[Federal Register Volume 88, Number 27 (Thursday, February 9, 2023)]
[Notices]
[Pages 8494-8502]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-02717]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96798; File No. SR-FINRA-2022-015]


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

February 3, 2023.

I. Introduction

    On June 3, 2022, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend FINRA Rule 8312 (FINRA 
BrokerCheck Disclosure) to release information on BrokerCheck as to 
whether a particular member firm (hereinafter referred to as ``member 
firm'' or ``firm'') or former member firm is currently designated as a 
``Restricted Firm'' pursuant to FINRA Rule 4111 (Restricted Firm 
Obligations) and FINRA Rule 9561 (Procedures for Regulating Activities 
Under Rule 4111).
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on June 17, 2022.\3\ On July 20, 2022, FINRA consented to 
extend until September 15, 2022, the time period in which the 
Commission must approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
approve or disapprove the proposed rule change.\4\ On September 15, 
2022, FINRA responded to the comment letters received in response to 
the Notice.\5\ On September 15, 2022, the Commission issued an order 
instituting proceedings to determine whether to approve or disapprove 
the proposed rule change.\6\ On November 25, 2022, FINRA responded to 
the comment letters received in response to the Order Instituting 
Proceedings.\7\ On November 25, 2022, FINRA consented to extend the 
time period in which the Commission must approve or disapprove the 
proposed rule change to February 10, 2023.\8\ This order approves the 
proposed rule change.
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    \3\ See Exchange Act Release No. 95092 (June 13, 2022), 87 FR 
36551 (June 17, 2022) (File No. SR-FINRA-2022-015) (``Notice''). The 
Notice is available at https://www.sec.gov/rules/sro/finra/2022/34-95092.pdf.
    \4\ See letter from Michael Garawski, Associate General Counsel, 
FINRA, to Daniel Fisher, Branch Chief, Division of Trading and 
Markets, Commission, dated July 20, 2021. This letter is available 
at https://www.finra.org/sites/default/files/2022-07/sr-finra-2022-015-extension1.pdf.
    \5\ See letter from Michael Garawski, Associate General Counsel, 
FINRA, to Vanessa Countryman, Secretary, Commission, dated September 
15, 2022 (``FINRA September 15 Letter''). The FINRA September 15 
Letter is available at https://www.sec.gov/comments/sr-finra-2022-015/srfinra2022015-20143024-308848.pdf. Comments received on the 
proposed rule change are available at https://www.sec.gov/comments/sr-finra-2022-015/srfinra2022015.htm.
    \6\ See Exchange Act Release No. 95791 (September 15, 2022), 87 
FR 57731 (September 21, 2022) (File No. SR-FINRA-2022-015) (``Order 
Instituting Proceedings''). The Order Instituting Proceedings is 
available at https://www.sec.gov/rules/sro/finra/2022/34-95791.pdf.
    \7\ See letter from Michael Garawski, Associate General Counsel, 
FINRA, to Vanessa Countryman, Secretary, Commission, dated November 
25, 2022 (``FINRA November 25 Letter''). The FINRA November 25 
Letter is available at https://www.sec.gov/comments/sr-finra-2022-015/srfinra2022015-20151669-320145.pdf.
    \8\ See letter from Michael Garawski, Associate General Counsel, 
FINRA, to Daniel Fisher, Branch Chief, Division of Trading and 
Markets, Commission, dated November 25, 2022. This letter is 
available at https://www.finra.org/sites/default/files/2022-11/sr-finra-2022-015-extension2.pdf.
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II. Description of the Proposed Rule Change

A. Background

1. FINRA Rules 4111 (Restricted Firm Obligations) and 9561 (Procedures 
for Regulating Activities Under Rule 4111)
    FINRA Rule 4111 established an annual process to designate member 
firms as ``Restricted Firms'' when the member firms 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 member firms a ``Restricted Deposit Requirement'' \9\ 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.\10\ The rule is designed to protect 
investors and the public interest by strengthening the tools available 
to FINRA to address the risks posed by member firms with a significant 
history of misconduct.\11\ It creates incentives for member firms to 
change behaviors and activities, either to avoid being designated or 
re-designated as a Restricted Firm.\12\
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    \9\ See FINRA 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 FINRA Rule 4111(a); 4111(i)(14) 
(definition of ``Restricted Deposit Account'').
    \10\ See 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) and Exchange Act Release No. 
92525 (July 30, 2021), 86 FR 49589 (September 3, 2021) (Order 
Approving File No. SR-FINRA-2020-041) (Correction) (collectively, 
``FINRA Rule 4111 Order'').
    \11\ See FINRA Rule 4111 Order, 86 FR 42926.
    \12\ See id. at 42926 and 42932.
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    FINRA Rule 9561 established expedited proceedings that: (1) provide 
member firms an opportunity to request a hearing with FINRA's Office of 
Hearing Officers to approve or withdraw any and all of the 
requirements, conditions, or restrictions imposed by FINRA's Department 
of Member Regulation (the ``Department'') under FINRA Rule 4111; \13\ 
and (2) enables

[[Page 8495]]

FINRA to address a member firm's failure to comply with any 
requirements imposed under FINRA Rule 4111.\14\
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    \13\ See FINRA Rule 9559(n)(6) (stating that ``[i]n any action 
brought under Rule 9561(a), the Hearing Officer may approve or 
withdraw any and all of the Rule 4111 Requirements, or remand the 
matter to the department that issued the notice for further 
consideration of specified matters, but may not modify any of the 
Rule 4111 Requirements imposed by the notice or impose any other 
requirements, obligations or restrictions available under Rule 4111. 
In any action brought under Rule 9561(b), the Hearing Officer may 
approve or withdraw the suspension or cancellation of membership, 
and may impose any other fitting sanction.''); see also FINRA Rule 
4111 Order, 86 FR 42928 notes 55 and 65.
    \14\ FINRA Rule 4111 Order, 86 FR 42931.
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2. FINRA Rule 8312 (FINRA BrokerCheck Disclosure)
    FINRA Rule 8312 (FINRA BrokerCheck Disclosure) governs the 
information FINRA releases to the public through its BrokerCheck 
system.\15\ Information available to investors through BrokerCheck 
includes, among other things, information reported on the most recently 
filed ``Registration Forms'' (with limited exceptions) for both member 
firms and registered individuals, and summary information about certain 
arbitration awards against the firm involving a securities or 
commodities dispute with a public customer.\16\ This information 
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 member is subject to FINRA Rule 
3170 (Tape Recording of Registered Persons by Certain Firms) (the 
``Taping Rule''),\17\ among other information and disclosures.\18\ 
FINRA stated that 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.\19\
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    \15\ According to FINRA, 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. See Notice, 87 FR 
36553. FINRA requires member firms to inform their customers of the 
availability of BrokerCheck. See FINRA 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) and 
FINRA 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); see also Notice, 87 FR 36552 note 12 and 
accompanying text (stating FINRA requires member firms to inform 
their customers of the availability of BrokerCheck). The BrokerCheck 
website is available at brokercheck.finra.org. See Notice, 87 FR 
36552 note 11.
    \16\ See Notice, 87 FR 36552 note 13; see also FINRA Rule 
8312(b)(2)(A) (using 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)).
    \17\ For further information regarding the Taping Rule see infra 
note 21 and accompanying text.
    \18\ See Notice, 87 FR 36553-54. On its website, FINRA 
elaborates on the contents of a firm's BrokerCheck report. 
Specifically, FINRA states that the BrokerCheck report includes, 
among other things, a summary report, providing ``a brief overview 
of the firm and its background'' (``Summary Report''), and a more 
detailed report, providing ``information about any arbitration 
awards, disciplinary events, and financial matters on the firm's 
record,'' including ``pending actions or allegations that have not 
been resolved or proven'' (``Detailed Report''). The website is 
available at https://www.finra.org/investors/learn-to-invest/choosing-investment-professional/about-brokercheck.
    \19\ See Notice, 87 FR 36552.
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B. Proposed Amendments to FINRA Rule 8312

