[Federal Register Volume 87, Number 117 (Friday, June 17, 2022)]
[Notices]
[Pages 36551-36555]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-13044]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95092; File No. SR-FINRA-2022-015]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
FINRA Rule 8312 (FINRA BrokerCheck Disclosure) To Release Information 
on BrokerCheck[supreg] Relating to Firm Designation as a Restricted 
Firm

June 13, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 3, 2022, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend Rule 8312 (FINRA BrokerCheck 
Disclosure) to release information on BrokerCheck[supreg] as to whether 
a particular member firm or former member firm is currently designated 
as a ``Restricted Firm'' pursuant to Rule 4111 (Restricted Firm 
Obligations) and Rule 9561 (Procedures for Regulating Activities Under 
Rule 4111).
    Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in brackets.
* * * * *

8000. INVESTIGATIONS AND SANCTIONS

* * * * *

8300. SANCTIONS

* * * * *

8312. FINRA BrokerCheck Disclosure

    (a) No Change.
    (b)(1) No Change.
    (2) The following information shall be released pursuant to this 
paragraph (b):
    (A) through (F) No Change.
    (G) Historic Complaints (i.e., the information last reported on 
Registration Forms relating to customer complaints that are more than 
two (2) years old and that have not been settled or adjudicated, and 
customer complaints, arbitrations or litigations that have been settled 
for an amount less than $10,000 prior to May 18, 2009 or an amount less 
than $15,000 on or after May 18, 2009 and are no longer reported on a 
Registration Form), provided that any such matter became a Historic 
Complaint on or after August 16, 1999; [and]
    (H) the name and succession history for current or former 
BrokerCheck Firms[.]; and
    (I) information as to whether a particular current or former member 
is currently designated as a Restricted Firm pursuant to Rules 4111 and 
9561.

(c) through (g) No Change.

   Supplementary Material:
    .01 through .03 No Change.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background
    On July 30, 2021, the SEC issued an order approving proposed rule 
changes concerning firms with a significant history of misconduct.\3\ 
The new rules include new Rule 4111 (Restricted Firm Obligations), new 
Rule 9561 (Procedures for Regulating Activities Under Rule 4111), and 
amendments to Rule 9559 (Hearing Procedures for Expedited Proceedings 
Under the Rule 9550 Series).
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 92525 (July 30, 
2021), 86 FR 42925 (August 5, 2021) (Order Approving File No. SR-
FINRA-2020-041, as Modified by Amendment Nos. 1 and 2) (``SEC 
Order''); see also Securities Exchange Act Release No. 92525 (July 
30, 2021), 86 FR 49589 (September 3, 2021) (Order Approving File No. 
SR-FINRA-2020-041) (Correction).
---------------------------------------------------------------------------

    Rule 4111 establishes an annual process to designate as 
``Restricted Firms'' member firms that present a high degree of risk to 
the investing public, based on numeric thresholds of firm-level and 
individual-level disclosure events, and then impose on such firms a 
``Restricted Deposit Requirement'' \4\ or, in addition or in the 
alternative, conditions or restrictions on the member firm's operations 
that are necessary or appropriate to protect investors and the public 
interest.\5\
---------------------------------------------------------------------------

    \4\ See Rule 4111(i)(15) (definition of ``Restricted Deposit 
Requirement''). A firm subject to a Restricted Deposit Requirement 
will be required to establish a Restricted Deposit Account and 
deposit in that account cash or qualified securities with an 
aggregate value that is not less than the member's Restricted 
Deposit Requirement. See Rule 4111(a); 4111(i)(14) (definition of 
``Restricted Deposit Account'').
    \5\ See SEC Order, 86 FR 42925, 42932. Firms designated as 
Restricted Firms will have significantly higher levels of risk-
related disclosures as compared to firms of similar sizes. See SEC 
Order, 86 FR 42925, 42926. There are numeric thresholds for seven 
firm-size categories, based on the number of Registered Persons In-
Scope. See Rule 4111(i)(11); see also Rule 4111(i)(13) (definition 
of ``Registered Persons In-Scope'').
---------------------------------------------------------------------------

    Rule 4111 is designed to protect investors and the public interest 
by strengthening tools available to FINRA to address the risks posed by 
member firms with a significant history of misconduct.\6\ The rule will 
create incentives for firms to change behaviors and activities, either 
to avoid being designated or re-designated as a Restricted Firm, to 
mitigate FINRA's concerns.\7\
---------------------------------------------------------------------------

