The Securities and Exchange Commission ("SEC") has approved a Financial Industry Regulatory Authority, Inc. ("FINRA") proposal that requires brokerages to strengthen the background reviews they conduct on new hires. Under the new requirement, firms must adopt written procedures to verify the accuracy and completeness of a broker's registration information on Form U4. The document is the foundation of the broker profiles contained on FINRA's BrokerCheck database which investors can review before hiring a financial adviser. Firms already are expected to review job applicants; however, the new rule makes the requirement more stringent by forcing them to conduct a search of public records.The new FINRA Rule 3110(e) streamlines and clarifies members' obligations relating to background investigations of registered persons and adds a requirement to adopt written procedures to verify the information in an applicant's Form U4, including the requirement to conduct a public records search. The new rule, which replaces NASD Rule 3010(e)(Qualifications Investigated), becomes effective July 1, 2015.
Under the new rule, members must investigate the good character, business reputation, qualifications and experience of an applicant before applying to register that applicant. Firms must also establish and implement written procedures for completing the Form U4 verification process, including a "national public records search," no later than 30 days after filing an initial or transfer Form U4.
The investigation and verification requirements are intended to be complementary, not duplicative of each other, although FINRA expects many firms will conduct both processes concurrently using some of the same information before filing the Form U4. In fact, FINRA encourages the completion of the verification process before filing the Form U4. Firms will incur a Late Disclosure Fee if a disclosure event should have been reported on the initial or transfer Form U4, regardless of whether the verification process is completed within the 30 day window. In instances where the verification process cannot be timely completed (e.g., fingerprints are illegible and must be resubmitted), the procedures should provide for completion of the verification process as soon as possible with documentation for the basis for the delay.
To satisfy the "national public records search" requirement, firms should search "reasonably available" public records, including general information such as an individual's name and address (e.g., by checking a valid state-issued driver's license or government-issued passport); criminal records; bankruptcy records; civil litigations and judgments; liens; and business records. The potential burden to firms of a comprehensive verification is compounded by the ambiguous language regarding the scope of records that may need to be searched. The scope and complexity of of the public records requirement depends on the definition of “reasonably available,” “public records” and “national public records search.” The rule, however, does not provide a definition for any of these key terms. In its 19b-4 filing with the SEC, FINRA, defines the term “public records” in a footnote as including:
[R]ecords [that] include, but not limited to: general information, such as name and address of individuals; criminal records; bankruptcy records, civil litigations and judgments; liens and business records.
Firms may conduct the records search in a variety of ways, including through the use of credit reports, reputable public databases, or utilizing the services of third-party provider, such as a background screening or investigative company, that can provide companies with a comprehensive assortment of background screening services. To the extent it is not practical to verify all of the information in Form U4, a firm should document what information could not be verified and the reason therefore. While the public records search requirement does not extend to foreign jurisdictions, firms may find it necessary to search records in a foreign jurisdiction as part of their verification process (to the extent consistent with applicable law). FINRA also notes that firms must make their own determination about whether an applicant's consent on a Form U4 complies with the laws of any particular jurisdiction regarding consent to obtain investigative consumer reports.
Melissa Rodriguez is a Senior Investigative Analyst at MSA Investigations.