    The proposed rule changes would amend FINRA 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 FINRA Rules 4111 and 9561. Information that a member firm 
is currently a Restricted Firm would be displayed in BrokerCheck on 
both the firm's Summary Report and Detailed Report.\20\ 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 FINRA Rule 4111 and what it means to be a 
Restricted Firm.\21\ Under the proposed rule change, this information 
would be displayed during the course of any FINRA Rule 9561 expedited 
proceeding to review the Department's decision, since the effectiveness 
of FINRA's decision that designates a member firm as a Restricted Firm 
will not be stayed during these proceedings.\22\
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    \20\ For further information regarding the Summary Report and 
Detailed Report displayed on BrokerCheck see supra note 18.
    \21\ This disclosure would be made in a similar manner to how 
FINRA discloses on BrokerCheck that a member firm is a ``taping 
firm'' pursuant to the Taping Rule. See Exchange Act Release No. 
90635 (December 10, 2020), 85 FR 81540 (December 16, 2020) (File No. 
SR-FINRA-2020-011) (approving the disclosure of information as to 
whether a particular member firm is a Taping Firm). In that case, 
FINRA provides a simplified disclosure that a firm is subject to the 
Taping Rule on the firm's Summary Report on BrokerCheck, along with 
a hyperlink to a separate page on FINRA's website containing a 
clear, more detailed description of what it means to be a taping 
firm. See Notice, 87 FR 36552 note 19; see also FINRA Rule 
8312(b)(2)(F).
    \22\ See Notice, 87 FR 36552; see also FINRA Rule 9561(a)(4) 
(Effectiveness of the Rule 4111 Requirements).
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    FINRA explained that disclosing on BrokerCheck the member firms and 
former member firms that are currently 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,'' while incentivizing investors 
to ``research more carefully the background of the firm.'' \23\ In 
addition, FINRA expressed that the public disclosure of the member 
firms and former member firms currently designated as Restricted Firms 
would create additional incentives for those firms with a significant 
history of misconduct to change behaviors and activities to reduce 
risk.\24\
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    \23\ See Notice, 87 FR 36552.
    \24\ See id. at 36552-53.
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    If the proposed rule change is approved, FINRA stated that it will 
announce an effective date that is after the date FINRA completes the 
first annual FINRA Rule 4111 cycle, but no later than the ``Evaluation 
Date'' \25\ for the second annual FINRA Rule 4111 cycle.\26\ FINRA 
stated that after the effective date, FINRA would make the relevant 
disclosures on BrokerCheck beginning with the member firms or former 
member firms that are designated or re-designated as Restricted Firms 
in the second annual FINRA Rule 4111 cycle.\27\ FINRA stated that this 
would allow FINRA to gain meaningful experience with new FINRA Rule 
4111, including any operational shortcomings, before FINRA begins 
disclosing Restricted Firms on BrokerCheck.\28\
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    \25\ See FINRA Rule 4111(i)(5) (definition of ``Evaluation 
Date''). FINRA established June 1, 2022 as the first Evaluation Date 
for FINRA Rule 4111, and indicated it expects the Evaluation Date in 
subsequent years will also be June 1. See FINRA Information Notice 
2/1/22, FINRA Announces Rule 4111 (Restricted Firm Obligations) 
Evaluation Date (Feb. 1, 2022) at note 12. The FINRA Information 
Notice 2/1/22 is available at https://www.finra.org/rules-guidance/notices/information-notice-020122.
    \26\ See Notice, 87 FR 36553.
    \27\ See id.
    \28\ See id.
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III. Discussion and Commission Findings

    After careful review of the proposed rule change, the comment 
letters,\29\ and

[[Page 8496]]

FINRA's responses to the comments, the Commission finds that the 
proposed rule change is consistent with the requirements of the 
Exchange Act and the rules and regulations thereunder that are 
applicable to a national securities association.\30\ Specifically, the 
Commission finds that the proposed rule change is consistent with 
Section 15A(b)(6) of the Exchange Act, which requires, among other 
things, that FINRA rules 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.\31\
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    \29\ See letter from Francis J. Skinner, Esq., Chief Legal 
Office, CoastalOne, dated July 6, 2022 (``CoastalOne Letter''); 
letter from Nicole G. Iannarone, Assistant Professor of Law, Drexel 
University Thomas R. Kline School of Law, and Christine Lazaro, 
Professor of Clinical Legal Education and Director of the Securities 
Arbitration Clinic, St. John's University School of Law, dated July 
7, 2022 (``Drexel and St. John's Letter''); letter from Michael 
Edmiston, President, Public Investors Advocacy Bar Association 
(``PIABA''), dated July 8, 2022 (``PIABA Letter''); letter from Mark 
Quinn, Director of Regulatory Affairs, Cetera Financial Group, dated 
July 8, 2022 (``Cetera Letter''); letter from Steven B. Caruso, 
dated September 21, 2022 (``Caruso Letter''); letter from William A. 
Jacobson, Clinical Professor of Law, Cornell Law School, and 
Director, Cornell Securities Law Clinic and Erik Olson, Class of 
2024, Cornell Law School, dated October 10, 2022 (``Cornell Law 
Letter''); and letter from Andrew Hartnett, NASAA President, NASAA, 
and Deputy Administrator for Securities, Iowa Insurance Division, 
dated October 12, 2022 (``NASAA Letter'').
    \30\ In approving this rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \31\ 15 U.S.C. 78o-3(b)(6).
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    As discussed in more detail below, four commenters supported the 
proposed rule change.\32\ One of these commenters supported adoption of 
the proposed rule change without modification.\33\ Three of these 
commenters recommended that FINRA make additional changes to enhance 
the presentation of the BrokerCheck disclosure.\34\ Two of these 
commenters also recommended that FINRA disclose on BrokerCheck the 
historical Restricted Firm designations of member firms and former 
member firms.\35\
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    \32\ See NASAA Letter; PIABA Letter; Drexel and St. John's 
Letter; and Cornell Law Letter.
    \33\ See NASAA Letter at 2.
    \34\ See PIABA Letter at 1; Drexel and St. John's Letter at 2; 
and Cornell Law Letter at 2.
    \35\ See Drexel and St. John's Letter at 2; Cornell Law Letter 
at 3.
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    Three commenters opposed the proposed rule change.\36\ One of these 
commenters opposed the proposed rule change because it would only 
require FINRA to disclose whether a member firm is currently designated 
as a Restricted Firm, but not all historical Restricted Firm 
designations.\37\ Two of these commenters opposed any proposed rule 
change to publicly disclose Restricted Firm designations on BrokerCheck 
because they assert that such disclosure could irreparably harm those 
firms and their personnel.\38\ One of these commenters recommended 
that, if Restricted Firm designations are disclosed, FINRA amend the 
proposed rule change to give those firms the opportunity to appeal 
their Restricted Firm designation through a FINRA Rule 9561 expedited 
proceeding before disclosing their restricted status.\39\ Further, one 
commenter stated that the proposed rule change is unnecessary because 
information about the events giving rise to the Restricted Firm 
designation are already publicly available on BrokerCheck.\40\
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    \36\ See Caruso Letter; CoastalOne Letter; and Cetera Letter.
    \37\ See Caruso Letter at 2.
    \38\ See CoastalOne Letter at 3 and Cetera Letter at 2.
    \39\ See Cetera Letter at 3.
    \40\ See CoastalOne Letter at 2.
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A. Support for Adopting Rule as Proposed

