to propose a terms and 

conditions rule at this time. See Notice at 78554– 

55 (referencing IIROC Consolidated Rule 9208). 

270See Better Markets Letter at 5. 

271See FINRA March 4 Letter at 27. FINRA stated 

that it had already explained one possible 

alternative approach it has considered is to adopt 

an approach similar to the ‘‘terms and conditions’’ 

rule used by IIROC, under IIROC Consolidated Rule 

9208. See Notice at 78554. 

272See Notice at 78554–55. 

273 Id. 

274See FINRA March 4 Letter at 27–28. FINRA 

stated that particular aspects of proposed Rule 4111 

that are designed to curtail efforts by firms to game 

their Preliminary Identification Metrics include: (1) 

Defining ‘‘Registered Persons In-Scope’’ under 

proposed Rule 4111(i)(13) to cover all persons 

registered with the firm for one or more days within 

the year prior to the Evaluation Date, undercutting 

any effort to manipulate the outcome by reducing 

staff immediately before FINRA’s annual 

calculation of that firm’s Preliminary Criteria for 

Identification; and (2) performing the annual 

calculation of a firm’s Preliminary Criteria for 

Identification at least 30–45 days after the 

Evaluation Date, ‘‘to account for the lag time 

between when relevant disclosure events occurred 

and when they are required to be reported on the 

Uniform Registration Forms’’ to prevent any 

attempt by a firm to delay Uniform Registration 

Form submissions to manipulate annual metrics. Id. 

including U.S. Treasury Securities, 

serve as a benchmark for stability and 

liquidity within U.S. securities markets. 

Thus, the Commission expects that any 

change in value of these securities 

should be relatively minimal during the 

year between any Restricted Firm 

designation made by FINRA, and a 

firm’s next annual Rule 4111 

evaluation—wherein any re-designation 

of the firm as a Restricted Firm would 

require the firm to again satisfy any 

Restricted Deposit Requirement then 

imposed by FINRA. For these reasons, 

the Commission finds FINRA’s 

approach is designed to protect 

investors and the public interest. 

Additional Conditions and Restrictions 

Imposed on Restricted Firms 

One commenter stated that proposed 

Rule 4111.03 would unnecessarily limit 

FINRA’s options for conditioning or 

restricting the operation high-risk 

firms.262 Specifically, the commenter 

stated that by promulgating an 

illustrative list of conditions and 

restrictions that could be imposed on 

Restricted Firms proposed Rule 4111 

would not give FINRA the necessary 

flexibility to impose obligations on such 

firms.263 Instead, this commenter 

proposed that FINRA should explicitly 

amend its proposal to make clear that it 

does not cede any authority to take 

‘‘punitive’’ action against firms that 

violate FINRA’s rules and the rights of 

their customers.264

FINRA does not take the view that 

proposed Rule 4111 provides either an 

express or implied limit on the scope of 

conditions and restrictions that FINRA 

could impose on Restricted Firms.265

Further, FINRA disagrees with the 

suggestion that ‘‘punitive’’ conditions 

and restrictions would be imposed, and 

in fact has pointed to proposed Rule 

4111(e) as allowing the Department to 

impose those conditions and restrictions 

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.’’ 266 However, FINRA 

acknowledged the concerns raised by 

the commenter of the need to act, when 

appropriate, to protect investors from 

predatory firms, and indicated it ‘‘fully 

intends to continue using its existing 

authority to take action against 

predatory firms that violate FINRA’s 

rules and the rights of customers.’’ 267

Further, FINRA does not view anything 

in proposed Rule 4111 to limit FINRA’s 

authority to bring disciplinary action 

against firms and registered 

representatives for violations and 

‘‘impose remedial sanctions for 

violations, including expulsions and 

bars where appropriate.’’ 268

The Commission agrees with FINRA’s 

assessment that proposed Rule 4111 

provides no express or implied 

limitation on the scope of conditions or 

restrictions that it may impose as 

necessary or appropriate to protect 

investors and the public interest, or 

both, without seeking to undermine the 

viability of such firms’ ongoing 

operations. Additionally, the 

Commission agrees with FINRA’s 

assessment that nothing in proposed 

Rule 4111 limits its authority to impose 

remedial sanctions—including 

expulsions and bars where 

appropriate—through separate 

disciplinary actions against firms and 

registered representatives for violations 

of FINRA rules. For these reasons, the 

Commission finds FINRA’s approach is 

designed to protect investors and the 

public interest. 

