FINRA Announces Rule 4111 (Restricted Firm Obligations) Evaluation Date

In an Information Notice released February 1, 2022, FINRA announced the first “Evaluation Date” for the new Rule 4111 (Restricted Firm Obligations) on June 1, 2022. Rule 4111 went into effect on January 1, 2022, and addresses firms with a significant history of misconduct. More specifically, it requires member firms that are identified as Restricted Firms to deposit cash or qualified securities in a segregated, restricted account; adhere to specified conditions or restrictions; or comply with a combination of such obligations.

Rule 4111

Rule 4111 establishes a multi-step, annual process through which FINRA will determine whether a member firm raises investor protection concerns substantial enough to require that it be designated (or re-designated) as a Restricted Firm and subject to additional obligations, including a Restricted Deposit Requirement. Each year’s Rule 4111 process will begin with a calculation of which member firms meet 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. Specifically, for each member firm, FINRA’s Department of Member Supervision (Member Supervision) “will compute annually (on a calendar-year basis) the Preliminary Identification Metrics to determine if the member meets the Preliminary Criteria for Identification.” There are six Preliminary Identification Metrics based on six categories of events or conditions.

The Evaluation Date

The date, each calendar year, as of which Member Supervision calculates the Preliminary Identification Metrics to determine if the member firm meets the Preliminary Criteria for Identification is the “Evaluation Date.” The Evaluation Date impacts numerous aspects of the annual calculation—including, among other things, what the Evaluation Period is, the number of Registered Persons In-Scope, and the number of Registered Persons Associated with Previously Expelled Firms—and which firm-size Preliminary Identification Metrics Thresholds apply. The Evaluation Date will establish the date as of which all specified events that are reportable on the Uniform Registration Forms, or otherwise included in Rule 4111, would be included in the annual calculation of the Preliminary Criteria for Identification.

In Regulatory Notice 21-34, FINRA explained that it would announce the first Evaluation Date no less than 120 calendar days before the first Evaluation Date. Pursuant to that commitment, FINRA announces that the first Evaluation Date will be Wednesday, June 1, 2022. FINRA reiterates that the Evaluation Date is not the date when FINRA would actually perform the annual calculation of which member firms meet the Preliminary Criteria for Identification. Rather, FINRA plans to actually perform the annual calculation at least 30 days after the Evaluation Date, to account for the time between when relevant disclosure events occurred and when firms must report those events on the Uniform Registration Forms.

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