    One of the commenters who supported the proposed rule change 
favored adopting the proposed rule change without modification, stating 
that Restricted Firm designations ``should be public information.'' 
\41\ More specifically, this commenter stated that such disclosure 
would be ``consistent with the purpose of BrokerCheck,'' \42\ serving 
as ``clear, simple, and warranted notice to investors to think 
carefully before doing business with these firms and their associated 
persons.'' \43\ This commenter further stated the disclosures included 
in the proposed rule change would advance the goal of investor 
protection, pointing to studies indicating that ``past disclosures can 
be powerful indicators of future misconduct.'' \44\ Moreover, this 
commenter stated that disclosure of Restricted Firm designations on 
BrokerCheck would ``facilitate remediation of underlying issues'' by 
``incentiviz[ing firms] to be more proactive in taking remedial 
measures . . . to avoid being designated as a Restricted Firm.'' \45\ 
This commenter also stated that the proposed rule change is consistent 
with the similar required disclosure on BrokerCheck of firms whose 
behavior is subject to restrictions under the Taping Rule.\46\ Finally, 
this commenter stated the proposed rule change would provide state 
securities examiners with information that would help ``enhance risk 
assessments, simplify examinations, and alleviate potential 
misunderstandings and wasted effort during examinations,'' as it would 
make such examiners aware that the named firms were likely subject to 
certain conditions and restrictions, including the possibility of a 
Restricted Deposit Requirement.\47\
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    \41\ See NASAA Letter at 2.
    \42\ Id.
    \43\ Id. at 2.
    \44\ Id. (citing Mark Egan et al., The Market for Financial 
Adviser Misconduct, at 3, 12-15, and 52 Fig. 4 (Feb. 2016), 
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2739170; Hammad Qureshi & Jonathan Sokobin, 
Do Investors Have Valuable Information About Brokers?, at 17 (FINRA 
Office of the Chief Economist Working Paper, Aug. 2015), available 
at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2652535).
    \45\ Id.
    \46\ See id. at 3; see also FINRA Rule 8312(b)(2)(F).
    \47\ NASAA Letter at 3-4.
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B. Recommended Enhancements to Presentation of BrokerCheck Disclosure

    Three of the commenters who generally supported FINRA's proposed 
rule change recommended that FINRA make additional changes to help 
further improve BrokerCheck disclosure.\48\ Two of these commenters 
recommended that FINRA enhance the presentation of the disclosures made 
on BrokerCheck.\49\ One of these commenters expressed concern that 
investors were unfamiliar with BrokerCheck and how to use it \50\ and 
therefore recommended that FINRA establish ``an investor outreach 
program or marketing effort that draws attention to the importance of 
BrokerCheck and the types of information that can be found there.'' 
\51\
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    \48\ See PIABA Letter at 1 (stating that ``making this 
information about firms publicly available on BrokerCheck is the 
common-sense next step to the newly adopted FINRA Rule 4111 and 
comports with that rule's intended investor protection goal''); 
Drexel and St. John's Letter at 2 (stating that ``[d]isclosure of 
restricted firm status would further improve BrokerCheck and allow 
retail investors to make more informed choices and ask pertinent 
questions to financial professionals before engaging them''); and 
Cornell Law Letter at 2 (stating that the proposed rule change would 
help investors by making this information more easily accessible, 
and would help explain to investors the meaning of such a 
designation, providing ``a more accurate view of the firm they are 
considering'').
    \49\ See PIABA Letter at 1 and Drexel and St. John's Letter at 
2.
    \50\ See PIABA Letter at 1 (stating that ``[m]ost investors have 
no idea that their trusted financial professionals and firms had 
disclosure events, despite the fact that they were disclosed on 
BrokerCheck'').
    \51\ PIABA Letter at 1.
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    FINRA responded that it appreciated the commenter's suggestion, 
stating that it ``has taken, and continues to take various measures to 
increase investor awareness of BrokerCheck.'' \52\ For example, FINRA 
pointed to its adoption of rules that: (1) require any member firm 
website to include a ``readily apparent reference and hyperlink to 
BrokerCheck'' on the web page the firm

[[Page 8497]]

