Deeper broker background checks are necessary

Implementing a rule that would require mandatory background checks on new brokers could help uncover crucial information

Apr 20, 2014 @ 12:01 am

As Wall Street's self-funded regulator, the Financial Industry Regulatory Authority Inc. is well within its rights to consider a rule change that would require brokerage firms to conduct mandatory background checks on newly hired brokers.

Finra's decision to mull the rule proposal at its upcoming board meeting Thursday comes as the regulator faces unprecedented scrutiny from industry groups and the media over gaping holes in its online disclosure system, BrokerCheck. Those loopholes have led to the underreporting of bankruptcy filings, tax liens and criminal records of brokers.

Finra also plans to begin comparing publicly reported information about brokers against public court documents to make sure brokers are complying with Finra's disclosure rules. The regulator is also considering whether to put more information about brokers on BrokerCheck, including how many times brokers failed exams for the certifications needed to sell securities.

Finra's BrokerCheck database of licensing and disciplinary information allows investors to look quickly into the background of 1.3 million current and former Finra-registered brokers and 17,400 current and former Finra-registered brokerage firms. The free database also contains background information on 441,000 current and former investment adviser representatives, and 45,700 current and former investment advisory firms.


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.

Unfortunately, too few safeguards are in place to make sure brokers are disclosing such information about themselves, and reports of brokers' working with incomplete U4 forms — the document that is the foundation of broker profiles on BrokerCheck — have been surfacing.

Investors have a right to complete and accurate information about their brokers' work history, licensing credentials and disciplinary records. Therefore, it is imperative that the information found on BrokerCheck be up-to-date and reliable.

Enlisting the help of brokerage firms to verify the completeness and accuracy of information contained on a broker's U4 form will go a long way toward making sure investors have the information they need before deciding whether a broker is worthy of their trust.


Of course, the devil is in the details, and it will be up to Finra to make sure that firms are, in fact, performing suitable background checks on newly hired brokers. To that end, it will be crucial that Finra conduct periodic audits of background checks performed by the brokerages.

Firms that either fail to perform adequate background checks or do not have the policies and procedures in place to make sure the information found on a broker's U4 form is accurate and up-to-date should be subject to heavy fines and other sanctions.

On the matter of whether the information found on BrokerCheck should be expanded, we urge Finra to proceed with caution and seek input from practicing brokers. As much as we believe more disclosure is better than less when it comes to investor protection, requiring brokers to disclose information that does not materially assist investors in deciding whether a broker is honest, trustworthy and capable ultimately may deter qualified persons from entering the profession.


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