FINRA Should Impose Specific ‘‘Terms 

and Conditions’’ on Restricted Firms 

That Circumvent Conditions and 

Restrictions Imposed by FINRA Under 

Proposed Rule 4111, or Fail to 

Significantly Improve Compliance 

One commenter argued that FINRA 

should add to proposed Rule 4111 the 

general authority to impose ‘‘terms and 

conditions’’ on firms that demonstrate 

‘‘significant compliance failures’’ to 

prevent any ‘‘gaming’’ of the 

Preliminary Identification Metric 

Thresholds.269 In particular, this 

commenter expressed support for 

FINRA using this authority regarding 

those firms that ‘‘either circumvent the 

obligations and restrictions placed upon 

them by proposed Rule 4111 . . . or 

otherwise refuse to significantly 

improve their compliance culture.’’ 270

FINRA responded that although it is not 

adopting a ‘‘terms and conditions’’ 

approach currently, it will explore 

doing so in the future to address any 

compliance issues.271 While FINRA 

recognized that a terms and conditions 

rule would make it more difficult for 

firms to evade the identification criteria, 

FINRA believed that proposed Rule 

4111 may offer a better deterrent effect 

for firms to change their behavior, 

particularly those firms that may be 

close to meeting such criteria.272 For 

Restricted Firms that evade compliance 

with the conditions and restrictions 

imposed on them, FINRA stated that 

proposed Rule 9561(b) would permit it 

to ‘‘bring an expedited proceeding 

against a member that fails to comply 

with any Rule 4111 Requirements’’ that 

could result in the suspension or 

cancellation of the firm’s 

membership.273 Further, FINRA 

asserted that proposed Rule 4111 

already has been designed with features 

that will make it more difficult to 

manipulate their Preliminary 

Identification Metrics, but that it 

appreciates the support for any further 

efforts it adopts to curtail such 

behavior.274

The Commission finds the proposal 

provides for reasonable measures to 


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275See Better Markets Letter at 13. As discussed 

more fully above, the Commission considered this 

commenter’s recommended alternatives and has 

concluded that the proposed rule change represents 

a reasonable approach to identifying firms that pose 

the greatest risk to investors and imposing 

obligations on those firms to encourage them to 

change their behavior. 276See FINRA March 4 Letter at 26. For example, 

FINRA indicated that it ‘‘considered several 

alternative specifications to the numeric threshold 

based-approach, including alternative categories of 

reported disclosure events and metrics, alternative 

counting criteria for the number of reported events 

or conditions, and alternative time periods over 

which the events or conditions are counted.’’ See 

FINRA March 4 Letter at 26 note 70. 

277 Id. See Framework Regarding FINRA’s 

Approach to Economic Impact Assessment for 

Proposed Rulemaking (Sept. 2013), available at 

https://www.finra.org/sites/default/files/ 

Economic%20Impact%20Assessment_0_0.pdf. 

278See FINRA March 4 Letter at 25. Specifically, 

FINRA highlighted its rules pertaining to FINRA 

supervision, the membership application process, 

proceedings for statutory disqualification and other 

disciplinary proceedings as to firms and registered 

representatives, along with FINRA’s current ‘‘risk 

monitoring and focused examination programs . . . 

designed to monitor and address the risks posed by 

high-risk firms and high-risk brokers.’’ Id. 

279 Id. FINRA indicated that economic analysis 

‘‘demonstrated that for firms that would have met 

the Preliminary Criteria for Identification in the 

years 2013–2017, those firms were associated with 

2,995 ‘new’ Registered Person and Member Firm 

Events in the Post-Identification Period . . . [and] 

also demonstrated that such firms had between 6.1 

and 19.9 times more ‘‘new’’ disclosure events (per 

registered person) in the years after identification 

than other firms registered during the 2013–2017 

period.’’ See FINRA March 4 Letter at 25–26. 

