SEC approves Finra background check rule

SEC approves Finra background check rule; expanded requirement faces industry pushback but could help firms avoid rogue hires.
JUL 17, 2014
The Securities and Exchange Commission has approved a Finra proposal that requires brokerages to strengthen the background reviews they conduct on new hires. Under the new requirement, firms must adopt written procedures to verify the accuracy and completeness of a broker's registration information on Form U4. That document is the foundation of the broker profiles contained on the Financial Industry Regulatory Authority Inc.'s BrokerCheck database investors can review before hiring a financial adviser. Both for new registrants and those newly hired, firms must conduct a search of “reasonably available public records,” such as those pertaining to criminal history, bankruptcy, civil litigation, liens and business records. The background check must be completed within 30 days of a U4 being filed with Finra. “The proposal will provide firms with an incentive to determine if additional disclosures on Form U4 are required for their registered personnel, ultimately resulting in more complete and accurate information in WebCRD, and as a consequence in BrokerCheck,” the staff of the SEC Division of Trading and Markets wrote in a Dec. 30 regulatory order. The new rule will be implemented on July 1. The additional requirements are likely to increase compliance time and costs for financial firms, according to Kenneth E. Springer, president of Corporate Resolutions Inc., a firm that conducts background checks for investors. Sifting through public litigation records, for instance, is more than a check-the-box undertaking. “Even if a lawsuit is closed, it can still be toxic,” Mr. Springer said. If someone has been sued 10 times, it's important to look at the underlying facts.” Many public records are not available online, said Mr. Springer, a former FBI agent. Assessing an individual's background and character may require additional research. “It's going to take more time than [firms] expect,” Mr. Springer said. “You can't just do an Internet search.” The proposal, which Finra filed with the SEC in September, generated 10 comment letters. The Securities Industry and Financial Markets Association was concerned that Finra had not clearly defined the mandate to verify the accuracy of U4 forms. “As currently proposed, the language appears to require member firms to verify all of the information contained within the Form U4,” wrote Kevin Zambrowicz, SIFMA general counsel and managing director, in an Oct. 24 comment letter. “[S]uch a requirement would, for some responses in the Form U4, necessitate a member firm to review voluminous additional records not typically maintained in a centralized public database.” Finra, the industry-funded broker-dealer regulator, made only minor changes to the original proposal. The organization is trying to help its member firms avoid “headline risk,” Mr. Springer said. The new background check rules may force them to think twice about hiring a hotshot broker with a big book of business but a sketchy regulatory history. “You have to look at the long-term effect,” Mr. Springer said. “Are they going to hurt the firm's reputation? It's well worth the due diligence upfront to lessen the reputational risk.”

Latest News

SEC charges Chicago-based investment adviser with overbilling clients more than $2.5M in fees
SEC charges Chicago-based investment adviser with overbilling clients more than $2.5M in fees

Eliseo Prisno, a former Merrill advisor, allegedly collected unapproved fees from Filipino clients by secretly accessing their accounts at two separate brokerages.

Apella Wealth comes to Washington with Independence Wealth Advisors
Apella Wealth comes to Washington with Independence Wealth Advisors

The Harford, Connecticut-based RIA is expanding into a new market in the mid-Atlantic region while crossing another billion-dollar milestone.

Citi's Sieg sees rich clients pivoting from US to UK
Citi's Sieg sees rich clients pivoting from US to UK

The Wall Street giant's global wealth head says affluent clients are shifting away from America amid growing fallout from President Donald Trump's hardline politics.

US employment report reactions: Overall better than expected, but concerns with underlying data
US employment report reactions: Overall better than expected, but concerns with underlying data

Chief economists, advisors, and chief investment officers share their reactions to the June US employment report.

Creative Planning's Peter Mallouk slams 'offensive' congressional stock trading
Creative Planning's Peter Mallouk slams 'offensive' congressional stock trading

"This shouldn’t be hard to ban, but neither party will do it. So offensive to the people they serve," RIA titan Peter Mallouk said in a post that referenced Nancy Pelosi's reported stock gains.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.