Openonline.com (January 13, 2015) -- The Securities and Exchange Commission (SEC) approved a Financial Industry Regulatory Authority (FINRA) rule that mandates firms strengthen the background investigation of applicants seeking registration. FINRA’s new rule requires member firms to “establish and implement written procedures reasonably designed to verify accuracy and completeness of the information contained in an applicant’s Form U4 no later than 30 calendar days after the form is filed with FINRA.”

At minimum, these new procedures must include a search of reasonably available public records to be conducted by the member or an FCRA-compliant third-party service provider.

“FINRA believes that the proposed rule change will streamline and clarify members' obligations relating to background investigations, which will, in turn, improve members' compliance efforts,” the brokerage industry self-regulator wrote in the rule filing.

A Form U4 is the foundation of the broker profile contained on the Financial Industry Regulatory Authority Inc.'s BrokerCheck database and must be filed when an individual registers with a FINRA member. The person signing on behalf of the firm must certify that they have taken the appropriate steps to verify the accuracy and completeness of the information contained in the form.

“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 Wall Street watchdog will also conduct a search of publicly available criminal records of brokers who have not been fingerprinted within the last five years.

Once these initial searches are complete, FINRA will continue to hold periodic review of broker public records, to verify the accuracy and completeness of information made available to investors, regulators and firms. This will include a thorough review of FINRA’s database to identify instances where the regulator sees under-reporting.

Some opposed to the rule say these additional requirements may increase compliance time and costs for financial firms. However, supporters cite the March 2014 Wall Street Journal report that found BrokerCheck failed to detect more than 1,600 brokers who had bankruptcy filings or criminal charges that weren’t publicly reported.

The Public Investors Arbitration Bar Association (PIABA) released its own report in early March stating that BrokerCheck deletes crucial information about brokers’ backgrounds, including criminal records, despite the fact that such information is available from many state securities agencies operating under robust public records laws.

In response to PIABA’s report, FINRA said in a statement: “While the [BrokerCheck] system may not be perfect, we do have to make determinations on what information about registered representatives is appropriate to release, while at the same time balancing fairness rather than ignoring it.”

As for the new rule, the SEC has “accelerated approval”, though the agency still will accept comments for 21 days from publication in the Federal Register.

The rule is scheduled to take effect on July 1, 2015.

Sources

http://www.investmentnews.com/article/20150105/FREE/150109984/sec-approves-finra-background-check-rule

http://www.natlawreview.com/article/financial-industry-regulatory-authority-finra-proposes-rule-strengthening-background

http://www.sec.gov/rules/sro/finra/2014/34-73966.pdf