    \6\ See SEC Order, 86 FR 42925, 42926.
    \7\ See SEC Order, 86 FR 42925, 42926, 42932.
---------------------------------------------------------------------------

    New Rules 4111 and 9561, and the amendments to Rule 9559, were

[[Page 36552]]

effective on January 1, 2022.\8\ FINRA explained in Regulatory Notice 
21-34 that FINRA would announce, in a separate Regulatory Notice, the 
first Evaluation Date no less than 120 calendar days before the first 
Evaluation Date, and that FINRA expected that the first Evaluation Date 
would be mid-year 2022. On February 1, 2022, FINRA announced that the 
first Evaluation Date for Rule 4111 would be June 1, 2022.\9\
---------------------------------------------------------------------------

    \8\ See Regulatory Notice 21-34 (September 2021). On May 26, 
2022, FINRA filed for immediate effectiveness a proposed rule change 
to make non-substantive and technical amendments to Rules 4111 and 
9561. See SR-FINRA-2022-014 (Form 19b-4), available at https://www.finra.org/sites/default/files/2022-05/sr-finra-2022-014.pdf.
    \9\ See Information Notice, February 1, 2022 (FINRA Announces 
Rule 4111 (Restricted Firm Obligations) Evaluation Date); see also 
Rule 4111(i)(5) (definition of ``Evaluation Date''). As FINRA 
explained in that Information Notice, FINRA plans to actually 
perform the annual calculation at least 30 days after the June 1, 
2022 Evaluation Date.
---------------------------------------------------------------------------

Proposed Amendments to Rule 8312
    To enhance the investor-protection benefits of Rule 4111, FINRA is 
proposing rule changes to amend Rule 8312 (FINRA BrokerCheck 
Disclosure) to release information on BrokerCheck as to whether a 
particular member firm or former member firm is currently designated as 
a Restricted Firm pursuant to Rules 4111 and 9561.\10\
---------------------------------------------------------------------------

    \10\ In the rulemaking that approved the new rules concerning 
firms with a significant history of misconduct, FINRA committed to 
file this proposed rule change to Rule 8312. See Letter from Michael 
Garawski, Associate General Counsel, FINRA, to Vanessa Countryman, 
Secretary, SEC, dated July 20, 2021, at p. 3, (``July 2021 FINRA 
Response to Comments'').
---------------------------------------------------------------------------

    Rule 8312 governs the information FINRA releases to the public 
through its BrokerCheck system.\11\ BrokerCheck helps investors make 
informed choices about the brokers and member firms with which they 
conduct business by providing registration and disciplinary history to 
investors at no charge. FINRA requires member firms to inform their 
customers of the availability of BrokerCheck.\12\
---------------------------------------------------------------------------

    \11\ The BrokerCheck website address is brokercheck.finra.org.
    \12\ See Rule 2210(d)(8) (requiring that each of a member's 
websites include a readily apparent reference and hyperlink to 
BrokerCheck on the initial web page that the member intends to be 
viewed by retail investors and any other web page that includes a 
professional profile of one or more registered persons who conduct 
business with retail investors); Rule 2267 (requiring members to 
provide to customers the FINRA BrokerCheck Hotline Number and a 
statement as to the availability to the customer of an investor 
brochure that includes information describing BrokerCheck).
---------------------------------------------------------------------------

    Information that is released on BrokerCheck includes, among other 
things, information reported on the most recently filed ``Registration 
Forms'' (with limited exceptions) for both firms and registered 
individuals, and summary information about certain arbitration awards 
against a firm involving a securities or commodities dispute with a 
public customer.\13\ To provide enhanced disclosure to the public, 
FINRA is proposing to amend Rule 8312 to release information on 
BrokerCheck as to whether a particular member firm or former member 
firm is currently designated as a ``Restricted Firm'' pursuant to Rules 
4111 and 9561. As explained above, Rule 4111 will be an important new 
tool to identify and respond to firms that present a high degree of 
risk to investors. Disclosing on BrokerCheck the firms that are 
designated as Restricted Firms would provide material information to 
investors concerning the identity of firms that FINRA has determined 
pose far higher risks to the public than firms of similar size.\14\
---------------------------------------------------------------------------

