What's good for individual investors is, in the long run, good for the
financial planning and investment advice industry. That always has been our editorial policy at
InvestmentNews.
Better and more-reliable information about people advising them is good for individual investors. That's the purpose behind Finra's proposal to require brokerages to strengthen the background reviews performed on new hires.
The Securities and Exchange Commission has said it “finds good cause to approve the proposed rule change.”
The agency added that the proposal would “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 SEC pointed out that WebCRD is an important tool that regulators and the public use to obtain information about people with whom they may wish to do business. The regulator therefore approved the proposal on an accelerated basis.
The issue concerns Finra's proposal to adopt the National Association of Securities Dealers Rule 3010(e) as Finra Rule 3110(e) as part of the process of developing the Consolidated Finra Rulebook. (The NASD was merged with the
New York Stock Exchange's regulatory unit in 2007 to form the
Financial Industry Regulatory Authority Inc.)
The NASD rule mandates that members “ascertain by investigation the good character, business repute, qualifications and experience” of a person before applying to register him or her with the NASD.
Finra's proposal adds the requirement that firms review a copy of an applicant's most recent Form U5 (Uniform Termination Notice), and adopt written procedures designed to verify the accuracy and completeness of the information contained in an applicant's Form U4 (application for securities industry registration or transfer).
The proposal would require that the written procedures at least provide for a “national search of reasonably available public records.”
The SEC found that the requirements were developed to prevent fraudulent and manipulative acts and practices, and were therefore consistent with the Securities and Exchange Act of 1934. It received 10 comments on the proposed rule, all of them in favor, though several suggested minor changes.
One recommended alteration was that Finra expand the time for completing verification from within 30 days of the Form U4 filing to 60 or even 90 days. But Finra responded that it expects the hiring firm to have begun the investigation and verification process before the hiring and therefore before the filing.
Probably the greatest concern for most firms, especially small ones, is conducting a “national search of reasonably available public records.”
Those include items verifying names and addresses, criminal and bankruptcy history, civil litigation and judgments, and liens. Finra emphasized the words
“reasonably available.”
While such a stipulation might have been too expensive for small firms at one time, the costs should be modest considering the vast amount of information available on the Internet.
In fact, specialist firms could spring up to conduct due diligence for small and midsize businesses.
That the SEC received so few comments suggests that the proposal is not viewed as a significant burden.
MANY BLACK EYES
In the past 15 years, the financial industry has received many black eyes from incidents ranging from insider trading to Bernard Madoff's Ponzi scheme. It must take every action it can to weed out bad actors and rebuild investor confidence.
Finra's move to offer the investing public and regulators better information about registered representatives is one such action. It's good for the individual investor, and therefore good for the industry.
Those with nothing to hide have nothing to fear from Finra's requirement that firms look deeper when they are vetting a new hire's background.
