It’s always exciting to watch something that you just know will be deemed by later generations to be an historic event.  I mean, I distinctly remember watching Neil Armstrong on TV taking his first steps on the moon, or the tragic Challenger disaster, or OJ demonstrating how the glove just didn’t fit, and thinking: this is history happening, right now.

Well, FINRA’s roll-out of Rule 4111 may not belong on this list, I admit.  But, it is kind of interesting to watch things happen for the first time, and to see just how much of this FINRA is simply making up as they go along.  A lot, it seems.

I outlined in my previous blog post about Rule 4111 the multi-stage process spelled out in the rule.  We are now at the stage where FINRA has finished its math, assigning points to all the pertinent firm and RR disclosures, tallying them up, and seeing whether the sum is high enough to trigger further scrutiny.  Sadly, I have some clients who have found themselves in this predicament, and I am confident they are not alone.

So, what do you do if you get a letter from FINRA informing you of this unfortunate fact?

Step 1 is easy: check FINRA’s math.  Remember: what FINRA is computing here is a fraction.  The numerator represents the number of bad disclosures, and the denominator is the total number of registered reps.  While I don’t expect any issues with the denominator, it is possible that FINRA has indeed miscomputed the numerator, so if you can get that number down, you may succeed in getting the total down below the trigger.  To do this, check the disclosures that FINRA has identified to confirm that they are accurate, and that they rightfully belong in the tally that constitutes the numerator.  As the rule itself acknowledges, FINRA is not supposed to include as separate disclosures events that “are duplicative,” or which “involve[e] the same customer and the same matter,” or which “are not sales practice related.”  If you can get enough disclosures off the list based on these criteria, it might reduce your fraction to the point that the 4111 game is over for you.

Step 2 is easy, too, at least in theory: figure out if you are able to fire enough RRs with disclosures to bring your total down below the trigger.  If you are able to do this, and can get it done within 30 business days of receiving the 4111 letter, then you are also done.  Not everyone can do this, of course.  Some RRs may have old disclosures, and today, contrary to their histories, they are trusted, valuable, contributing team players who you simply don’t want to terminate.  Sometimes the disclosures come from individuals in firm management, who simply can’t be fired without severely impacting the firm’s ability to continue as a viable entity.  This is particularly true with small firms, where firm principals and officers get named as respondents way more frequently than they do at large firms.

Note that the ability to fire people to drop your total below the trigger point is not something you can keep in your pocket to use another time.  It is a one-time card to play, and is only playable the first time you receive the 4111 letter from FINRA.  If you don’t use it this year, you cannot use it next year.

It is also worth noting that you can’t achieve the same result by hiring a bunch of clean RRs, even though, mathematically speaking, it would do the trick (since increasing the denominator of the fraction can achieve the same thing as decreasing the numerator).  The only way to reduce your total is to terminate enough people with disclosures to get your fraction smaller than the threshold for your size firm.

This is where we are right now.  Firms that have received 4111 letters are busy analyzing the disclosures to see if there’s an easy way out of this mess.  I expect that BDs that have the ability to fire RRs with a lot of disclosures will strongly consider terminating them.  And perhaps this is one of the principal things that FINRA really wanted to see happen when it passed this rule.  It wants to see RRs with disclosures out of the industry, with no clear path back in (for two reasons, first, because anyone terminated under this provision cannot associate with the firm in any capacity, not just a registered capacity, for a whole year, and, second, because going forward, undoubtedly, “clean” BDs are going to be paying a great deal of attention to their 4111 threshold, and not risk exceeding it by hiring RRs with a truckload of disclosures).

But, what’s next?  What happens if you can’t reduce the fraction, or reduce it enough to fall below the trigger point?  You need to request that FINRA conduct a “Consultation,” a chance for you, basically, to somehow convince FINRA that despite the fact your number is high relative to your peer firms, you should be taken off the naughty list.  According to the rule, however, a Consultation is not something that happens automatically, or even something you can request.[1]  Certainly it’s not something that you will necessarily get even if you ask for one.  According to the rule, the Department of Member Regulation “shall conduct the Consultation to allow the member to demonstrate why it does not meet the Preliminary Criteria for Identification and should not be designated as a Restricted Firm” “[i]f the Department determines that the member meets the Preliminary Criteria for Identification and should proceed to a Consultation.”

I have to concede that I have no idea what criteria FINRA may employ to determine whether a firm “should proceed to a Consultation;” it’s not even addressed in the 4111 FAQs.  With that said, I find it difficult to believe that if a firm requests a Consultation that FINRA would deny such a request.  But, read strictly, that is certainly a possibility.  Regardless, given that the alternative – actually being branded a Restricted Firm – is so nasty, I cannot imagine a scenario in which I would not request, even demand, a Consultation.

As to what happens at the Consultation itself, at this point (since, to my knowledge, no Consultations have happened yet), all I know is what the rule itself spells out.  The good news is that if you are successful in getting a Consultation, FINRA has to listen you, given that the rule explicitly states that “[i]n conducting its evaluation of whether a member should be designated as a Restricted Firm and subject to a Restricted Deposit Requirement, the Department shall consider” the materials you provide.  Now, that doesn’t mean that FINRA will put any real stock in what you say, but at least they can’t tell you that they’re uninterested.  Still, and typically, however, there’s a caveat, maybe several.

First, the rule requires FINRA to “consider” “relevant information or documents” you supply. That means, of course, that FINRA may deem what you supply to be irrelevant, and discount it, perhaps entirely.

Second, the rule gives FINRA the right to “prescribe” the “manner and form” of the information it will consider.  So, that means that FINRA could, at least theoretically, decline to consider something you submit if it doesn’t like your chosen format.

Third, while the rule does use the phrase “shall consider” in describing what information FINRA reviews at the Consultation, it also states that such information must be “deem[ed] necessary or appropriate” by FINRA “to evaluate the matter.”  Thus, there looms the possibility that FINRA will deem your information to be unnecessary and/or inappropriate.

How this will all actually play out remains to be seen.  But, as they say, “history teaches.”  Anyone entering the Consultation process who simply presumes that FINRA will act reasonably and allow you to do whatever you want hasn’t been paying attention.  Given the gravity of being branded a Restricted Firm, it behooves you to dot every “i” and cross every “t,” make as professional and convincing a presentation as the facts allow, and be the best advocate you can be.  To half-ass the Consultation would be to invite the very outcome you’re hoping to avoid.


[1] Oddly, according to the rule, if you get the same letter next year, after next year’s annual computation by FINRA, then you can get a Consultation simply by requesting one.  But, as I said, the rule does not include similar language for the first time you are on the list.