280See FINRA March 4 Letter at 26. 281See Harvin Letter at 1. 

prevent firms from manipulating their 

Preliminary Identification Metrics, 

particularly by adopting checks within 

proposed Rule 4111 to impede any 

efforts to distort FINRA’s initial 

calculations of a firm’s metrics as of the 

Evaluation Date. For these reasons, the 

Commission finds FINRA’s approach is 

designed to protect investors and the 

public interest. 

Economic Impact Analysis 

One commenter suggested that 

although proposed Rule 4111 may 

increase investor protection above the 

status quo, FINRA should conduct a 

‘‘full economic assessment’’ that not 

only compares proposed Rule 4111 

against the ‘‘baseline scenario where 

FINRA takes no action to monitor or 

control predatory wolf-pack firms,’’ but 

also compares proposed Rule 4111 

against an alternative scenario that 

‘‘assumes the improvements offered’’ by 

the commenter.275 FINRA rejected the 

suggestion, as it believes that its current 

economic impact analysis ‘‘thoroughly 

addresses’’ how proposed Rule 4111 

addresses the current regulatory need 

better than reasonable alternatives,276

and is also ‘‘consistent with the 

framework for FINRA’s approach to 

economic impact assessments in 

proposed rulemakings.’’ 277 FINRA 

asserted that the appropriate economic 

baseline, and the one that it used to 

evaluate the economic impacts of 

proposed Rule 4111, is the ‘‘current 

regulatory framework,’’ which includes 

numerous provisions related to FINRA’s 

current supervision and oversight of 

member firms.278 FINRA argued that it 

has already conducted a thorough 

economic impact analysis of proposed 

Rule 4111, and assessed the potential 

impacts by examining the number of 

firms that would have met the 

Preliminary Criteria for Identification 

between 2013–2017, and the number of 

‘‘new’’ Registered Person and Member 

Firm Events in the 2014–2019 period.279

FINRA believes this assessment 

provided the ‘‘appropriate information 

about the economic baseline and 

effectiveness of the proposed rule in 

identifying firms that may be associated 

with additional events after 

identification.’’ 280

The Commission finds it is both 

reasonable and appropriate for FINRA to 

assess the hypothetical results of 

proposed Rule 4111 using the current 

regulatory framework as its economic 

baseline. Doing so enables FINRA to 

determine the potential impact of the 

proposal based on existing, recent 

market data. As any modification of the 

existing regulatory framework will lead 

to a response in the market and changes 

in firm behavior, it is appropriate for 

FINRA to compare the hypothetical 

impacts of proposed Rule 4111 against 

this pre-existing, recent market data. 

In sum, the Commission finds that 

proposed Rule 4111 would provide an 

important new tool to FINRA in 

identifying and imposing conditions or 

restrictions on those member firms with 

outlier-level disclosure events relative 

to their similarly sized peers. In 

addition, the Commission finds that 

proposed Rule 4111 takes a reasonable 

and appropriate approach to 

incentivizing better behavior from such 

firms for the protection of investors and 

the public interest. Further, the 

Commission finds that the proposed 

Rule 4111 process provides firms with 

ample opportunity to affect the ultimate 

outcome of FINRA’s decisions, 

including an extensive Consultation 

process—that will provide member 

firms who would be initially identified 

by FINRA with opportunities to 

demonstrate why they should not 

actually be designated as a Restricted 

Firm, or thereafter why they should not 

be subject to the maximum Restricted 

Deposit Requirement or other 

operational conditions or restrictions— 

along with avenues to seek further 

review if necessary. Moreover, by 

establishing different thresholds for 

identification across seven different firm 

sizes, proposed Rule 4111 should help 

reduce the possibility that the rule 

becomes overly burdensome on any 

group of firms based solely on their size 

or resources. 

Accordingly, the Commission finds 

proposed Rule 4111 is reasonably 

designed to protect investors by helping 

incentivize compliant behavior from 

those firms exhibiting higher levels of 

disclosure events, while effectively 

tailoring the review process to mitigate 

the burdens on member firms 

throughout that process. The 

Commission further supports FINRA’s 

commitment to working with individual 

state securities regulators to share 

relevant information and observes its 

commitment to further consider public 

disclosure of a firm’s designation as a 

Restricted Firm by filing proposed 

amendments to Rule 8312 that would 

require FINRA to identify on 

BrokerCheck those member firms or 

former member firms that are designated 

as Restricted Firms pursuant to 

proposed Rules 4111 and 9561. 

