Under Finra proposal, brokerages will be forced to conduct background checks on new brokers

Regulator would also cross-check broker disclosures against public court documents

Apr 16, 2014 @ 12:10 pm

By Mark Schoeff Jr.

Finra is set to propose a rule that would require brokerages to conduct background checks on new employees.

The rule will be considered at the April 24 Finra board meeting, according to an agenda that was posted on the organization's website on Wednesday.

Under the rule, firms would have to adopt written procedures “to verify the accuracy and completeness” of information contained on a broker's U4 form, a document that is the foundation of broker profiles on Finra's BrokerCheck database.

(Exclusive: Polk: Quantity does not equal quality: Expanding 'disclosure events' on BrokerCheck a bad idea)

The rule proposal was first reported by the Wall Street Journal, which also said that Finra is planning to compare publicly reported information for brokers against public court documents to make sure that brokers are complying with Finra's disclosure rules. A Finra spokeswoman confirmed the Journal report.

(Don't miss: Ketchum's plans for BrokerCheck)

BrokerCheck is supposed to include information about brokers' 10-year employment history, charges and convictions for felonies and investment-related misdemeanors, disciplinary actions, investment-related civil and judicial actions and proceedings, customer-initiated complaints and arbitration.

The system, designed to help investors find red flags that would indicate problems with brokers with whom they might do business, has been criticized recently for lacking substantive information.

In an interview with InvestmentNews on April 11, Finra chairman and chief executive Richard G. Ketchum said that Finra is focusing on BrokerCheck improvements.

“We are going to do a thorough review of our database to identify instances where we see underreporting — and we will continue to look at the categories that should be disclosed,” Mr. Ketchum said.

The head of the Public Investors Arbitration Bar Association said that Finra's background-check rule proposal is a step in the right direction.

“We're encouraged that Finra appears to be taking this seriously and will take action to cure the problem,” said Jason Doss, PIABA president and owner of The Doss Firm. “There's definitely a need and, frankly, it's disturbing that they haven't been doing [background checks] already.”

More from Mr. Doss on why BrokerCheck needs an overhaul.

In March, PIABA issued a report calling on Finra to include more information on the BrokerCheck site, such as older bankruptcies, tax liens, firings and internal investigations of brokers at their firms and broker scores on securities examinations.

The information is available on the Central Registration Depository, which includes data from state securities regulators and Finra arbitration. Finra decides what information from the CRD is included in BrokerCheck.

“Consumers should be able to determine whether that information is relevant, not Finra,” Mr. Doss said.

“It's information that's already out there,” he added. “Finra chooses not to disclose that information on its BrokerCheck reports, which can make them misleading, especially when they're marketed as being comprehensive.”

But another securities lawyer cautions that increasing the scope of BrokerCheck may lead to the dissemination of inaccurate information about brokers that they will be unable to challenge.

“There are many frivolous complaints that are filed where there is no finding,” said S. Lawrence Polk, a partner at Sutherland Asbill & Brennan. “It's very unfair to put that on someone's public record on BrokerCheck. It's important to give brokers a chance to explain why there may be some kind of civil complaint against them.”

Recruiter Danny Sarch, president of Leitner Sarch Consultants, on how BrokerCheck changes could affect adviser moves.


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