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FINRA Rule 3110 pertains to its member firms’ supervision of associated persons. It requires that “[e]ach member shall establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules. The final responsibility for proper supervision shall rest with the member.” The Rule then outlines requirements pertaining to firms’ supervisory system, written procedures, internal inspections, transactions review and investigation, and responsibility to investigate applicants for registration.
The language of Rule 3110(e), regarding firms’ responsibilities for investigating their applicants, is below, followed by explanations of the meaning of FINRA’s language, and what the firm is required to investigate about associated persons in order to remain compliant.
Rule 3110(e) states:
“Each member shall ascertain by investigation the good character, business reputation, qualifications and experience of an applicant before the member applies to register that applicant with FINRA and before making a representation to that effect on the application for registration.
If the applicant previously has been registered with FINRA or another self-regulatory organization, the member shall review a copy of the applicant’s most recent Form U5, including any amendments thereto, within 60 days of the filing date of an application for registration, or demonstrate to FINRA that it has made reasonable efforts to do so. In conducting its review of Form U5, the member shall take such action as may be deemed appropriate.
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The member shall also review an applicant’s employment experience to determine if the applicant has been recently employed by a Futures Commission Merchant or an Introducing Broker that is notice-registered with the SEC pursuant to Section 15(b)(11) of the Exchange Act. In such a case, the member shall also review a copy of the applicant’s most recent CFTC Form 8-T, including any amendments thereto, within 60 days of the filing date of an application for registration, or demonstrate to FINRA that it has made reasonable efforts to do so. In conducting its review of Form 8-T, the member shall take such action as may be deemed appropriate.
In addition, each member shall establish and implement written procedures reasonably designed to verify the accuracy and completeness of the information contained in an applicant’s initial or transfer Form U4 no later than 30 calendar days after the form is filed with FINRA. Such procedures shall, at a minimum, provide for a search of reasonably available public records to be conducted by the member, or a third-party service provider, to verify the accuracy and completeness of the information contained in the applicant’s initial or transfer Form U4.”
Reporting on FINRA Form U4
On December 30, 2014, the United States Securities and Exchange Commission (SEC) approved proposed amendments to FINRA’s requirements regarding background checks on its registered persons. Effective January 1, 2015, FINRA implemented updates to those requirements. Included in the updates was an expansion in member firms’ obligations to investigate their applicants’ backgrounds. When an applicant seeking registration with a broker-dealer member firm provides a Form U4, the firm must confirm that the information on the Form is complete and accurate. FINRA claimed that its purpose for doing so was to provide more accurate and more relevant information on its public databases, such as BrokerCheck. The requirement now applies to both initial and transfer Form U4 filings, in addition to filings of those associated persons who have not been registered with a FINRA member firm for over two years.
It is the responsibility of FINRA member firms to investigate each individual who applies for registration with the firm. The aspects of those individuals that firms are required to investigate span from character and business reputation to qualifications and experience. The firm must seek out any “reasonably available public records” pertaining to its applicants, in order to verify that the information and details disclosed on Form U4 are complete and accurate. In addition to its obligation pertaining to those individuals’ Forms U4, the firm must make a reasonable effort to review its applicants’ Forms U5 and thereby all information pertaining to the reason behind the termination of any prior registration(s) with a member firm or any claim(s) that arose concerning misconduct.
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The member firm must implement written procedures by which it shall verify the Form U4 information of its applicants. Therein, the processes for completing the required searches of public records and ensuring that such searches are thorough and adequate must be specified.
Records considered to be “reasonably available” in regard to the process of verifying information on Forms U4 include the data that is accessible to the public at the time when the search is conducted. A minimum search of nationally-available findings is required. Beyond that, FINRA’s use of the requirement of all data accessible to the public at the time of the search accounts for the evolution of publicly-available records over time. Currently, information pertaining to name and address, criminal records or civil litigation, bankruptcy filings, judgments, liens, and business records are included, among other information. Depending upon an individual’s position at the member firm and that individual’s responsibilities, FINRA may want the firm to conduct an even deeper search.
Verifying Information on FINRA Form U4
The firm must complete its verification of each individual’s Form U4 within a specified time period of 30 days, following the filing of the Form. Due to the amount of time that it can take to procure certain records from certain agencies, the firm should begin its verification process immediately and expect that delays may occur with some of the records necessary to verify the information. Not all criminal record data is available remotely, and some requests for information take weeks to process.
Many service providers on the internet offer public record checks for a fee. However, the firm must confirm that any such nationwide search includes the necessary records from the correct jurisdictions, as not all jurisdictions make all records available online.
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Give us a call today at (303) 952-4025 or contact us for a complimentary consultation.
A professional research or compliance team can be of help when determining whether a search is fully in compliance with FINRA requirements. When a search is incomplete, those experts can consult in determining where records are available, how to access them, and how long it may take to do so. Additionally, they can provide advice regarding the firm’s specific background investigation responsibilities as they pertain to individuals at each level of employment.
Third-party providers also offer background-checking services. In order to engage one, the notification and authorization requirements set forth by the Fair Credit Reporting Act (FCRA) must be adhered to. Although Form U4 includes a section authorizing background investigations, it does not necessarily comply with FCRA obligations. Employment attorneys may be of help in determining whether a search is FCRA-compliant when using a third-party provider.
FINRA is watching
According to FINRA’s website, these current guidelines are valid through Jun 30, 2022. For those who are desiring assistance interpreting the new amendments in 2022, AdvisorLaw can help.
Our robust enforcement defense team can help you remain compliant as FINRA continues to make updates to the rules and regulations governing members. We also offer disclosure expungement services to remove meritless or false Form U4 or Form U5 disclosures from financial advisors and wealth managers’ records, such as CRD, BrokerCheck, IARD, or IAPD records. We have removed over 2,000 disclosures in the form of customer disputes and investor complaints, terminations, criminal disclosures, tax liens, and more.
If you’d like to learn more about our services, please complete the form below for a complimentary consultation.