New FINRA Rule on Background Checks

Angela Preston

 

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FINRA (the Financial Industry Regulatory Authority) has issued a rule change for background screening requirements that goes into effect on July 1, 2015. FINRA Rule 3110(e) is based on similar provisions in NASD Rule 3010(e) and NYSE Rule 345.11. For those of us who are acronym challenged, that’s the National Association of Securities Dealers and the New York Stock Exchange, respectively.

In short, FINRA Rule 3110(e) lays out the specifics of what is required for a background check on U4 applicants. The new rule walks through the investigation and verification requirements for information in the Form U4 (Uniform Application for Securities Industry Registration or Transfer). Significantly, the rule introduces a new requirement to search national public records in order to verify U4 information. The full text of the rule and an executive summary can be found here.  Here is an overview of what you need to know.

Investigation Requirement

The threshold requirement under 3110(e) is that “each member firm ascertain by investigation the good character, business reputation, qualifications and experience of an applicant before the firm applies to register that applicant with FINRA and before making a representation to that effect on the application for registration.” While it does not dictate a specific process, the reg gives the following guidance:

  • Firms are required to complete the investigation process prior to filing the Form U4.
  • FINRA does not place any limits on the scope of such a background investigation—a firm must obtain all the necessary information to make an evaluation.
  • Firms should consider all available information gathered in the pre-registration process for this purpose, including, but not limited to, Form U4 and Form U5, responses, authorized searches of the CRD system, fingerprint results obtained under SEA Rule 17f-2 and communications with previous employers.
  • Firms also may wish to consider private background checks, credit reports and reference letters for this purpose, provided that firms ensure that the background investigations are conducted in accordance with all applicable laws, rules and regulations, including federal and state requirements, and that all necessary approvals, consents and authorizations have been obtained.
  • FINRA Rule 3110(e) clarifies that a firm is required to review a copy of an applicant’s most recent Form U5 if the applicant previously has been registered with FINRA or another self-regulatory organization including amendments.

Verification Process and Public Record Requirement

FINRA Rule 3110(e) requires “that a firm adopt written procedures reasonably designed to verify the accuracy and completeness of the information contained in an applicant’s Form U4 by no later than 30 calendar days after an initial or a transfer Form U4 is filed with FINRA.”

A few of the finer points:

  • If a firm becomes aware of any discrepancies as a result of the verification process after the filing of the Form U4, the firm is required to file an amended Form U4.
  • While FINRA notes that firms are encouraged to complete the verification prior to filing, it provides the 30 day window and allows for unplanned delays as a means for firms to quickly fill open positions and manage hiring needs.
  • If an applicant is already registered with a firm and is transferring to an affiliate, the firm only needs to verify new information on the U4—there’s no requirement to verify historic information.

The New Twist: “Reasonably Available” National Public Record

Here is the new twist: a firm’s verification process “must, at a minimum, provide for a national search of reasonably available public records conducted by the firm or a third-party service provider to verify the accuracy and completeness of the information contained in an applicant’s Form U4.”

FINRA defines public records to include general information, such as name and address of individuals, criminal records, bankruptcy records, civil litigations and judgments, liens, and business records. Since 3110(e) requires that a firm search only “reasonably available” national public records, it clarifies that, at a minimum, such records include criminal records, and bankruptcy records, judgments and liens.

The rule acknowledges that what is “reasonably available” might change over time, and that a firm may find it necessary to conduct a more in-depth search of public records depending on the applicant’s job function, responsibilities or position at the firm. Notably, FINRA says that the public records search requirement does not require a credit report, which contains both public and non-public records, but says a credit report might be just one of several means by which to obtain the information. Other suggested means include obtaining a report from a third party background screening provider containing criminal and financial information, and accessing various database resources.

The Bottom Line

  • Firms subject to regulation by FINRA need to review their investigation policies and practices for U4 applications.
  • Written policies need to reflect a compliant investigation process.
  • Effective July 1, 2015 that process needs to include verification by using reasonably available public record information.

This is a great time to review your screening program. Check with your background screening provider to review your options for conducting a compliant verification process under the new rules, and consult with your counsel for legal advice.

Questions for FINRA regarding the notice and the new rule can go to Afshin Atabaki, Associate General Counsel, Office of General Counsel, at (202) 728-8071 or afshin.atabaki@finra.org.

Angela Preston
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Angela Preston

Vice President of Compliance & General Counsel at EmployeeScreenIQ
Angela Preston has more than 20 years as a licensed attorney and over 10 years in the background screening area. She serves on the Board of Directors of the National Association of Professional Background Screeners (NAPBS), is a member of the NAPBS Background Screening Credentialing Council (BSCC), and is actively involved in the Society for Human Resource Management (SHRM) and ASIS International. Angela is also a member of the Ohio State and Columbus Bar Associations. Angela has direct oversight and management of compliance programs, and will provide guidance in complex legal matters including state and federal legislation, EEO law, client education, adjudication, pre/adverse action process, NAPBS Accreditation and client and vendor contract management.
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