Rule 4111 was well underway before RobinHood’s potentially poor behavior concerning trading GameStock, but that action, now the subject of dozens of class action lawsuit, may have moved FINRA.
In April of 2021, we took a deep dive into what changes the Biden Administration might have on the various financial regulatory agencies, including Garry Gensler, who since that blog post was published has been sworn in. We posited how some of those appointments could show a change towards investigation and away from rulemaking.
But other rulemaking agendas could be changing too. One of the institutions analysts love to bemoan for its penchant for rulemaking (including making “rules about rules”) is the Financial Industry Regulatory Authority (better known by it’s portmanteau FINRA). FINRA is a self-regulating agency, meaning it is independent from the executive branch of the government. That independence doesn’t mean it is immune from recent public concerns or plans to ignore any recent market events. In fact, FINRA may have captured public attention with it’s eye-popping $26.5 million settlement with stock trader Robinhood over it’s trading halt of GameStop stock back in 2020.
In February of 2021, FINRA issued a new rule regarding when a registered person could be named as an executor or other position of trust for a customer. While there isn’t much that is groundbreaking in that rule, which exempts family members and situations involving prior written approval, new rules may show an intent towards consumers.
A quick review of FINRA’s proposed rules for 2021 include some “rules about rules” as some authors have noted, including extending effective dates for certain temporary amendments to rules, as well as rules to clarifying other rules. However, a few more specific, and possibly important rules have been submitted by FINRA to the SEC and others are in the works. The later category includes the Proposed Rule Change to Address Firms with a Significant History of Misconduct (SR-FINRA-2020-041) which involves the proposed Rule 4111 requiring firms with a history of misconduct to hold higher capital reserves than others. Rule 4111 was well underway before RobinHood’s potentially poor behavior concerning trading GameStock, but that action, now the subject of dozens of class action lawsuit, may have moved FINRA again. The rule was initially targeted at small firms with repeat offenders who break FINRA rules.
Many analysts note that financial advisors should observe Rule 4111 enactment in March 2021 with caution. As one legal advisor to financial firms summarized it “it does not appear that FINRA will provide firms with a tool for determining what the deposit amount will be, FINRA ensures us that the amount will need to be sufficient to cover all pending arbitration claims and unpaid arbitration awards for the firm and its associated persons, and the amount will be tailored, based upon the size, operations, and financial conditions of the firm, itself.” In other words, proceed with caution and stay close to the advice of your legal counsel. This caution includes potentially reaching out to have legal counsel determine if and how Rule 4111 applies to your company.
It is also worth noting that an amendment to Rule 4111 was proposed on May 12, 2021. That amendment, according to FINRA seeks to ensure a broad reading of those with a past history of malfeasance. In FINRA’s words, “the current rule text may suggest that the ‘specified risk event’ definition does not include final SEC and CFTC regulatory actions where the sanction against the person was a suspension other than a suspension from associating with a member.”
Financial advisors may want to consult with their legal counsel on the impact of these new rules, including the proposed amendments.
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 For the full text of the newest amendment to the Rule 4111 and FINRA’s description of it, please see:
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
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