Finra set to strengthen background checks for new registered rep hires

Regulator will conduct public financial records review within 15 days of Form U4 filing

Jul 5, 2018 @ 1:40 pm

By Mark Schoeff Jr.

Finra will soon step up its background checks on newly hired brokers.

Beginning Monday, the regulator will conduct a review of public financial records within 15 days of a brokerage submitting a registration application, known as a Form U4.

Under current procedures, the firm is responsible for validating its prospective hire's financial disclosures regarding bankruptcies, judgments and liens.

The Form U4 information goes into the Central Registration Depository and populates the BrokerCheck public database, which contains profiles of the approximately 630,000 registered representatives.

For several years, Finra has been reviewing brokers' financial records on an annual basis. Now it will do so more quickly and will relieve firms of a duplicate responsibility. The regulator estimates it will save firms a combined $1.5 million to $3 million annually in background search and late filing fees.

"Small firms, in particular, should see meaningful cost savings and reduced regulatory burden through this enhancement," Derek Linden, Finra executive vice president for registration and disclosure, said in a statement. "The timeliness of Finra's review will also help assure investors that the BrokerCheck information about their representatives is accurate, complete and up-to-date as possible."

Cobbling together a broker's background for BrokerCheck could be hit-or-miss, with the process relying on honest answers from the registered rep hopeful, which were then double-checked by the hiring firm and eventually checked again by Finra.

Having Finra assume responsibility for the review of public financial records from the start will strengthen BrokerCheck, said Emily Gordy, a partner at McGuireWoods.

"This is significant because of the ability of Finra to do it on a scaled and consistent basis," said Ms. Gordy, a former Finra senior vice president for enforcement. "It will lead to greater investor protection."

If Finra flags discrepancies between information submitted on the Form U4 and what it finds in its background search, the regulator will notify the firm. The firm would then have to investigate and, if necessary, amend the U4.

The new process for reviewing public financial records will make hiring and onboarding brokers easier, said to Robert Keenan, chief executive of St. Bernard Financial Services.

In the past, a firm may have missed a 20-year-old lien against a broker that Finra found later.

"This will be an improvement because it will allow us to be on the same page from the start and fully disclose an event or correct any error [on the U4]," said Mr. Keenan, a former small-firm governor on the Finra board. "It will let you see what Finra is seeing."

The regulator said that the enhanced disclosure review is the result of its Finra 360 self-examination initiative.

"This is a testament to their looking across the board at all of their programs," Ms. Gordy said.


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