SEC approves Finra background check rule
January 6, 2015 by Mark Schoeff Jr.
Expanded requirement faces some industry pushback, but could help firms avoid rogue hires
The Securities and Exchange Commission has approved a 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. That document is the foundation of the broker profiles contained on the Financial Industry Regulatory Authority Inc.’s BrokerCheck database investors can review before hiring a financial adviser.
Both for new registrants and those newly hired, firms must conduct a search of “reasonably available public records,” such as those pertaining to criminal history, bankruptcy, civil litigation, liens and business records. The background check must be completed within 30 days of a U4 being filed with Finra.
“The proposal will provide firms with an incentive to determine if additional disclosures on Form U4 are required for their registered personnel, ultimately resulting in more complete and accurate information in WebCRD, and as a consequence in BrokerCheck,” the staff of the SEC Division of Trading and Markets wrote in a Dec. 30 regulatory order.
The new rule will be implemented on July 1.
The additional requirements are likely to increase compliance time and costs for financial firms, according to Kenneth E. Springer, president of Corporate Resolutions Inc., a firm that conducts background checks for investors.
Sifting through public litigation records, for instance, is more than a check-the-box undertaking.
“Even if a lawsuit is closed, it can still be toxic,” Mr. Springer said. If someone has been sued 10 times, it’s important to look at the underlying facts.”
Many public records are not available online, said Mr. Springer, a former FBI agent. Assessing an individual’s background and character may require additional research.
“It’s going to take more time than [firms] expect,” Mr. Springer said. “You can’t just do an Internet search.”
The proposal, which Finra filed with the SEC in September, generated 10 comment letters.
The Securities Industry and Financial Markets Association was concerned that Finra had not clearly defined the mandate to verify the accuracy of U4 forms.
“As currently proposed, the language appears to require member firms to verify all of the information contained within the Form U4,” wrote Kevin Zambrowicz, SIFMA general counsel and managing director, in an Oct. 24 comment letter. “[S]uch a requirement would, for some responses in the Form U4, necessitate a member firm to review voluminous additional records not typically maintained in a centralized public database.”
Finra, the industry-funded broker-dealer regulator, made only minor changes to the original proposal.
The organization is trying to help its member firms avoid “headline risk,” Mr. Springer said. The new background check rules may force them to think twice about hiring a hotshot broker with a big book of business but a sketchy regulatory history.
“You have to look at the long-term effect,” Mr. Springer said. “Are they going to hurt the firm’s reputation? It’s well worth the due diligence upfront to lessen the reputational risk.”