    \13\ See Rule 8312. Rule 8312 uses the term ``Registration 
Forms'' to refer collectively to the Uniform Application for 
Securities Industry Registration or Transfer (Form U4), the Uniform 
Termination Notice for Securities Industry Registration (Form U5), 
the Uniform Disciplinary Action Reporting Form (Form U6), the 
Uniform Application for Broker-Dealer Registration (Form BD), and 
the Uniform Request for Broker-Dealer Withdrawal (Form BDW). See 
Rule 8312(b)(2)(A).
    \14\ This disclosure would be similar to disclosures on 
BrokerCheck as to whether a particular member is subject to the 
provisions of Rule 3170 (the ``Taping Rule''). See Rule 
8312(b)(2)(F).
---------------------------------------------------------------------------

    If the proposed rule change is approved, information that a firm is 
a Restricted Firm would display on BrokerCheck while that firm is 
designated as a Restricted Firm. This would include while a Rule 9561 
expedited proceeding to review a Department of Member Regulation 
(``Department'') decision is pending, because a Department decision 
that designates a firm as a Restricted Firm will not be stayed during a 
Rule 9561 expedited proceeding.\15\ When a firm is not designated, or 
is no longer designated, as a Restricted Firm, no historical 
information would be displayed on BrokerCheck that the firm was a 
Restricted Firm.
---------------------------------------------------------------------------

    \15\ See Rule 9561(a)(4) (Effectiveness of the Rule 4111 
Requirements).
---------------------------------------------------------------------------

    For example:
    [rtarr8] If FINRA designates a firm as a Restricted Firm in Year 1 
but does not re-designate the firm as a Restricted Firm in Year 2, the 
Restricted Firm status would display in BrokerCheck beginning from the 
date in Year 1 when the Department designated the firm as a Restricted 
Firm to the date in Year 2 when the firm is no longer designated as a 
Restricted Firm.
    [rtarr8] If a firm is designated as a Restricted Firm in Year 1 and 
subsequently in Year 1 withdraws from FINRA membership and becomes a 
former member firm,\16\ the Restricted Firm status would continue to 
display in BrokerCheck until the date in Year 2 when the firm is no 
longer designated as a Restricted Firm (i.e., when the annual 
calculation of the ``Preliminary Criteria for Identification'' \17\ for 
member firms occurs), even though the firm had withdrawn from FINRA 
membership before that date.\18\
---------------------------------------------------------------------------

    \16\ See Rule 4111(i)(7) (definition of ``Former Member'').
    \17\ See Rule 4111(i)(9) (definition of ``Preliminary Criteria 
for Identification'').
    \18\ FINRA believes that disclosing on BrokerCheck the former 
members that are currently designated as Restricted Firms would 
provide valuable information to investors and third parties. A 
former member that is currently designated as a Restricted Firm was 
a member at the time it was designated as a Restricted Firm, and it 
remains designated as a Restricted Firm until the date when the next 
annual calculation of the Preliminary Criteria for Identification 
for member firms occurs. During the period when a former member 
remains designated as a Restricted Firm, it continues to be subject 
to the obligations imposed on it pursuant to Rule 4111 and to a 
presumption that any application it files to withdraw all or any 
portion of its Restricted Deposit Requirement should be denied. See 
Rule 4111(f)(1), (3). Disclosure on BrokerCheck of information for a 
firm that was designated as a Restricted Firm and became a former 
member in the same year also could be information that investors 
consider when weighing their options in active or contemplated 
arbitration claims against former members. See Regulatory Notice 20-
11 (April 2020).
---------------------------------------------------------------------------

    Information that a firm is currently a Restricted Firm would be 
displayed in BrokerCheck on both a firm's summary report and detailed 
report. Specifically, those reports would include the text, ``This firm 
is currently designated as a Restricted Firm pursuant to FINRA Rule 
4111 (Restricted Firm Obligations),'' in a color or font that is 
prominent. The alert also would include the text ``Click here for more 
information,'' with a hyperlink to a page on FINRA's website that 
provides for the investing public a clear explanation of Rule 4111 and 
what it means to be a Restricted Firm.\19\ FINRA believes that 
releasing information on BrokerCheck as to whether a particular member 
firm or former member firm is currently designated as a Restricted Firm 
would help inform investors of firms that may pose outlier-level risks 
compared to firms of similar sizes, which may incent investors to 
research more carefully the background of the firm. FINRA also believes 
that the public disclosure of the firms currently designated as 
Restricted

[[Page 36553]]

Firms would create additional incentives for firms with a significant 
history of misconduct to change behaviors and activities to reduce 
risk.
---------------------------------------------------------------------------

    \19\ This would be similar in nature to how the information in 
BrokerCheck that a firm is a ``taping firm'' includes a hyperlink to 
a page on FINRA's website containing a clear description of what it 
means to be a ``taping firm.'' See Regulatory Notice 21-09 (March 
2021); FINRA Taping Rule, available at https://www.finra.org/rules-guidance/guidance/taping-rule.
---------------------------------------------------------------------------

