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New FINRA rule for high-risk firms

On Behalf of | Sep 13, 2021 | FINRA |

Recently, the SEC has approved a new rule from the Financial Industry Regulation Authority. Under this new rule, brokerages and dealers with a history of risky behavior will need to keep a prudent reserve on hand. Pennsylvania residents should know that this money would be used to pay claims for investors and fees levied by regulatory agencies. The term for the firms required to follow this rule would be “restricted.”

Understanding Rule 4111

This new regulation is known as Rule 4111. It was created by FINRA. Firms will be deemed restricted only if they fall within a well-defined numerical range, for six different characteristics. In practice, that means that only a very few firms will fall into the restricted category.

Rule 4111 was approved in 2021. Experts have applied the criteria to firms for past years, to give people an idea of how many brokers and dealers are considered this risky. In terms of large brokerages, none would fall into this restricted classification for the years 2017-19. Only 1.3% of small firms would be restricted for 2019, and just 2.5% of mid-sized firms. This is good news for investors. It shows that most brokerages are being responsible when dealing with their clients’ money.

Large firms tend to be concerned with maintaining their status and reputation. Typically, they will not hire people with a track record of high-risk activity. They are also more likely to terminate problem brokers. Overall, these firms have a more conservative strategy. They know they are seen as “safe” by most investors, and they want to keep it that way.

FINRA is a non-profit organization formed by the financial industry. FINRA is an example of self-regulation. By working with the SEC, a government regulatory entity, they are showing good faith and maintaining some control.


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