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New FINRA rule focuses on firms with bad track record

On Behalf of | Oct 12, 2021 | FINRA |

FINRA is a non-profit organization that self-regulates brokerages within the financial industry. FINRA is helpful in setting ethical standards for firms to abide by. Investors in Pennsylvania should know that recently, FINRA adopted a new rule designed to help protect the public from unscrupulous brokers. Rule 4111 has already been approved by the SEC and will come into force in 2022.

Understanding Rule 4111

Rule 4111 is designed to target firms that have a record of violations. It defines some firms as belonging to a restricted category. Under the terms of this rule, restricted firms must keep cash reserves on hand in a separate account. This is designed to ensure that they have the funds on hand to pay settlements and fines should they re-offend.

This new FINRA rule is designed to protect the general public from unscrupulous brokers. Some firms employ brokers who cold-call people at home to give them unsolicited advice and encourage them to invest in specific financial instruments. FINRA notes that many times, they target investors who are more vulnerable and less able to absorb the risk of these investments.

Most firms that operate in the financial sector will not be affected by this. Small and mid-sized firms are the most likely to be impacted by this new rule. Even then, it’s expected to impact only about 1-3% of firms. Large brokerages may be even less affected. They tend to be very conservative in their strategies, whereas small brokerages may be more aggressive in an effort to compete. The brokerages restricted by Rule 4111 will have a pattern of questionable conduct, and several brokers have broached these rules.

FINRA’s proactive stance on the issue of predatory brokerages is designed to keep their industry clean. Taking this step will also help consumers to feel more comfortable putting their trust in a broker.


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