FINRA To Strengthen Background Checks For Broker Hires

From next Monday, the regulator will begin to perform public record reviews of potential financial advisors.

The Financial Industry Regulatory Authority (FINRA) announced on Thursday that broker-dealers would no longer need to verify information provided by candidates for brokerage or investment jobs by searching through public records. Instead, the US regulator will take over this process.

From next Monday, July 9, FINRA will begin to perform public record reviews of potential financial advisors within 15 days after a firm applies to register them with the US regulator.

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The review process

Brokers will need to submit a Form U4, the uniform registration application, for job candidates. In the form, firms must validate that the disclosure questions are answered correctly. These include financial disclosures regarding bankruptcies, judgments, and liens.

From there, the regulator will review the form, and if a firm does not hear back from FINRA within 15 days, it can assume it has satisfied its obligation to conduct a public records search for new hires and transfer.

However, if the review conducted by FINRA finds that information is missing or contains discrepancies, firms will be alerted to this and are required to investigate. Brokers can submit an amended Form U4 if the information is reportable.

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Currently, many brokers use vendors to perform public record checks with respect to those financial disclosures. As a result, FINRA estimates the brokers will save a combined $1.5 million to $3 million per year by avoiding late fees and fees charged by vendors.

Increasing market transparency

The information provided on Form U4 will be placed on a central registration depository (CRD). This serves as the database for the registrations of firms and individuals in the brokerage industry. From there, the information will be made available to investors through BrokerCheck, a free tool that allows traders to research the background and experience of financial brokers, advisers, and firms.

Commenting on the new initiative, Derek Linden, FINRA Executive Vice President of Registration and Disclosure said: “FINRA’s enhanced disclosure review process delivers significant benefits to brokerage firms as well as the investing public.

“Small firms, in particular, should see meaningful cost savings and reduced regulatory burden through this enhancement. The timeliness of FINRA’s review will also help assure investors that the BrokerCheck information about their representative is as accurate, complete and up-to-date as possible.”

According to the statement, FINRA aims to ensure that firms can meet their reporting obligations easier and that information made available to investors through BrokerCheck is more current and reliable.

The regulator adds that the enhanced disclosure review is the latest in a series of actions under FINRA360 – an organizational improvement initiative.

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