FINRA proposes to publicly identify “restricted firms” on BrokerCheck – Financial Services

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BrokerCheck is the database through which FINRA publishes the licensing, registration and disciplinary history of firms in the brokerage industry and their personnel. BrokerCheck does not currently specify whether a particular firm is a “restricted firm” – a FINRA considers it “to pose significantly higher risks to the public than firms of a similar size” based on the firms’ misconduct history and of their registered individuals, including decisions and pending issues and matters related to termination and internal review.

FINRA’s proposal to publicly identify restricted company status may, as FINRA puts it, “incentivize companies with a significant history of misconduct to change their behaviors and activities to reduce risk” and also “improve [their]monitoring and compliance practices. “It’s a daunting undertaking for almost any company, even those with pristine regulatory histories. But the proposal also puts companies in the position of potentially having to explain to existing and potential customers what the designation is, what the company or its staff have acted improperly to warrant designation, and how this might affect the services the client receives or the overall relationship In the age of compliance with Reg., disclosure obligations they have and, importantly, how the Registered Representatives answer related questions from current and potential clients. That said, FINRA intends to provide a hyperlink to educational materials that explain the meaning of the restricted business designation.

FINRA explained that the proposal aims to improve public disclosure while improving investor protection. Significantly, FINRA does not intend to release information about the obligations or conditions to which a restricted firm is subject (such as a restricted filing requirement, as defined in Rule 4111, or restrictions on the sectors of activity, the types of products offered, the opening of new accounts, the activities expansions, mergers, consolidations or changes of control). Nevertheless, FINRA intends to share with state securities regulators information regarding member designations and related restrictions and obligations.

Businesses have seven days to challenge the restricted business designation (or seek to reduce the requirements/restrictions that come with it) with FINRA’s Office of Hearing Officers once they are notified that the Department of FINRA member regulation determined the status. The designation will cease to appear on BrokerCheck when the firm is no longer considered a restricted firm, which FINRA will assess annually. But this means that once designated, the label will remain in BrokerCheck for at least a year.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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