Broker-dealers have started terminating reps with compliance issues to dodge the “restricted firm” label that the Financial Industry Regulatory Authority will begin to make official for high-risk firms in mid-July, Finra officials said at the self-regulator’s annual conference today.

Under Finra’s “restricted firm” rule, broker-dealers that have high incidents of reps with disciplinary histories or in some case have disciplinary events themselves will be required to create a restricted deposit of capital or securities which will require Finra’s permission to withdraw.

Restricted firms may also have to deal with Finra placing restrictions on their lines of business, product sales and hiring practices and they may have to face public disclosure of their riskier “restricted” status on BrokerCheck, officials said.

On June 1, Finra will start providing initial predicative reports to firms who either because of reps’ risks, the firm’s own disciplinary events or both, look like they may be placed onto Finra’s “restricted firm” watchlist.

The initial report will give firms about 30 days to fire riskier brokers and begin to make disclosures that may be missing regarding rep or firm risks and disciplinary events.

“We have heard and seen reps being terminated ... which is a proactive approach to prepare and be aware of risks that will cause firms to be designated restricted,” said Kosha Dalal, vice president and associate general counsel in Finra’s Legal Policy Division.

Finra’s rule only gives firms a one-time option to reduce staff the first year they find themselves on the restricted firm list, Dalal warned.

At the same time, riskier brokers who are terminated can’t be rehired for one year, she said. If another firm decides to hire the higher-risk broker, they will need to have a discussion with Finra, based on other Finra requirements about hiring high-risk reps.

“We do have firms that do have concentrations of these individuals. We want to make sure this type of individual just doesn’t go to another firm,” said Dalal, who added that the rule is intended to capture firms whose disclosures on these events are “in most cases significantly outside the norm.”

What firms do in response to the initial June 1 Finra report regarding their risk levels will likely determine whether or not Finra will designate them as a restricted firm by mid-July, when Finra plans to make the decision about which of the 3,500 firms it regulates should be designated “restricted.”

“Be proactive. After the June date when [firms] receive that first predictive report, add or amend disclosures and terminate reps who fall into [a higher-risk] category,” Dalal advised.

Finra is not trying to chase firms out of business, said Bill St. Louis, executive vice president of Finra’s National Cause and Financial Crimes Detection Program.

The June 1 predictive report is only the beginning of the process for firms, he noted. “I get calls from firms asking about this. The June 1 reports we provide do not make a firm a restricted firm. That starts the process that can ultimately lead to you being designated restricted,” St Louis said.

A number of regulators have reached out to Finra to say they support public disclosure regarding firms that are designed restricted, officials said.

“Some form of public disclosure is warranted here. In the current year, firms that are identified as restricted will get a tag on BrokerCheck denoting the firm is a restricted firm. If someone looks for you they’ll see a little tab,” Dalal said.

“This is a proposal pending with SEC staff that has not been formally filed yet, but be on the lookout,” she added.