While the subject matters of FINRA Rule 4111 and heightened supervision do not happen with great frequency, they are two topics that need to be discussed because when these rules do come into play, they can change a broker dealer drastically. Restricted broker dealer obligations and heightened supervision go hand in hand, and your broker dealer risk can be mitigated by creating supervision practices that include proactive reviews during the hiring process.
The Financial Industry Regulatory Authority (“FINRA”) Rule 4111 – Restricted Firm Obligations – lays out a series of steps that occur when a broker dealer receives a Restricted Broker Dealer Obligation Letter. A broker dealer will receive this letter because of the firm’s significant adverse history or due to the concentration of misconduct by the broker dealer and/or by registered representatives.
While FINRA math does not always perfectly match broker dealer math, if your broker dealer is in receipt of a 4111 letter, the first step is to evaluate the accuracy of the letter. The threshold is determined by the ratio of bad disclosures to total registered representatives. Exclusions to the total number include duplicative and non-sales related disclosures. Next, the broker dealer must terminate enough registered representatives with disclosures within thirty days to bring the ratio below the threshold. This is permitted once and only at the first receipt of the 4111 letter. This course of action is harsh because it prohibits the terminated registered representative from association with the broker dealer in any way for a full year.
However, if your broker dealer believes that the ratio provided in the 4111 letter is inaccurate, the firm has the option to request a consultation with FINRA to justify the unacceptable ratio. Within thirty days of the consultation, your broker dealer should have a determination letter in hand.
To stay off FINRA’s 4111 radar entirely, take the time to properly evaluate the severity and circumstances of disclosures of prospective hires as it relates to whether they will qualify for “4111 consideration” and how your broker dealer may have to document justification against heightened supervision. It is strongly recommended that your firm add this review to its hiring checklist. It only takes a few relevant disclosures to throw the ratio out of balance. This is especially true for smaller broker dealers. It is important to always have an eye on how close your broker dealer is to the 4111 threshold.
When it comes to heightened supervision, your broker dealer should focus primarily on investor related disclosures and customize a plan of supervision unique to the activities of your firm. Criminal, internal, and other disciplinary factors may also weigh on the decisions made. Document all relevant factors that are being considered so your broker dealer has a justifiable response if the regulators ask the firm questions about bad actors and overall risk to investors and market integrity.
If your broker would like assistance regarding the topics of restricted broker dealer obligations and heightened supervision, the Master Compliance team of consulting professionals can help direct your broker dealer with various compliance tools. Please contact us here to discuss the above issues and how your broker dealer can put proactive and preventative measures in place to protect your broker dealer.