intends retail investors to view, along with ``any other web page that 
includes a professional profile of one or more registered persons who 
conduct business with retail investors;'' \53\ and (2) require member 
firms 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.'' \54\ 
Finally, FINRA stated that it also already ``regularly promotes'' 
awareness of BrokerCheck through the media, its own social media 
channels, and at various investor-focused events.\55\
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    \52\ FINRA September 15 Letter at 7.
    \53\ Id. (citing FINRA Rule 2210(d)(8)).
    \54\ See id. at 7-8 (citing FINRA Rule 2267).
    \55\ See id. at 8.
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    The other commenter stated that it ``[does] not believe a link to 
the rule on its own would be enough for unsophisticated retail 
investors to understand the importance of the disclosure and make an 
informed decision about working with such a firm'' and therefore 
recommended that FINRA ``provide a plain English explanation of what 
[R]estricted [F]irm designation means on the BrokerCheck report if a 
firm is so designated.'' \56\
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    \56\ See Drexel and St. John's Letter at 2.
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    FINRA responded that the proposed disclosure on BrokerCheck would 
be designed to include hyperlinks not only to FINRA Rule 4111, ``but 
also to a page on FINRA's website that provides for the investing 
public a clear explanation of FINRA Rule 4111 and what it means to be a 
Restricted Firm.'' \57\ FINRA stated that it chose to provide this 
explanation through a hyperlink to a separate web page to facilitate 
BrokerCheck usability, as ``the explanation of what it means to be a 
Restricted Firm would be several paragraphs long,'' and its inclusion 
at the top of the relevant firms' BrokerCheck reports would necessitate 
using a font ``too small to be easily readable'' due to space 
constraints.\58\ FINRA asserted that it believes, based on ``general 
user testing'' of BrokerCheck, that inclusion of this information on 
each member firm and former member firm's BrokerCheck report would 
``create a cluttered presentation that has a detrimental impact on the 
user's experience.'' \59\ Despite this, FINRA indicated that it 
appreciated the commenters' suggestions, and stated it would ``revisit 
this presentation choice as part of its routine monitoring of 
BrokerCheck information design'' if the proposed rule change is 
approved.\60\
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    \57\ See FINRA September 15 Letter at 6.
    \58\ See id.
    \59\ See id.
    \60\ See id.
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    One of the opposing commenters similarly stated that without 
further guidance, disclosure of Restricted Firm status on BrokerCheck 
would be confusing and misleading to the general public.\61\ This 
commenter stated that although FINRA stated in the Notice that it would 
provide a hyperlink to additional information defining Restricted Firm, 
without an example of the proposed linked web page the commenter could 
not opine on its adequacy. Moreover, the commenter stated that there is 
no guarantee that investors researching a member firm on BrokerCheck 
would access the hyperlink.\62\
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    \61\ See CoastalOne Letter at 2.
    \62\ See id.
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    In its response, FINRA disagreed with the commenter's assessment, 
stating that the proposed rule change would provide investors with 
clear and accurate information about Restricted Firms and that the 
specific display of those firms' Restricted Firm designation on 
BrokerCheck would make this status more readily apparent to 
investors.\63\ Further, FINRA stated that, under the proposed rule, 
FINRA would present both the information about a member firm's 
restricted status on BrokerCheck, as well as a hyperlink to a separate 
page providing a more detailed explanation of what it means to be a 
Restricted Firm, in the same manner as FINRA discloses similar 
information about member firms currently subject to the Taping 
Rule.\64\
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    \63\ See FINRA September 15 Letter at 5.
    \64\ See id.
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    The Commission finds that FINRA's proposal to disclose Restricted 
Firm designations is reasonable, and that the proposed rule change 
would enhance the investor-protection benefits of FINRA Rule 4111. As 
with the Taping Rule disclosures, the proposed rule change would make 
it easier for investors to obtain information about member firms that 
are currently designated as Restricted Firms, as well as those 
registered representatives associated with those member firms, through 
a preexisting database with which the public is already familiar. 
Moreover, the proposed rule change would incentivize investors to 
research more carefully the background of their financial 
professionals.
    Furthermore, the proposed rule change will add an alert to a member 
firm's Summary Report that the member firm is currently designated as a 
Restricted Firm, in conjunction with a link to a separate web page with 
a description of what this designation entails. A firm's Summary Report 
is meant to provide readers with an overview of information pertinent 
to their decision to hire or retain a financial professional. And, 
BrokerCheck is already structured to employ hyperlinks directing 
investors to more detailed information, both as to a firm's Detailed 
Report, and in the case of firms subject to restrictions under the 
Taping Rule, a hyperlink to a page providing a detailed explanation of 
the more simplified disclosure found on the firm's Summary Report. As 
such, the Commission believes FINRA's proposed further use of layered 
disclosure of summary information combined with the proposed use of 
hyperlinks to direct investors to more detailed information on what a 
Restricted Firm designation entails is reasonable, as it aligns with an 
approach to disclosure on BrokerCheck that investors are already 
familiar with. In doing so, the proposed rule change appropriately 
balances investors' need for information about the significance of a 
Restricted Firm designation with the need to bring the most salient 
information to the attention of investors in a user-friendly manner. 
Accordingly, for the reasons set forth above, the Commission finds that 
the proposed rule change is designed to protect investors and the 
public interest.

C. Recommended Disclosure of Historical Restricted Firm Designations

    As discussed above, the proposed rule change would impose a 
disclosure obligation on FINRA as to the current Restricted Firm 
designations it has made. One commenter opposed the proposed rule 
change because it would not require FINRA to disclose historical 
Restricted Firm designations.\65\ This commenter stated that 
``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.'' \66\ As such, the 
proposed rule change would be ``inconsistent with this historical 
disciplinary predicate,'' as it would only require the release of 
information about current Restricted Firm designations.\67\ Separately, 
this commenter stated that requiring the release of information on 
BrokerCheck of only current Restricted Firm designations ``would be 
inconsistent with the disclosure requirements on Form BD which, in 
questions 11E(3) and (4), requires disclosure as to whether any self-

[[Page 8498]]

regulatory organization has `ever' either `restricted' the activities 
of a member firm or `otherwise restrict[ed] its activities.' '' \68\ 
This commenter stressed that if the purpose of both BrokerCheck and 
Form BD is to help investors make more informed choices by providing 
registration and disciplinary history of firms to investors, then ``the 
fact that a member firm was ever designated as a Restricted Firm is 
information that is clearly critical and material to investors.'' \69\
---------------------------------------------------------------------------

    \65\ See Caruso Letter at 2.
    \66\ Id.
    \67\ Id.
    \68\ Id. See also Form BD, the Uniform Application for Broker-
Dealer Registration. 17 CFR 249.501, available at https://www.sec.gov/files/formbd.pdf (asking in Questions 11E(3) and (4) 
whether ``any self-regulatory organization or commodities exchange 
ever: . . . (3) found the applicant or a control affiliate to have 
been the cause of an investment-related business having its 
authorization to do business denied, suspended, revoked, or 
restricted?; (4) disciplined the applicant or a control affiliate by 
expelling or suspending it from membership, barring or suspending 
its association with other members, or otherwise restricting its 
activities?'').
    \69\ Caruso Letter at 2.
---------------------------------------------------------------------------

    Two other commenters that supported the proposed rule change also 
recommended that FINRA disclose on BrokerCheck a member firm's 
historical Restricted Firm designations.\70\ One such commenter stated 
that ``[a] historic record of when--and how many times--a firm has been 
a restricted firm assists investors in making informed decisions.'' 
\71\ This commenter further stated that requiring FINRA to disclose 
historical Restricted Firm designations would incentivize member firms 
and associated persons ``to reform and not engage in future 
misconduct'' because a prospective customer observing on BrokerCheck 
``a lengthy period of time after a restricted firm designation has been 
removed may signal that a firm has made significant positive changes.'' 
\72\
---------------------------------------------------------------------------

    \70\ See Drexel and St. John's Letter at 2; Cornell Law Letter 
at 3.
    \71\ Drexel and St. John's Letter at 2.
    \72\ Id.
---------------------------------------------------------------------------

    In response to comments that disclosing only current, but not 
historical, Restricted Firm designations would be inconsistent with how 
a member firm's ``disciplinary history'' is disclosed on BrokerCheck, 
FINRA noted that it has previously stated that, in its view, ``a 
Restricted Firm designation is not disciplinary in nature.'' \73\ 
Instead, FINRA stated that it believes that disclosure of Restricted 
Firm designations more directly analogizes ``to how Rule 8312 requires 
the disclosure of information as to whether a particular member firm 
`is' subject to the provisions of [the Taping Rule].'' \74\ Regarding a 
commenter's assertion that disclosure of only current Restricted Firm 
designations would be inconsistent with the disclosure requirements of 
Questions 11E(3) and (4) on Form BD, FINRA stated that the proposed 
rule change ``would not impact a firm's obligations under Form BD or 
alter how Rule 8312 requires the release on BrokerCheck of `any 
information reported on the most recently filed . . . Form BD.' '' \75\
---------------------------------------------------------------------------

