Securities Lawyers Blog
The Financial Industry Regulatory Authority (FINRA) announced approval of amendments to FINRA’s supervision rule that would expand the obligations of brokerage firms to check the background of applicant brokers upon registration. The rule would encompass first-time applications as well as transfers between firms and require the brokerage firm to verify the accuracy and completeness of the information contained in an applicant’s Form U4. Under the new rule brokerage firms must adopt written procedures in their supervisory manuals that include searching public records in order to check the accuracy of the information. The amendments to the supervision rule will be submitted to the Securities and Exchange Commission for review and approval.
The U4 Form is the foundation of FINRA’s BrokerCheck system that helps investors find red flags that would indicate potential problems and signs of misconduct by their brokers. FINRA’s BrokerCheck come under fire recently by investor advocacy groups and federal lawmakers for its inaccuracies and lack of complete information.
In addition, FINRA will also search public financial records for all registered representatives and also search other publicly available information including criminal records of brokers. FINRA intends to conduct periodic reviews of public records to ensure that the organizations BrokerCheck database and information is accurate. Also under consideration is whether to add additional information to a broker’s publically available Central Registration Depository such as broker scores on securities exams.
On a broker’s BrokerCheck profile, brokers must include information about their 10-year employment history, law enforcement charges and convictions for felonies as well as investment-related actions, regulatory disciplinary actions, and customer arbitrations.
FINRA’s move to strengthen the requirements to perform background checks and ensure the accuracy of U4 information is an important step in investor protection. Many financial advisors who engage in misconduct are repeat offenders who move from firm to firm when the heat gets too hot. When customers complain, brokerage firms often argue that they were not aware of the broker’s misconduct. This rule reinforces the obligation to ensure that supervision is appropriate for brokers with a record of past misconduct.
For example, if a broker has a record of credit judgments and tax liens the brokerage firm should monitor the broker to ensure that they are not selling an excessive amount of high commission products that are inappropriate for clients solely to escape the broker’s own financial problems. Likewise, if a broker moves from firm to firm in rapid succession the firm should investigate the broker a little more closely to ensure the broker is not engaging in outside business activities or private securities sales that would cause the broker to continually seek to find a new home.
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