Finra should review Form U4 to help industry diversity: Robinhood

The registration application known as Form U4 asks an applicant for a variety of information, from employment history to whether he or she has been convicted of or charged with a felony.

The Financial Industry Regulatory Authority Inc. could help foster diversity in the securities industry if it rethought questions about criminal activity on the basic employment record for the roughly 300,000 financial advisers working at brokerage firms, according to a handful of comments, including from online trading upstart Robinhood Securities.

Robinhood and others made the comments in response to Finra’s April notice to members about diversity. Monday was the final day for comments.

In that April 29 notice, Finra said it was seeking comment on rules, operations and administrative processes that may create unintended barriers to greater diversity and inclusion in the broker-dealer industry.

Known as Form U4, the registration application asks an applicant for a variety of information, from employment history to whether he or she has been convicted of or charged with a felony.

This may disproportionately have an impact on minorities looking to work in the securities industry because of “data supporting the conclusion that racial disparities are widespread in the U.S. criminal justice system is abundant,” according to the comment letter from Robinhood, which was signed by Norman Ashkenas, chief compliance office at Robinhood Financial, and Kelly Zigaitis, chief compliance officer at Robinhood Securities.

“On its own this data is troubling, and Robinhood believes that requiring individuals to disclose this information without a reasonable timeframe or in situations without a conviction is likely harmful, misaligned with relevant industry standards, and not necessary to protect the investing public,” according to the letter. “Therefore, Robinhood believes that Finra should champion the effort to revise or eliminate the questions related to prior criminal matters on the Form U4.”

Problems with hiring and building a diverse group of financial advisers are not new to Wall Street, which has been trying to shed its image of an old boys network for decades. It’s not clear to what extent these efforts have succeeded or failed.

Others agreed with Robinhood about the questions on Form U4 and diversity in the industry.

“Inequalities in our law enforcement and justice procedures lead to more Black people with blemishes on their criminal record than for others,” wrote James J. Angel, associate professor of finance at Georgetown University.

“This effectively bars many good people from the industry,” he wrote. “It is in the public interest to undo this injustice. Finra and the industry need to reevaluate the background requirements for entry into the industry. Minor blemishes should not result in automatic rejection, especially for incidents prior to the age of 21.”

“Even more egregious, more dangerous and a barrier to greater diversity is the requirement for non-securities related criminal disclosures,” wrote Peggy E. Chait, managing director, and Howard Spindel, senior managing director with Integrated Solutions, a consulting firm.

“Many associated persons are forced to disclose information about their past, which may discourage them from joining or being part of our industry when they are qualified to do so and despite their past controversial background they could benefit the industry and the public at large,” they wrote. “This is especially evident now with the number of arrests that were made related to marijuana, which is no longer a criminal offense in many states.”