    \73\ See FINRA November 25 Letter at 3 (citing to Notice, 85 FR 
78566).
    \74\ Id. (citing to FINRA Rule 8312(b)(2)(F)).
    \75\ Id. at 4 (citing to FINRA Rule 8312(b)(2)(A)). FINRA also 
noted that it had ``previously acknowledged that `information about 
a firm's status as a Restricted Firm . . . could become publicly 
available through existing sources or processes,' such as `through 
Form BD.' '' See Notice, 85 FR 78467 note 159.
---------------------------------------------------------------------------

    FINRA further stated that it believes the potential for a 
Restricted Firm disclosure to be removed from BrokerCheck would provide 
``a strong incentive'' to Restricted Firms to improve their behavior, 
and ``thus, would further the primary purpose of Rule 4111 itself.'' 
\76\ However, FINRA stated that it appreciated the suggestion to 
disclose all historical Restricted Firm designations, and ``will 
revisit it after gaining experience with disclosing Restricted Firm 
designations on BrokerCheck.'' \77\
---------------------------------------------------------------------------

    \76\ FINRA November 25 Letter at 3.
    \77\ See FINRA September 15 Letter at 8 and note 24; see also 
FINRA November 25 Letter at 3 (reiterating FINRA's assertion that 
the lack of disclosure of historical Restricted Firm designations 
would incentivize currently Restricted Firms to improve their 
behavior).
---------------------------------------------------------------------------

    The Commission finds that the proposed rule change for FINRA to 
prominently display current Restricted Firm designations on BrokerCheck 
is reasonable, and that such disclosure would enhance the investor 
protection benefits provided by FINRA Rule 4111. Specifically, the 
disclosure of current Restricted Firm designations on BrokerCheck would 
provide investors with valuable information in an easily accessible 
format, including FINRA's determination that a firm currently has a 
higher risk profile relative to similar firms, and that the firm may be 
subject to certain conditions and/or restrictions on its operations.
    Further, FINRA's determination not to require disclosure of a 
historical Restricted Firm designation is reasonable. The potential for 
removal from BrokerCheck of the prominent display of a current 
Restricted Firm designation once the firm is no longer so-designated 
could incentivize currently Restricted Firms to improve their behavior, 
and thereby benefit investors.\78\ FINRA's approach with this proposed 
disclosure obligation is also consistent with its approved approach to 
disclosing a member firm's Taping Firm status pursuant to FINRA Rule 
3170.\79\
---------------------------------------------------------------------------

    \78\ See infra note 95 and accompanying text (identifying 
examples of how FINRA believes firms that are currently designated 
as Restricted Firms could improve their behavior).
    \79\ See supra note 21; see also FINRA Rule 8312(b)(2)(F).
---------------------------------------------------------------------------

    The Commission also acknowledges FINRA's commitment to revisit the 
proposed rule change (including commenters' suggestions to require 
disclosure on BrokerCheck of the historical Restricted Firm's 
designations of member firms and former member firms pursuant to this 
rule) after gaining experience with disclosing Restricted Firm 
designations on BrokerCheck.\80\
---------------------------------------------------------------------------

    \80\ See FINRA November 25 Letter at 4.
---------------------------------------------------------------------------

    The Commission also finds that the proposed rule change would not 
be inconsistent with the approach to disclosure of a member firm or 
former member firm's disciplinary history on BrokerCheck. The 
disclosure of such firm's disciplinary history on BrokerCheck flows 
from the information reported on Registration Forms (including Form 
BD),\81\ and appears in the firm's Detailed Report within a discrete 
``Disclosure Events'' section. As FINRA stated, the proposed rule 
change would have no impact on such disclosures. Relatedly, the 
Commission also finds that the proposed rule change would not be 
inconsistent with a firm's disclosure obligations under Form BD. The 
proposed rule change would not impact any of the requirements imposed 
upon firms by Form BD, or amend FINRA's obligation under FINRA Rule 
8312 to release on BrokerCheck ``any information reported on the most 
recently filed . . . Form BD.'' \82\ Instead, the proposed rule change 
would only impose a distinct disclosure obligation on FINRA as to the 
current Restricted Firm designations it has made.
---------------------------------------------------------------------------

    \81\ See FINRA Rule 8312(b)(2)(A).
    \82\ Id.
---------------------------------------------------------------------------

    For the reasons discussed above, the proposed rule change to 
require FINRA to prominently display current Restricted Firm 
designations on BrokerCheck is consistent with Section 15A(b)(6) of the 
Exchange Act, which requires, among other things, that FINRA rules 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.

D. Potential Harm to Firms and Their Personnel of Disclosing Restricted 
Status

    Two commenters opposed any proposed rule change to publicly

[[Page 8499]]

disclose Restricted Firm designations on BrokerCheck because they 
assert that such disclosure could irreparably harm those firms and 
their personnel.\83\ In particular, one commenter stated that while 
FINRA Rule 4111 enhances investor protection by ``giving FINRA 
additional authority to enforce compliance with its rules, encourage 
member firms toward more compliant business models, and better ensure 
that firms are able to meet their financial obligations to customers or 
potential claimants,'' publicly identifying Restricted Firms on 
BrokerCheck pursuant to the proposed rule change would likely 
``undercut the effectiveness of Rule 4111.'' \84\ The commenter stated 
that while the information ``would be relevant to investors in 
determining whether to establish relationships with or continue to do 
business with [a firm,] the negative connotation [would] increase the 
likelihood that the firm will fail.'' \85\ Further, the commenter 
stated the possibility of failure would ``make [the firm] less able to 
meet its obligations to customers, and perhaps worse, increase the 
possibility of disorderly failure or closure.'' \86\ As a result, this 
commenter stated that ``customers may well be worse off than had the 
restricted status of the firm not been disclosed.'' \87\
---------------------------------------------------------------------------

    \83\ See CoastalOne Letter at 3 and Cetera Letter at 2.
    \84\ Cetera Letter at 1-2.
    \85\ Id. at 2.
    \86\ Id. In particular, the commenter opined that public 
disclosure of Restricted Firm status may ``create `run on the bank' 
situation[s] in which representatives and customers leave the firm 
quickly and cause it to fail.'' Id.
    \87\ Id.
---------------------------------------------------------------------------