Proposed Rule 9561 (Procedures for 

Regulating Activities Under Rule 4111) 

and Amendments to Rule 9559 To 

Implement the Requirements of 

Proposed Rule 4111 

The proposal to adopt new Rule 9561 

and to amend Rule 9559 to establish 

new, expedited proceedings to enable 

firms to challenge any requirements 

imposed by the Department under the 

Rule 4111 process will help provide for 

both the fair administration of Rule 

4111, and faster remediation of 

instances of non-compliance. Proposed 

new Rule 9561 is designed to afford 

firms with an opportunity to address 

such matters through timely notice of 

FINRA’s decision to impose obligations, 

or determination that a firm is failing to 

comply with such obligations, and the 

ability to thereafter request a hearing 

regarding such a decision or 

determination. Correspondingly, the 

proposed amendments to Rule 9559 

would assist in the administration of 

such requested hearings. 

One commenter suggested that the 

expedited proceeding rule be amended 

to include a requirement ‘‘that each 

member firm be given notice of the 

Preliminary Identification Metrics.’’ 281

FINRA declined this suggestion, 

asserting that the purpose of the 

proposed rule, ‘‘is to establish 

procedures for when the Department 

determines, after the Rule 4111 process, 


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42944 Federal Register / Vol. 86, No. 148 / Thursday, August 5, 2021 / Notices 

282See FINRA March 4 Letter at 25. 

283 Id. 

284 Id. See supra note 152 (addressing FINRA’s 

commitment to providing additional guidance and 

resources to member firms to assist in satisfying 

their compliance burdens under the proposed rule). 

285Separate comments addressing whether 

FINRA should otherwise disclose to firms their 

Preliminary Identification Metrics across all six 

categories is discussed above in ‘‘Resources to assist 

Member Firms with Compliance.’’ 

286 15 U.S.C. 78s(b)(2). 287 17 CFR 200.30–3(a)(12). 

that a firm is a Restricted Firm and 

seeks to impose requirements, 

conditions, or restrictions on the 

Restricted Firm.’’ 282 Further, FINRA 

asserted that the proposed expedited 

proceeding rule is not intended to 

provide any notice of the Preliminary 

Identification Metrics to firms other 

than those few that are deemed to be 

Restricted Firms.283 FINRA believes that 

the commenter may have instead been 

suggesting that it provide each firm with 

notice of its own Preliminary 

Identification Metrics under proposed 

Rule 4111, and indicated that if this is 

the case, FINRA reiterates its 

commitment to providing firms with 

compliance tools for the Rule 4111 

process.284

The expedited proceedings process 

proposed by FINRA will help afford 

firms with fair procedures to contest 

such decisions and determinations. The 

Commission also agrees with FINRA 

that disclosure of the Preliminary 

Identification Metrics to member firms 

does not fall within the purpose of the 

expedited proceedings rule.285

Accordingly, the Commission finds that 

the proposed new Rule 9561 and 

proposed amendments to existing Rule 

9559 will help facilitate the effective 

administration of proposed new Rule 

4111, while providing a fair appeal and 

review process for firms seeking to 

challenge FINRA’s decisions and 

determinations thereunder. For these 

reasons, the Commission finds FINRA’s 

approach is designed to protect 

investors and the public interest. 

However, the Commission also 

supports and encourages FINRA’s 

willingness to regularly reassess the 

performance of the Rule 4111 process in 

practice to continue to identify what 

further measures, if any, are necessary 

and appropriate to guard against such 

manipulation by firms. 

IV. Conclusion 

It is therefore ordered pursuant to 

Section 19(b)(2) of the Exchange Act 286

that the proposed rule change (SR– 

FINRA–2020–041), as modified by 

Amendment No. 1 and Amendment No. 

2, be, and hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.287

J. Matthew DeLesDernier, 

Assistant Secretary. 

[FR Doc. 2021–16671 Filed 8–4–21; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Investment Company Act Release No. 