    If the proposed rule change is approved, FINRA expects that the 
effective date of the proposed rule change would be a date after FINRA 
completes the first annual Rule 4111 cycle, but no later than the 
Evaluation Date for the second annual Rule 4111 cycle. After the 
effective date, FINRA would make the relevant disclosures on 
BrokerCheck beginning with the firms that are designated or re-
designated as Restricted Firms in the second annual Rule 4111 cycle. 
This would allow FINRA to gain meaningful experience with new Rule 
4111, including any operational shortcomings, before FINRA begins 
disclosing Restricted Firms on BrokerCheck.\20\
---------------------------------------------------------------------------

    \20\ Information that a firm is currently designated as a 
Restricted Firm would not be made available on BrokerCheck prior to 
the effective date of the proposed rule change, and information 
about the obligations to which a Restricted Firm is subject would 
not be made available on BrokerCheck. FINRA recognizes that 
information about a firm's Restricted Firm designation and the 
obligations imposed on it would be important to state securities 
regulators, both before and after the effective date of the proposed 
rule change. FINRA reiterates its commitment to working with 
individual state securities regulators to share information 
concerning whether firms that operate in their individual states 
have been designated by FINRA as Restricted Firms, along with 
information concerning any obligations that have been imposed 
pursuant to Rules 4111 and 9561 on the Restricted Firm. See July 
2021 FINRA Response to Comments, supra note 10, at p. 3.
---------------------------------------------------------------------------

    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice following Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\21\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest, and Section 15A(i)(1) of the Act,\22\ which requires 
that FINRA establish and maintain a toll-free telephone listing, and a 
readily accessible electronic or other process, to receive and promptly 
respond to inquiries regarding, registration information on its members 
and their associated persons, and to adopt rules governing the process 
for making inquiries and the type, scope, and presentation of 
information to be provided in response to such inquiries. Publicly 
disclosing through BrokerCheck information concerning the current 
status of a member firm as a Restricted Firm would inform more 
investors of which firms pose high risks to the investing public, 
compared to firms of similar sizes, and thereby incent investors to 
research carefully the background of the firm and may also act to 
incentivize firms with a significant history of misconduct to change 
behaviors and activities to reduce risk.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78o-3(b)(6).
    \22\ 15 U.S.C. 78o-3(i)(1).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.
Economic Impact Assessment
    FINRA has undertaken an economic impact assessment, as set forth 
below, to analyze the regulatory need for the proposed rule change, its 
potential economic impacts, including anticipated benefits and costs, 
and the alternatives FINRA considered in assessing how to best meet its 
regulatory objectives.
1. Regulatory Need
    Rule 4111 identifies member firms that present a high degree of 
risk to the investing public and allows FINRA to impose on such firms a 
Restricted Deposit Requirement and, in addition or in the alternative, 
other conditions or restrictions on firms' operations. FINRA 
anticipates that investors may benefit from the public disclosure of 
information that a firm is a ``Restricted Firm,'' both in how it would 
help investors decide whether to use a firm and its registered 
representatives for brokerage services, and in how it would make 
stronger the incentives for a firm to improve its supervisory and 
compliance practices. The proposed amendments to Rule 8312 would 
provide this information to investors through BrokerCheck.
2. Economic Baseline
    The economic baseline for the proposed rule change is the current 
regulatory framework and Rule 4111 (which was approved by the SEC on 
July 30, 2021, and was effective on January 1, 2022), the information 
currently available on BrokerCheck, and current investor utilization of 
BrokerCheck.\23\ Rule 4111 creates a multi-step process for FINRA's 
determination of whether a member firm should be designated as a 
Restricted Firm. The first step in the process is an annual calculation 
to determine whether a member firm meets the Preliminary Criteria for 
Identification.\24\ Only some of the firms that meet the Preliminary 
Criteria for Identification will be designated as Restricted Firms at 
the end of the multi-step process.\25\
---------------------------------------------------------------------------