    The other commenter stated that the disclosure of a member firm's 
Restricted Firm status would be a ``Scarlet Letter'' that would have a 
``severe economic impact'' upon the member firm, and would ``serve[ ] 
no purpose other than to put additional financial strain on Restricted 
Firms.'' \88\ This commenter stated that this additional financial 
strain would result from the fact that: (1) some existing and 
prospective customers would no longer do business with the member firm; 
and (2) the member firm would lose, and have trouble recruiting, good 
employees, which is contrary to FINRA's goal of improving ``bad'' 
member firms.\89\ Accordingly, this commenter stated that the harm to 
Restricted Firms and their personnel under the proposed rule change 
would outweigh the potential investor protections.\90\ This commenter 
also stated that FINRA's Notice failed to identify or discuss ``any 
objective evidence which would demonstrate the effectiveness'' of 
providing disclosure of a member firm's designation as a Restricted 
Firm on BrokerCheck.\91\ Without such evidence and understanding of the 
impact of the proposed rule change, the commenter stated that ``FINRA 
is proposing a rule which has no rational basis to support its 
implementation,'' and thus that it should be reconsidered.\92\
---------------------------------------------------------------------------

    \88\ CoastalOne Letter at 2 (stating that ``[u]nder Rule 4111, 
FINRA may impose upon a Restricted Firm a monetary cash escrow 
deposit which FINRA will effectively control, and that sum cannot be 
calculated in net capital. This alone will put some small firms on 
the edge of net capital failure. In addition, FINRA may order other 
remedies, such as shorte[r] examination cycles, which result in 
additional overhead costs to firms. Those remedies alone are 
sufficient to achieve FINRA's purposes in Rule 4111.''). The 
commenter concluded that the proposed rule change is an 
``unnecessary `add-on' to a [r]ule which is already extremely 
punitive in nature.'' Id.
    \89\ See id.
    \90\ See id.
    \91\ Id. at 1.
    \92\ Id.
---------------------------------------------------------------------------

    In response, FINRA cited its Notice and the economic impact 
analysis therein, which detailed a range of the potential economic 
impacts of the proposed rule change, and which FINRA stated is 
``consistent with FINRA's approach to economic impact assessments for 
proposed rulemakings.'' \93\ Among the benefits to investors outlined 
in FINRA's economic impact analysis is that the proposed rule change 
``may . . . prompt[ ] [investors] 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,'' which ``may help some investors avoid 
the harms associated with future misconduct.'' \94\ FINRA stated that 
due to this additional investor caution, ``Restricted Firms may respond 
by offering more competitive pricing or improved customer service . . . 
[and] 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.'' \95\
---------------------------------------------------------------------------

    \93\ FINRA September 15 Letter at 7 and note 22 (citing 
Framework Regarding FINRA's Approach to Economic Impact Assessment 
for Proposed Rulemaking, available at https://www.finra.org/sites/default/files/Economic%20Impact%20Assessment_0_0.pdf). In the 
Notice, FINRA discussed the qualitative impact to investors, firms 
and financial professionals of the disclosure of Restricted Firm 
designations. For example, FINRA stated that ``[w]hile the magnitude 
of . . . 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.'' 
See Notice, 87 FR 36554.
    \94\ Notice, 87 FR 36554; see also FINRA September 15 Letter at 
2-3.
    \95\ Notice, 87 FR 36554; see also FINRA September 15 Letter at 
2-3.
---------------------------------------------------------------------------

    FINRA also stated that additional investor caution, along with 
potential reactions by third parties,\96\ may lead to financial 
distress at a Restricted Firm.\97\ While FINRA indicated that the 
``magnitude of those reactions cannot be quantified,'' it acknowledged 
that some Restricted Firms may go out of business; but these potential 
impacts should be mitigated by the inclusion of ``numerous features'' 
within the FINRA Rule 4111 process that are ``designed to narrowly 
focus the new obligations on the firms of the most concern.'' \98\
---------------------------------------------------------------------------

    \96\ FINRA stated that ``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. 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 Restricted 
Firm's designation only after the information is disclosed publicly. 
These third-party firms may 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.'' 
Notice, 87 FR 36554 (citing Exchange Act Release No. 90527 (November 
27, 2020), 85 FR 78540 (December 4, 2022) (File No. SR-FINRA-2020-
041) (``Rule 4111 Notice''), available at https://www.sec.gov/rules/sro/finra/2020/34-90527.pdf); see also FINRA September 15 Letter at 
3.
    \97\ See FINRA September 15 Letter at 3 (citing Notice, 87 FR 
36554).
    \98\ Id. at 3 (citing Rule 4111 Notice).
---------------------------------------------------------------------------

    Further, FINRA cited regulatory frameworks designed to help 
mitigate the potential impact on investors should the public disclosure 
of a member firm's Restricted Firm designation lead to a member firm's 
failure, such as the Net Capital Rule,\99\ the Customer Protection 
Rule,\100\ and the Securities Industry Protection Corporation 
(SIPC).\101\ To the extent there are any residual risks to customers, 
FINRA stated that ``they would be outweighed by the investor-protection 
benefits from publicly

[[Page 8500]]

disclosing a firm's designation as a Restricted Firm.'' \102\
---------------------------------------------------------------------------

    \99\ Exchange Act Rule 15c3-1 (Net Capital Rule) requires 
broker-dealers to maintain certain levels of liquid assets.
    \100\ Exchange Act Rule 15c3-3 (Customer Protection Rule) 
requires broker-dealers that have custody of customer assets to keep 
those assets separate from their own accounts.
    \101\ See FINRA September 15 Letter at note 13 (stating that 
``when a brokerage firm liquidates, securities regulators `work with 
the firm to make sure that customer accounts are protected and that 
customer assets are transferred in an orderly fashion to one or more 
SIPC-protected brokerage firms.' ''). See also Investor Alert, If a 
Brokerage Firm Closes Its Doors, available at https://www.finra.org/investors/alerts/if-brokerage-firm-closes-its-doors.
    \102\ FINRA September 15 Letter at note 13.
---------------------------------------------------------------------------

    FINRA also addressed the potential impact of BrokerCheck disclosure 
of Restricted Firm designations on the employees of such member firms, 
stating that it anticipated an indirect effect on individuals 
associated with Restricted Firms.\103\ For example, employees with 
clean disciplinary records who work for a currently designated 
Restricted Firm, or a member firm that an employee anticipates may soon 
be designated as a Restricted Firm, may be incentivized to leave.\104\ 
However, FINRA stated that the extent to which disclosure of Restricted 
Firm designations on BrokerCheck would impact future employment 
prospects of those firms' registered persons, including those with 
relevant disclosures, ``is expected to be limited,'' \105\ particularly 
as ``none of the Rule 4111 metrics are based on an employee's prior 
associations with Restricted Firms.'' \106\ Moreover, FINRA stated that 
prospective firms likely already consider the disclosure history of 
individual registered persons seeking new employment, ``including in 
determining if the individual's disclosures impact the firm's Rule 4111 
metrics,'' because ``most of the underlying events included in the 
[Rule 4111 metrics] are already [captured] in BrokerCheck.'' \107\ 
FINRA stated that there is ``some possible risk that a person's 
association or prior association with a Restricted Firm may potentially 
impact future employment prospects in ways unrelated to Rule 4111,'' 
but, as discussed above, such risks are ``outweighed by the investor 
protection benefits of the proposed rule change.'' \108\
---------------------------------------------------------------------------

