In its continuing efforts to combat fraud and provide the public with accurate information on investment professionals, the Financial Industry Regulatory Authority (FINRA) implemented changes to its background check requirements for registered individuals in 2015. These changes expanded the obligation of member firms to investigate the background of applicants for registration by confirming the completeness and accuracy of the information provided on an individual’s Form U4, the document used to register individuals with FINRA member firms. The proposed amendments were approved by the Securities and Exchange Commission (SEC) on December 30, 2014, and the new FINRA background check requirements went into effect on July 1, 2015.
By streamlining and clarifying the background check responsibility of member firms, FINRA hopes to include more relevant and accurate information regarding broker-dealers and registered individuals for inclusion in its WebCRD and BrokerCheck databases. The securities regulator’s Chairman and Chief Executive Officer, Richard Ketchum, stated that the new FINRA background check requirements would help “…improve the accuracy and totality of details reported on an individual’s Form U4…” to ensure that investors obtain relevant and important information on individuals entrusted with investing their money.
This new measure applies to all initial and transfer Form U4 filings, as well as individuals who have not been registered with a FINRA member firm for more than two years.
What are the new FINRA background check requirements?
Under the new FINRA background check rule, firms continue to be responsible for investigating the good character, business reputation, qualifications, and experience of applicants for registration.
Additionally, it is now necessary to perform a search of “reasonably available public records” to verify the completeness and accuracy of the details included in an individual’s Form U4. Firms are also required to make a reasonable effort to review an applicant’s most recent Form U5, which provides information regarding the reason for the termination of a registration with a member firm, for any potential claims regarding investment misconduct or other derogatory activities.
To maintain compliance, member firms are responsible for adopting written procedures for verifying the information on the Form U4. These procedures should specify the process for completing the necessary public record research and provide that those checks will include, at minimum, a national search of available filings.
Although the background investigation must be completed before filing a Form U4, and the public records check and Form U5 review within 30 calendar days and 60 calendar days, respectively, after filing the Form U4, FINRA indicated that these requirements are complementary and not duplicative. Since there may be some research that will fulfill aspects of the character assessment or public record check requirements, these elements are not mutually exclusive. The research procedures were designed to enhance the overall background and character verification process.
The organization does, however, encourage firms to conclude all requirements before submitting a Form U4 for registration.
What are “reasonably available” public records?
For the verification of Form U4 data obligation, firms are required to conduct a search of “reasonably available public records” to verify the accuracy of information provided by an applicant. FINRA clarified that, since the scope of available public record information is anticipated to change over time, the regulator stresses reviewing data that is currently accessible to the public. Such information includes, but is not limited to, general details relating to name and address, criminal records, bankruptcy filings, civil litigation, court judgments, liens, and business records.
While the public record search responsibility entails performing, at minimum, a national review, FINRA encourages firms to perform more in-depth research on applicants based on job function, responsibilities, and position to be held at the firm. Despite the level of research being implemented, the Form U4 verification must be completed within the specified timeframe after filing with FINRA.
With the amount of information that is necessary to verify, it is important for firms not to delay the public record checks, as some records may take more time to research than others. For example, not all jurisdictions make criminal record data remotely available, and it could take several weeks to process a request with the proper agency. Additionally, in the event you uncover relevant civil litigation or judgments, retrieving the necessary court records from the appropriate clerk’s office could take up extra valuable time. Therefore it is important to begin the public record research portion of the FINRA background check as soon as possible.
A Word of Caution
Although it may be tempting to sign-up with one of any number of the “instant” background check providers that offer billions of public records for less than $20, doing so will most likely not keep you compliant with the FINRA background check rule. Since not all jurisdictions make records such as criminal actions and civil litigation available for remote review, it is important to confirm that any nationwide service you might use includes the appropriate records from the specific jurisdictions connected with your applicant.
When in doubt, consult with a professional research firm to thoroughly review your investigative options to ensure that you are in full compliance with FINRA background check requirements. The right firm can provide you with important details on record availability, access methods, the location of relevant documents, and turnaround time for the jurisdictions covering your research. They should also be able to provide information on the appropriate type of background research for all levels of employment and responsibility within your firm.
Should you decide to source out your FINRA background check research to a third-party provider, you may want to review this article with tips on evaluating a background screening firm.
How does the FCRA factor into the new FINRA background check rule?
If using a third-party provider, you will need to follow the proper notification and authorization requirements under the Fair Credit Reporting Act (FCRA) to initiate a FINRA background check on an employee or applicant.
According to FINRA, since obtaining an investigative consumer report on applicants is not specifically required, as firms can perform the research internally, it will be up to the member firm to determine whether the general release contained within the Form U4 is sufficient to comply with the employment background check laws in its specific jurisdiction.
While the Form U4 does contain a section that authorizes a background investigation, the document does not necessarily comply with FCRA notification and consent obligations. Specifically, the FCRA allows employers to combine the background check disclosure and consent within a single form, but that form must be a standalone document and not grouped with other paperwork.
It may be helpful to consult with an employment attorney to ensure that your written procedures and research process will comply with FCRA obligations should you use the services of a third-party provider.
With its background check rule, FINRA hopes to streamline the screening process of securities professionals for registration and obtain more relevant and accurate information to combat fraud and educate investors. Although the updated FINRA background check requirements may seem daunting, and will most certainly require additional time and cost to complete, the overall process will benefit member firms by providing a clearer picture on the person they are hiring.
To accomplish this, you will need to either take the time to fully explore the availability and access methods concerning public records research or partner with a trusted investigative professional to help maintain compliance. With the prevalence of investment fraud, promptly discovering relevant public record information and/or prohibited investment practices is critical to safeguarding your firm in the long run.
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