    \23\ This analysis uses a baseline inclusive of Rule 4111 for 
clarity and simplicity. The expected impacts of Rule 4111 were 
considered in detail in SR-FINRA-2020-041. See Securities Exchange 
Act Release No. 90527 (November 27, 2020), 85 FR 78540, 78551-54 
(December 4, 2020) (Notice of Filing of File No. SR-FINRA-2020-041) 
(``Filing'').
    \24\ The Preliminary Criteria for Identification are based on 
information that is reportable on Forms U4, U5, U6 and BD or derived 
from customer arbitrations filed with FINRA Dispute Resolution 
Services' arbitration forum. See Rule 4111(i)(4). Most of this 
information is disclosed on BrokerCheck.
    \25\ In 2019, for example, there were 40 small firms (1.3% of 
all small member firms) and five mid-size firms (2.5% of all mid-
size member firms) that would have met the Preliminary Criteria for 
Identification had it existed at that time. See SR-FINRA-2020-041, 
Exh. 3g, available at https://www.finra.org/sites/default/files/2021-07/SR-FINRA-2020-041-Amendment2.pdf. These statistics 
correspond to the number of firms that would have met the 
Preliminary Criteria for Identification as of year-end (December 31, 
2019) of the identification year. The total number of member firms 
that would have met the Preliminary Criteria for Identification had 
it existed at the time has trended down since 2014, when 75 small 
firms (2% of all small member firms), four mid-size firms (1.9% of 
all mid-size member firms) and one large firm (0.6% of all large 
member firms) would have met the Preliminary Criteria for 
Identification. FINRA defines a small firm as a member with at least 
one and no more than 150 registered persons, a mid-size firm as a 
member with at least 151 and no more than 499 registered persons, 
and a large firm as a member with 500 or more registered persons. 
See FINRA By-Laws, Article I.
---------------------------------------------------------------------------

    The proposed amendments to Rule 8312 are expected to affect users 
of BrokerCheck, currently and formerly registered firms, and, 
indirectly, the individuals associated with those firms. Users of 
BrokerCheck include, among others, investors, member firms and other 
entities in the financial services industry, regulators, and 
individuals registered as brokers or seeking employment in the 
brokerage industry. The information about firms currently available to 
investors through BrokerCheck is derived from the Registration Forms 
and the disclosures required thereunder, and includes a description of 
where and when the firm was established, people and entities that own 
controlling shares or directly influence the firm's daily operations, a 
firm's history that details mergers, acquisitions or name changes 
affecting the firm, the firm's active licenses and registrations, the 
types of businesses it conducts, information about arbitration awards 
and disciplinary matters, and information as to whether a particular

[[Page 36554]]

member is subject to the provisions of the Taping Rule, among other 
information and disclosures.\26\ In 2020, BrokerCheck helped users 
conduct almost 38 million searches of firms and individual brokers. 
Information available on BrokerCheck may reach investors through 
additional channels, because the data may be copied and compiled 
through data gathering or extraction tools, subject to applicable terms 
of use.\27\
---------------------------------------------------------------------------

    \26\ See About BrokerCheck, https://www.finra.org/investors/learn-to-invest/choosing-investment-professional/about-brokercheck; 
Rule 8312.
    \27\ See Section 5 of the FINRA BrokerCheck Terms of Use, 
https://brokercheck.finra.org/terms.
---------------------------------------------------------------------------

3. Economic Impacts
    The proposed amendments to Rule 8312 would disclose in BrokerCheck 
a firm's designation as a Restricted Firm for the duration of that 
designation. As noted above, the potential benefits to investors need 
not be limited to individuals who consult BrokerCheck, because third 
parties may harvest and compile the information and make it available 
through other outlets, subject to applicable terms of use.
    The disclosure on BrokerCheck of firms' Restricted Firm 
designations may benefit investors. Currently, BrokerCheck already 
displays disclosures reported on the most recently filed Registration 
Forms for both firms and registered individuals, as well as summary 
information about certain arbitration awards against firms involving a 
securities or commodities dispute with a public customer. However, with 
the proposed additional disclosure of a firm's designation as a 
Restricted Firm, investors might be prompted to learn more about such 
Restricted Firms, engage with them more cautiously, or--for investors 
currently using the services of Restricted Firms--critically review 
their experiences with these firms. As discussed at length in SR-FINRA-
2020-041, FINRA's analysis indicated that firms that would have met the 
Preliminary Criteria for Identification during the 2013-2017 review 
period had on average 6-20 times more new ``Registered Person and 
Member Firm Events'' \28\ after their identification than other firms 
of the same size category.\29\ The disclosure on BrokerCheck of a 
firm's Restricted Firm designation and the resulting additional 
investor caution may help some investors avoid the harms associated 
with future misconduct. Although the magnitude of these effects is not 
known, they would supplement the protective effects of the obligations 
imposed by FINRA on the designated Restricted Firms.\30\ The 
anticipated benefits to investors of the proposed amendments would 
increase with the likelihood that potential or actual customers of a 
designated Restricted Firm seek or learn information in BrokerCheck 
about a firm's Restricted Firm designation and consider it in their 
research on the background of a firm.
---------------------------------------------------------------------------