    \103\ Id. at 4 (citing Notice, 87 FR at 36553).
    \104\ Id. at 4.
    \105\ Id. at 4-5 (citing Rule 4111 Notice at 78553 and note 62, 
wherein FINRA asserted that ``the economic impact from Rule 4111 on 
individuals' employment prospects is expected to be limited to a 
small proportion of registered persons, specifically those with a 
significant number of disciplinary and other disclosure events on 
their records, and that the vast majority of member firms would 
likely be able to employ most of the individuals seeking employment 
in the industry, including ones who have some disclosures, without 
coming close to meeting the Rule 4111 Preliminary Criteria for 
Identification'').
    \106\ Id. at 5.
    \107\ Id. at 4-5.
    \108\ Id. at 5.
---------------------------------------------------------------------------

    The Commission acknowledges commenters' concerns that the proposed 
rule change could negatively impact Restricted Firms and their 
financial professionals. To the extent customers avoid using, or leave, 
a Restricted Firm in response to the disclosure of its Restricted Firm 
status, the concomitant reduction in revenue generated by that member 
firm could increase the risk of that member firm's failure, which could 
negatively impact the remaining customers of the member firm. In 
addition, the disclosure of a Restricted Firm's status could negatively 
impact the firm's ability to hire or retain the type of employees 
likely to help improve the firm sufficiently to remove the designation.
    Despite these possibilities, the Commission finds that the proposed 
rule change reasonably balances the potential negative impact to 
Restricted Firms and their employees against the benefits to investors 
of public disclosure of a Restricted Firm's restricted status, and that 
it would enhance the investor-protection benefits of FINRA Rule 4111. 
BrokerCheck is designed to provide free public access to detailed 
information about member firms and their registered representatives, 
including information about arbitration awards, disciplinary history, 
and information concerning conditions and restrictions on the firm or 
individual's operations, such as whether a particular member firm is 
subject to the Taping Rule. Investors can use this information to help 
make informed choices about the member firms with which they conduct 
business. Public disclosure of a Restricted Firm's status on 
BrokerCheck, as the proposed rule change would provide, would similarly 
give investors information they could use to research more carefully 
the operations of a member firm before engaging it; or, for existing 
customers, it may encourage them to reevaluate their relationship with 
the firm. In addition, the display of Restricted Firm designation--
which would only occur when a member firm is currently designated and 
not for historical designations--may encourage Restricted Firms to 
improve internal controls to avoid further potential reputational harm 
in being re-designated as a Restricted Firm in subsequent years, which 
would provide investor protection benefits to both customers and 
potential customers of Restricted Firms.
    It is possible that disclosure of a Restricted Firm's status on 
BrokerCheck may negatively impact that firm by warning away existing 
and potential customers. And as a consequence, those firms may 
experience financial hardship or even failure. It is also possible that 
the proposed rule change would negatively impact employees, or prior 
employees, of Restricted Firms. However, any potential effect on the 
firm or their financial professionals of such a designation must be 
considered in light of the potential benefits to customers and 
potential customers of having these disclosures made available to them. 
As commenters indicate, many investors could find the information 
regarding a Restricted Firm designation, which FINRA expects to apply 
to a relatively limited number of member firms with significantly 
higher levels of risk-related disclosures than similarly sized peers 
and that present a high degree of risk to investors (i.e., according to 
FINRA, only 1.3% of all member firms as of December 31, 2019, would 
have been identified as Restricted Firms),\109\ material to their 
decision of whether to engage or remain with the firm. In addition, to 
the extent the proposed rule change results in the failure of a 
Restricted Firm, the regulatory regime governing firm failures provides 
sufficient investor protections to help ensure the orderly winding up 
of the firm's business and the protection of their customers.\110\ In 
light of this, the Commission finds that FINRA has appropriately 
balanced the investor protection benefits of the proposed rule change 
against the potential harm to Restricted Firms and their registered 
representatives, and that FINRA has reasonably considered the impacts 
of the proposed rule change as outlined in its economic impact analysis 
and its response to comments.
---------------------------------------------------------------------------

    \109\ See Notice, 87 FR 36553 note 25 (citing SR-FINRA-2020-041, 
Exhibit 3g).
    \110\ See supra notes 99-101 and accompanying text.
---------------------------------------------------------------------------

    Accordingly, for the reasons set forth above, the Commission finds 
that the proposed rule change is consistent with the provisions of 
Section 15A(b)(6) of the Exchange Act, 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.

E. Recommended Withholding of Disclosure During a FINRA Rule 9561 
Expedited Proceeding

    As stated above, FINRA Rule 9561 established expedited proceedings 
providing member firms and former member firms, among other things, an 
opportunity to challenge any requirements the Department has imposed, 
including any Restricted Deposit Requirements, by requesting, pursuant 
to FINRA Rule 9561, a prompt review of its decision in the FINRA Rule 
4111 process (``FINRA Rule 9561 expedited proceeding''). Under the 
proposed rule change, FINRA would prominently disclose a Restricted 
Firm's

[[Page 8501]]

status on BrokerCheck, including while such a challenge is 
ongoing.\111\
---------------------------------------------------------------------------

    \111\ Proposed FINRA Rule 8312(b)(2)(I) would require the 
disclosure on BrokerCheck of information as to whether a particular 
current or former member is currently designated as a Restricted 
Firm pursuant to FINRA Rules 4111 and 9561. This would include the 
obligation to disclose while a FINRA Rule 9561 expedited proceeding 
to review the Department's decision is pending, because a decision 
that designates a firm as a Restricted Firm will not be stayed 
during a FINRA Rule 9561 expedited proceeding. See Notice, 87 FR 
36552; see also FINRA Rule 9561(a)(4) (Effectiveness of the Rule 
4111 Requirements).
---------------------------------------------------------------------------

    One commenter recommended that FINRA amend the proposed rule change 
to give member firms and former member firms the opportunity to appeal 
their Restricted Firm designation through a FINRA Rule 9561 expedited 
proceeding before disclosing their restricted status.\112\ The 
commenter stated that publishing a Restricted Firm designation prior to 
completion of the adjudicatory process denies that firm adequate due 
process.\113\ As such, the arrangement ``fails to strike the correct 
balance between the need for investor protection and the procedural due 
process rights of the firm.'' \114\
---------------------------------------------------------------------------

    \112\ See Cetera Letter at 3.
    \113\ See id.
    \114\ Id. (stating that ``[g]iven the potential for serious 
consequences upon disclosure of Restricted Firm status, it seems 
only fair that any such disclosure should be delayed until the 
entire adjudicatory process has been completed'').
---------------------------------------------------------------------------

