Finra approves background checks for brokers

Regulator also considering requiring new information on BrokerCheck such as exam scores

Apr 24, 2014 @ 12:59 pm

By Mark Schoeff Jr.

Brokerage firms would have to perform background checks on new employees under regulatory changes Finra set last Thursday, but some industry groups are prepared to push back.

The board of the Financial Industry Regulatory Authority Inc. approved amendments to its supervision rule that would require member firms to investigate the backgrounds of financial advisers applying for Finra registration.


The reviews would be mandated for first-time applicants and transfers. Firms would have to verify the accuracy and completeness of information contained in a broker's Form U4, the foundation of broker profiles on Finra's ¨BrokerCheck database.

In addition to amending the supervision rule, Finra will search public financial records of all registered representatives and search publicly available criminal records for brokers who have not been fingerprinted in the last five years. The regulator also said it would conduct periodic reviews of public records to ensure that BrokerCheck information is thorough and correct.

David Bellaire, executive vice president and general counsel at the Financial Services Institute Inc., said background checks would not be new for the independent broker-dealers and financial advisers that belong to his organization.

“Many of our firms already perform routine credit and other background checks when they're recruiting and supervising financial advisers,” he said.

But the group will evaluate the frequency, detail and potential cost of the new background-check requirements to determine whether it supports the plan.

“If the Finra proposal memorializes what our member firms are already doing, it would be helpful to set that standard for the whole industry,” Mr. Bellaire said.

In their BrokerCheck profiles, brokers are supposed to include information about their 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 arbitrations.

Finra is considering whether to add additional information from the Central Registration Depository to BrokerCheck, such as broker scores on securities exams, and is conducting a study to see if there is a correlation between that data and broker misconduct.

The Public Investors Arbitration Bar Association has been pushing Finra to include more information on BrokerCheck, such as older bankruptcies, tax liens, firings and internal investigations of brokers at their firms and exam scores. That data can be found on the CRD but not on BrokerCheck.

While the FSI backs Finra's efforts to improve the accuracy of information in the CRD and on BrokerCheck, it opposes putting exam scores on it, Mr. Bellaire said.

Many brokers took exams under the assumption that the goal was to pass rather than worrying about their score, he said.

“Now to disclose scores, and tell investors that they're a relevant and important component in their consideration, is misleading and unfair,” Mr. Bellaire said.

The Securities Industry and Financial Markets Association, said PIABA goes too far.

“We're concerned about this notion that everything in the CRD should be published on BrokerCheck,” said Kevin Carroll, managing director and associate general counsel at SIFMA. “We don't think all that information is relevant and helpful to investors and could be prejudicial to brokers and their firms.”

Both FSI and SIFMA said that they intend to talk to Finra about BrokerCheck changes.

“We want to work with them to make sure investors have access to information that's accurate and meaningful in their choice of a financial adviser,” Mr. Bellaire said.

BrokerCheck has been criticized recently because the profiles do not include all the negative information from the CRD that Finra requires. Critics have also said it does not contain enough information to allow investors to make informed decisions.


“These are important initiatives to improve the accuracy and totality of details reported on a registered individual's Form U4,” Finra chairman and chief executive Richard G. Ketchum said in a statement after the board met last week.

The amendments must be approved by the Securities and Exchange Commission.


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