    \28\ See Rule 4111(i)(12) (defining ``Registered Person and 
Member Firm Events'' to include ``Registered Person Adjudicated 
Events,'' ``Registered Person Pending Events,'' ``Registered Person 
Termination and Internal Review Events,'' ``Member Firm Adjudicated 
Events,'' and ``Member Firm Pending Events,'' all of which are 
defined in Rule 4111(i)(4)).
    \29\ FINRA's analysis compared firms that satisfied the 
Preliminary Criteria for Identification in each year between 2013 
and 2017 to firms of similar size that did not satisfy the criteria 
and looked at the number of subsequent disclosure events in the 
remainder of the period analyzed, which ended in 2019. See Filing, 
supra note 23, 85 FR 78540, 78552; SR-FINRA-2020-041, Exhibit 3c, 
available at https://www.finra.org/sites/default/files/2020-11/SR-FINRA-2020-041.pdf.
    \30\ Rule 4111 will create strong measures of deterrence of 
misconduct while a firm is designated a Restricted Firm. See Filing, 
85 FR 78540, 78550.
---------------------------------------------------------------------------

    The disclosure on BrokerCheck of firms' Restricted Firm 
designations and additional investor caution may have a range of 
effects on such firms. Designated Restricted Firms may respond by 
offering more competitive pricing or improved customer service. 
Designated Restricted Firms may also act to improve internal controls 
in order to avoid additional reputational harm and being re-designated 
as a Restricted Firm in subsequent years. However, additional investor 
caution, if significant enough, may cause financial distress at some 
firms. Disclosing a firm's Restricted Firm designation on BrokerCheck 
may lead investors to review their engagement with the firm more 
critically and, therefore, also may potentially lead to increased 
customer complaints, arbitration cases and possible awards against, and 
settlements by, such firms. In addition, as noted in SR-FINRA-2020-041, 
Restricted Firms may have greater difficulty or increased costs 
associated with maintaining a clearing arrangement, loss of trading 
partners, or similar impairments where third parties can determine that 
a firm meets the Preliminary Criteria for Identification or has been 
deemed to be a Restricted Firm.\31\ While some third parties like 
clearing firms may require a firm to disclose Restricted Firm status 
during private contract negotiations, other third-party firms may learn 
of a firm's Restricted Firm designation only after the information is 
disclosed publicly. These third-party firms may then anticipate an 
increase in legal and contingent costs through the potential 
liabilities that they face through their business relationships with a 
Restricted Firm. As a result, Restricted Firms may find that costs of 
these third-party agreements increase and potentially lose access to 
such providers. While the magnitude of these reactions from investors 
and third parties cannot be quantified, it is possible that the 
disclosure of the designation as a Restricted Firm may result in some 
firms going out of business.
---------------------------------------------------------------------------

    \31\ See Filing, 85 FR 78540, 78553.
---------------------------------------------------------------------------

4. Alternatives Considered
    FINRA recognizes that the design and implementation of the rule 
proposals may impose direct and indirect costs on a variety of 
stakeholders, including firms, brokers, regulators, investors and the 
public. Accordingly, in developing its rule proposals, FINRA seeks to 
identify ways to enhance the efficiency and effectiveness of the 
proposed rules while maintaining their regulatory objectives.
    In developing the proposal, FINRA considered two different 
alternatives for when to begin releasing information on BrokerCheck as 
to whether a particular member firm or former member firm is currently 
designated as a Restricted Firm. Specifically, FINRA considered whether 
to begin releasing this information on BrokerCheck during the first 
annual Rule 4111 cycle or, instead, the second annual Rule 4111 cycle. 
FINRA has proposed to start this disclosure in the second annual Rule 
4111 cycle, and not sooner, because it would allow FINRA and member 
firms to gain meaningful experience with new Rule 4111, including any 
operational shortcomings, before FINRA begins disclosing Restricted 
Firms on BrokerCheck.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or

[[Page 36555]]

    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FINRA-2022-015 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2022-015. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of FINRA. All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-FINRA-2022-015 and should be submitted 
on or before July 8, 2022.
---------------------------------------------------------------------------

    \32\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-13044 Filed 6-16-22; 8:45 am]
BILLING CODE 8011-01-P