FINRA Launches Enhanced Process for Financial Background Checks of Brokers

Written By ESR News Blog Editor Thomas Ahearn

Beginning on July 9, 2018, the Financial Industry Regulatory Authority (FINRA) started to perform financial background checks that include a public records review within 15 calendar days after a firm applies to register an individual with FINRA to enhance the quality of information about individual brokers available to investors and reduce costs for the industry, particularly small firms, according to a news release from FINRA.

The announcement that FINRA is launching an enhanced disclosure review process for public financial records of individuals seeking registration with a brokerage firm is the latest in a series of actions under FINRA360, FINRA’s comprehensive organizational improvement initiative. The fact that FINRA will take over performing financial background checks should improve data quality for both regulators and investors.

Firms hiring registered representatives must fill out a Form U4, the uniform registration application, and submit it to the Central Registration Depository (CRD), the database for the registrations of firms and individuals in the brokerage industry. Form U4 includes information on a representative and is used by FINRA and federal and state regulators for licensing. The information is also available to investors at BrokerCheck.

Starting on July 9, 2018, FINRA conducted its public records review at the time that a Form U4 is submitted and will contact the applicant’s firm within 15 calendar days of the application if that review indicates that information on the Form U4 may be missing or contains discrepancies. If notified by FINRA of a potential deficiency, the firm must then investigate, and if the information is reportable, submit an amended Form U4.

Individual brokers are responsible for providing the necessary information to complete Form U4 and firms must validate that disclosure questions – including financial disclosures regarding bankruptcies, judgments, and liens – are answered correctly as part of their supervisory obligations. This requirement has resulted in firms hiring vendors to perform public record checks with respect to those financial disclosures.

With this new process, FINRA aims to ensure that firms can more readily accomplish their reporting obligations and that the data collected in CRD and made available to investors through BrokerCheck is more current and reliable. FINRA estimates that firms will save a combined $1.5 million to $3 million per year by avoiding search fees charged by vendors and fees assessed by FINRA for late filings.

While firms can rely on the financial public record reviews performed by FINRA to satisfy the applicable part of FINRA Rule 3110(e), FINRA’s review does not relieve firms or registered representatives of their duty to keep their records up to date. For more information, firms should review FINRA’s Information Notice from May 18, 2018: Enhancements to FINRA’s Disclosure Review Process Relating to Public Financial Records.

“FINRA’s enhanced disclosure review process delivers significant benefits to brokerage firms as well as the investing public,” Derek Linden, FINRA Executive Vice President, Registration and Disclosure, stated in the news release. “The timeliness of FINRA’s review will also help assure investors that the BrokerCheck information about their representative is as accurate, complete and up-to-date as possible.”

FINRA is a not-for-profit organization dedicated to investor protection and market integrity that regulates brokerage firms doing business with the public in the United States. Overseen by the SEC, FINRA writes rules, enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. To learn more, visit www.finra.org.

In November 2017, FINRA fined J.P. Morgan Securities, LLC $1.25 million for failing to conduct adequate background checks on approximately 8,600 – or 95 percent – of its non-registered associated persons from January 2009 to May 2017. FINRA found J.P. Morgan did not appropriately screen the individuals for all felony convictions or for disciplinary actions by financial regulators during their background checks.

ESR Offers Background Checks for the Financial Industry

Employment Screening Resources® (ESR) – a leading global background check firm – offers background checks specializing in the banking and finance industries. ESR helps banks and financial institutions protect assets, limit liability, mitigate risk, meet regulatory compliance requirements, and avoid employee theft. To learn more, please visit www.esrcheck.com/Background-Checks/Industry-Specific-Solutions/Financial/.

NOTE: Employment Screening Resources® (ESR) does not provide or offer legal services or legal advice of any kind or nature. Any information on this website is for educational purposes only.

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