Securities regulators in Massachusetts have floated a plan to conduct criminal background checks on anyone applying to be an investment adviser representative in the state.
The securities regulator is taking advantage of the access it recently obtained to the state's electronic criminal history database. The new rule would require that anyone applying to be an investment adviser sign a consent form allowing the division to run his or her name through the system. The applicant would have to provide a partial Social Security number and date of birth.
“The [Massachusetts Securities] Division believes that it is in the public interest and for the protection of investors to conduct criminal background checks of those individuals seeking IAR registration in order to ensure that the applicant is not subject to a statutory disqualification, and has truthfully and accurately disclosed any criminal background required on Form U-4,” the securities division said in a
request for comment on the proposed rule.
Comment letters are due by May 15.
The practical effect of the new rule likely will be limited, according to observers.
“It's a little bit of saber-rattling,” said Steven Thomas, director of Lexington Compliance, a division of RIA in a Box LLC.
Applicants already must reveal past criminal activities, according to Mr. Thomas, former chief compliance examiner in South Dakota.
“If it's not on the U-4, that's disqualifying already,” Mr. Thomas said. “What they're saying is that they're going to heighten their examinations of the U-4 disclosure.”
A clean criminal slate is no guarantee of good behavior, according to Todd Cipperman, managing principal at Cipperman Compliance Services LLP.
“It may be a lot of work for not much benefit,” Mr. Cipperman said of criminal background checks. “For instance, I don't think Bernie Madoff had a criminal record. You don't have to have a criminal record to be a bad guy.”
Conducting the checks will help Massachusetts argue that it has done as much as it can to prevent future investor ripoffs. Neither Mr. Thomas nor Mr. Cipperman knows of any other state that conducts criminal-record reviews.
Massachusetts' move, however, may influence others to propose similar rules.
“Massachusetts is a leader when it comes to state securities regulations,” Mr. Cipperman said. “They're very active.”
State scrutiny of advisers has become more intense in the wake of the Madoff Ponzi scandal and with the additional responsibilities given to them under the Dodd-Frank financial reform law, according to Mr. Cipperman.
The Massachusetts proposal “is another example of them stepping it up,” he said.
