SEC Approves FINRA Rule Change to Disclose BrokerCheck's "Restricted Firm" Designations

The SEC approved an amendment to FINRA Rule 8312 ("FINRA BrokerCheck Disclosure") to allow the disclosure of BrokerCheck's designation of "Restricted Firms."

The amendments also provide for hyperlinks to (i) the rules that define what constitutes a "Restricted Firm" designation and (ii) assist in educating "unsophisticated retail investors to understand the importance of the disclosure and make an informed decision about working with such a firm."

The rule change provides for BrokerCheck's public disclosure of member firms designated as a "Restricted Firm" as determined annually pursuant to FINRA Rule 4111 ("Restricted Firm Obligations") and FINRA Rule 9561 ("Procedures for Regulating Activities Under Rule 4111"). According to FINRA, providing transparency of BrokerCheck's "Restricted Firm" designations will serve to incentivize member firms to adjust their behavior and activities as FINRA has determined that these firms "pose higher risks to the investing public compared to member firms and former member firms of similar sizes."

The rule change was first proposed in SR-FINRA-2022-015. After considering the related comment letters received, the SEC adopted the amendment immediately with an effective date of February 9, 2023. The SEC and FINRA said that they will revisit any potential harm to designated "Restricted Firms" after data is gathered with the amendment in place.