34346] 

Notice of Applications for 

Deregistration Under Section 8(f) of the 

Investment Company Act of 1940 

July 30, 2021. 

The following is a notice of 

applications for deregistration under 

section 8(f) of the Investment Company 

Act of 1940 for the month of July 2021. 

A copy of each application may be 

obtained via the Commission’s website 

by searching for the file number, or for 

an applicant using the Company name 

box, at http://www.sec.gov/search/ 

search.htm or by calling (202) 551– 

8090. An order granting each 

application will be issued unless the 

SEC orders a hearing. Interested persons 

may request a hearing on any 

application by emailing the SEC’s 

Secretary at Secretarys-Office@sec.gov 

and serving the relevant applicant with 

a copy of the request by email, if an 

email address is listed for the relevant 

applicant below, or personally or by 

mail, if a physical address is listed for 

the relevant applicant below. Hearing 

requests should be received by the SEC 

by 5:30 p.m. on August 24, 2021, and 

should be accompanied by proof of 

service on applicants, in the form of an 

affidavit or, for lawyers, a certificate of 

service. Pursuant to Rule 0–5 under the 

Act, hearing requests should state the 

nature of the writer’s interest, any facts 

bearing upon the desirability of a 

hearing on the matter, the reason for the 

request, and the issues contested. 

Persons who wish to be notified of a 

hearing may request notification by 

writing to the Commission’s Secretary at 

Secretarys-Office@sec.gov. 

ADDRESSES: The Commission: 

Secretarys-Office@sec.gov. 

FOR FURTHER INFORMATION CONTACT: 

Shawn Davis, Assistant Director, at 

(202) 551–6413 or Chief Counsel’s 

Office at (202) 551–6821; SEC, Division 

of Investment Management, Chief 

Counsel’s Office, 100 F Street NE, 

Washington, DC 20549–8010. 

AIP Macro Registered Fund A [File No. 

811–22682] 

Summary: Applicant, a closed-end 

investment company, seeks an order 

declaring that it has ceased to be an 

investment company. On May 17, 2019, 

August 28, 2019, December 20, 2019, 

April 2, 2020, and July 1, 2020, 

applicant made liquidating distributions 

to its shareholders based on net asset 

value. Expenses of $67,000 incurred in 

connection with the liquidation were 

paid by the applicant. Applicant also 

has retained $67,000 for the purpose of 

paying outstanding accrued liabilities. 

Filing Dates: The application was 

filed on October 14, 2020 and amended 

on July 27, 2021. 

Applicant’s Address: 

Jonathan.Gaines@dechert.com. 

BNY Mellon Growth and Income Fund, 

Inc. [File No. 811–06474] 

Summary: Applicant seeks an order 

declaring that it has ceased to be an 

investment company. The applicant has 

transferred its assets to Nationwide 

Dynamic U.S. Growth Fund, a series of 

Nationwide Mutual Funds, and on 

December 11, 2019 made a final 

distribution to its shareholders. 

Expenses of $199,671.76 incurred in 

connection with the reorganization were 

paid by the applicant’s investment 

adviser and the acquiring fund’s 

investment adviser. 

Filing Dates: The application was 

filed on April 5, 2021 and amended on 

June 9, 2021, July 16, 2021, and July 22, 

2021. 

Applicant’s Address: peter.sullivan@

bnymellon.com. 

FSI Low Beta Absolute Return Fund 

[811–22595] 

Summary: Applicant, a closed-end 

investment company, seeks an order 

declaring that it has ceased to be an 

investment company. Applicant 

currently has six beneficial owners and 

will continue to operate as a private 

investment fund in reliance on Section 

3(c)(1) of the Act. 

Filing Dates: The application was 

filed on May 14, 2021 and amended on 

July 27, 2021. 

Applicant’s Address: tsheehan@

bernsteinshur.com. 

Variable Account J of Lincoln Life 

Assurance Co of Boston [File No. 811– 

08269] 

Summary: Summary: Applicant, a 

unit investment trust, seeks an order 

declaring that it has ceased to be an 

investment company. The applicant is 

not making and does not presently 

propose to make a public offering of its 

securities, and will continue to operate 


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