FINRA member securities broker-dealers in the United States are mandated to conduct background investigations of applicants for registration with the member firm, including verifying the accuracy and completeness of information reported to the Central Registration Depository (CRD) using the Form U4.
In January 2015, the Securities and Exchange Commission (SEC) approved a proposed rule by the Financial Industry Regulatory Authority (FINRA) to strengthen the quality of the individual background vetting process used by FINRA-member institutions.
Ultimately, this information will be made publicly available through the FINRA BrokerCheck system to enable “investors to make informed choices about the individuals and firms with which they conduct business.”
Financial services organizations should be aware of the following highlights of the new FINRA requirements.
- FINRA Rule 3110 has been approved by the SEC and is effective on July 1, 2015. It applies to all FINRA-member broker firms.
- Member firms must conduct background verifications for new hires and transfers from other firms. Organizations must have documented procedures for collecting information and conducting background checks.
- Member firms are not required to conduct the background checks themselves but may choose to employ third-party vendors with the necessary regulatory compliance expertise.
- Organizations must validate that Form U4 (Uniform Application for Securities Industry Registration or Transfer) information provided by the candidate is complete and accurate. The Form U4 contains detailed information on past employment and disclosure history, including bankruptcy, liens/judgments, criminal history, and civil litigation.
- Within 30 days of filing Form U4, a “reasonably available public records” search for information contained in U4 must be conducted.
- In addition to the initial background check, FINRA will also conduct periodic reviews of public records to validate information available to investors, regulators and firms.
Conducting background investigations can be challenging and complex, given the many EEOC, FCRA and various industry-specific compliance regulations that must be taken into account.
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