FINRA Submits New Proposed Rule Requiring Broker Background Checks to SEC for Approval

FINRA has sent a proposed rule to the Securities and Exchange Commission to adopt NASD Rule 3010(e) (Qualifications Investigated) relating to background investigations as FINRA Rule 3110(e) (Responsibility of Member to Investigate Applicants for Registration) in the consolidated FINRA rulebook. While firms currently are required to review job applicants, the new rule would also require firms to conduct background checks.

“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. “The proposed rule change’s requirement … will enhance the accuracy of the information in the [Central Registration Depository] system and ultimately in BrokerCheck, which is critical from both a regulatory and investor-protection standpoint.”

In BrokerCheck profiles, brokers are required to include information about their 10-year employment history, charges and convictions for felonies and investment-related misdemeanors, disciplinary actions, investment-related civil and judicial actions and proceedings, customer-initiated complaints, and arbitrations.

The “proposed rule change streamlines and clarifies the rule language and adds a provision to require members to adopt written procedures that are reasonably designed to verify the accuracy and completeness of the information contained in an applicant’s Form U4 (Uniform Application for Securities Industry Registration or Transfer),” according to FINRA.

FINRA also is conducting a one-time review of financial public records, checking for bankruptcies, judgments and liens, on each of the approximately 630,000 brokers registered with the organization, according to Investments News. The new proposed rule would apply to new job applicants and transfers.

Critics of the rule have complained about its cost, but FINRA asserts that the new proposed rule is intended to be cost effective and complement background checks already in place by many firms. “FINRA does not believe that this requirement would be unduly burdensome for members given the availability of online access to public records databases and the relatively low cost of hiring a third-party service provider to conduct such a search,” the rule filing states.

FINRA approved the proposed rule in April 2014. Now, the SEC will publish the proposed rule in the public register, and seek public comment. The SEC then will have up to 90 days to approve the rule after its publication.

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