    In response, FINRA stated that it proposed disclosing Restricted 
Firm designations during the pendency of a FINRA Rule 9561 expedited 
proceeding, because a ``firm's obligations under Rule 4111 are not 
stayed [during a Rule 9561 expedited proceeding].'' \115\ Specifically, 
FINRA stated ``a designated Restricted Firm will still be required to 
comply with any conditions and restrictions imposed on the firm and 
deposit a portion of any Restricted Deposit Requirement.'' \116\ FINRA 
stated that although it appreciates the commenter's suggestion, it 
continues to believe that the display of any member firm's current 
designation as a Restricted Firm on BrokerCheck, including during the 
pendency of a FINRA Rule 9561 expedited proceeding, ``strikes the right 
balance in support of investor protection.'' \117\ For example, FINRA 
stated that ``[d]isplaying the firm's Restricted Firm status on 
BrokerCheck while the Rule 9561 expedited proceeding is pending could 
prompt investors to ask the firm about the firm's status.'' However, in 
response to the commenter's concerns, FINRA stated that it will work to 
disclose on BrokerCheck that any firm that is appealing its Restricted 
Firm designation pursuant to a FINRA Rule 9561 expedited proceeding has 
a Restricted Firm designation that is ``on appeal.'' \118\
---------------------------------------------------------------------------

    \115\ FINRA September 15 Letter at 9 (citing Notice at 36552 and 
note 15).
    \116\ Id.
    \117\ Id.
    \118\ Id.
---------------------------------------------------------------------------

    The Commission finds that the proposed rule change to display the 
current Restricted Firm designations of member firms and former member 
firms, during the pendency of a FINRA Rule 9561 expedited proceeding is 
reasonable, and appropriately enhances the investor protection benefits 
of the proposed rule change. The structure of the FINRA Rule 4111 
process is designed such that Restricted Firm designations themselves 
are not stayed, nor are the concomitant obligations and conditions to 
which the firms are subject, during a FINRA Rule 9561 expedited 
proceeding. Therefore, it is reasonable for FINRA to require 
publication of the firm's active Restricted Firm designation on 
BrokerCheck in light of the important investor protection benefits such 
disclosure brings, and for FINRA to not delay such disclosure solely 
because the designated firm has requested a hearing (which may or may 
not be successful) pursuant to the FINRA Rule 9561 expedited proceeding 
provisions.\119\ Accordingly, for the reasons set forth above, the 
Commission finds that the proposed rule change is designed to protect 
investors and the public interest.
---------------------------------------------------------------------------

    \119\ The Commission notes that FINRA's commitment to work to 
enhance its display of Restricted Firm designations on BrokerCheck 
to convey to investors when member firms and former member firms 
have requested a hearing pursuant to FINRA Rule 9561 that such a 
designation is on appeal would make additional information available 
to investors, who may benefit from knowing that a firm is 
challenging its designation.
---------------------------------------------------------------------------

F. The Disclosure of Restricted Status Is Redundant

    As stated above, FINRA Rule 4111 authorizes FINRA to designate as 
Restricted Firms those 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.\120\ One commenter stated that the 
proposed rule change is unnecessary because information about the 
events giving rise to the Restricted Firm designation are already 
publicly available on BrokerCheck.\121\ The commenter pointed out that 
disclosures about member firms' and former member firms' history of 
litigation, regulatory actions, and financial disclosures (among other 
things) are reported on Form BD, which information in turn appears on 
BrokerCheck.\122\ The commenter stated that, similarly, information 
about firms' registered representatives is reported on Forms U4 and U5, 
which information is also available on BrokerCheck.\123\ Because 
investors already have access to the relevant data forming the basis of 
a Restricted Firm designation, this commenter stated the proposed rule 
change would result in redundant disclosure.\124\
---------------------------------------------------------------------------

    \120\ See FINRA Rule 4111(i)(11).
    \121\ See CoastalOne Letter at 2.
    \122\ See id.
    \123\ See id.
    \124\ See id. at 2-3.
---------------------------------------------------------------------------

    FINRA disagreed with the assertion that such proposed disclosure 
would be redundant.\125\ FINRA stated that although Restricted Firm 
designations stem from events already disclosed on BrokerCheck, 
including certain events that are reported on Registration Forms, ``the 
disclosure of a firm's designation as a Restricted Firm would provide 
additional information to investors.'' \126\ Specifically, this 
information ``would convey [to investors] that FINRA has designated the 
firm as a Restricted Firm after determining that the firm meets the 
Preliminary Criteria for Identification, conducting an initial 
evaluation, and having a consultation with the member; that the firm 
has significantly higher levels of risk-related disclosures than other 
similarly sized peers and presents a high degree of risk to investors; 
and that the firm may be subject to a `Restricted Deposit Requirement' 
and other conditions or restrictions.'' \127\ FINRA asserted that this 
information would be new for investors, as it is not information that 
could be ``gather[ed] today from reviewing a firm's BrokerCheck 
report.'' \128\
---------------------------------------------------------------------------

    \125\ See FINRA September 15 Letter at 6.
    \126\ Id.
    \127\ Id.
    \128\ Id.
---------------------------------------------------------------------------

    The Commission finds that the proposed rule change requiring the 
disclosure of Restricted Firm designations on BrokerCheck would not be 
redundant of existing disclosures and would therefore provide 
additional information to investors and investor protection benefits. 
While the FINRA Rule 4111 metrics are comprised of disclosure events 
that are required to be reported on Registration Forms, FINRA's 
designation of a member firm or former member firm as a Restricted Firm 
follows an extensive FINRA Rule 4111 process that includes FINRA's own 
evaluation of the events, a consultation with the member firm in 
question, and an independent decision by FINRA's Department of Member 
Supervision to

[[Page 8502]]

make the designation in question. Further, the disclosure of Restricted 
Firm designations also would indicate to investors that the firm may be 
subject to a Restricted Deposit Requirement and other conditions or 
restrictions. Therefore, this designation would be new and additive to 
the array of information currently available to investors. Accordingly, 
for the reasons set forth above, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Exchange 
Act,\129\ which requires, among other things, that FINRA rules 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.
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    \129\ 15 U.S.C. 78o-3(b)(6).
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IV. Conclusion

    The Commission finds that the proposed rule change is consistent 
with the provisions of Section 15A(b)(6) of the Exchange Act, 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.
    As with FINRA's approach to disclosing a member firm's Taping Firm 
status, the proposed rule change would provide disclosures to investors 
of information concerning the current status of member firms and former 
member firms that FINRA believes pose higher risks to the investing 
public compared to member firms and former member firms of similar 
sizes. This new category of information, provided in a user-friendly 
manner, would arm investors with information they could use to more 
carefully research the background of such firms. The proposed rule 
change could also incentivize member firms with a significant history 
of misconduct to change behaviors and activities to reduce risk. As 
such, the proposed rule change would enhance the investor-protection 
benefits of FINRA Rule 4111.\130\ While the proposed rule change may 
negatively impact those firms designated as Restricted Firms, as 
described above, the existing regulatory regime would help mitigate 
potential harm. Furthermore, FINRA stated that it would revisit the 
proposed rule change after gaining experience with disclosing 
Restricted Firm designations on BrokerCheck.
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    \130\ See FINRA Rule 4111 Order.
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    For these reasons, the Commission finds the proposed rule change is 
designed to protect investors and the public interest.
    It is therefore ordered pursuant to Section 19(b)(2) of the 
Exchange Act \131\ that the proposed rule change (SR-FINRA-2022-015), 
be, and hereby is, approved.
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    \131\ 15 U.S.C. 78s(b)(2).
    \132\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\132\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-02717 Filed 2-8-23; 8:45 am]
BILLING CODE 8011-01-P


