Thursday, April 2, 2015

FINRA Has a New Background Investigation Rule

What are the new FINRA requirements for background checks?

The Securities and Exchange Commission recently approved FINRA's new Rule 3110(e) regarding background checks of registered persons and verification of information in Form U4; it will replace NASD Rule 3010(e) and take effect on July 1, 2015.

According to Rule 3110(e), an applicant's good character, business reputation, qualifications and experience must be ascertained by investigation before a member submits a Form U4 to register that applicant; this is substantially the same as existing requirements in Rule 3010.  As made clear by a recent FINRA Acceptance, Waiver and Consent, firms currently must conduct a pre-hire investigation beyond the information contained in the CRD.

The new Rule further requires members to adopt written procedures for the investigation and verification of the accuracy and completeness of information contained in an applicant's Form U4. At a minimum, these written procedures must provide for a national search of reasonably available public records. Members must verify that the information in the Form U4 is correct within 30 days of filing the Form U4 (although verification before filing is encouraged).  These requirements might very well lead to increased costs for members, as they find the need to devote more time and resources to background checks or retain outside services to complete them.

We believe most firms will opt to use either major credit reporting agencies to obtain credit reports (in states where permitted) that contain information as to bankruptcies, judgments and liens or specialized providers that search various data bases. (Firms may rely on the fingerprint results to comply with the requirement to conduct a public search of criminal records.)

There will be a Late Disclosure Fee imposed if a disclosure event should have been reported on the Form U4 when it was originally filed, regardless of whether the 30-day verification process window has expired.

In addition, FINRA’s temporary program to refund Late Disclosure Fees assessed for late filing of responses about unsatisfied judgments or liens in limited circumstances was extended to December 1, 2015 from July 31, 2015.

The law firm of Lehman & Eilen LLP has advised numerous clients on securities regulatory matters for more than 20 years, and its senior lawyers each have more than 30 years of experience. Our attorneys provide broker-dealers with comprehensive representation on regulatory and compliance matters. Our services include helping firms with drafting written supervisory procedures and advising on Forms U4 and U5 and other employee-related matters. Contact us today at (516) 222-0888 to learn how our knowledge can be put to work for you.

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