Rule proposal for new hire background checks moving to SEC

The role moving to the SEC would require brokers to put written procedures in place to verify the accuracy of applicants' U4 forms.

Finra is pushing ahead with a rule-change that would require brokerage firms to vet new hires more thoroughly.
The regulatory agency sent a rule to the Securities and Exchange Commission on Wednesday that would require brokers to put in place written procedures to verify the accuracy of information contained in an applicant’s U4 form, the foundation for broker profiles on the Financial Industry Regulatory Authority Inc.’s BrokerCheck database.
Firms already are expected to review job applicants. The new rule makes that requirement more stringent by forcing them to conduct a search of public records.
“Finra believes that the proposed rule change will streamline and clarify members’ obligations relating to background investigations, which will, in turn, improve members’ compliance efforts,” the brokerage industry self-regulator wrote in the rule filing. “The proposed rule change’s requirement … will enhance the accuracy of the information in the [Central Registration Depository] system and ultimately in BrokerCheck, which is critical from both a regulatory and investor-protection standpoint.”
As part of its effort to clean up BrokerCheck, Finra also is conducting a one-time review of financial public records — searching for bankruptcies, judgments and liens — on each of the approximately 630,000 brokers registered with the organization.
The SEC will have up to 90 days to approve the rule after it is published in the Federal Register. The agency also will seek public comment. The rule was approved by the Finra board in April.
In its rule filing, Finra noted that many firms already have a background-check system in place and asserted that the rule would not foist unreasonable costs on them.
“Finra does not believe that this requirement would be unduly burdensome for members given the availability of online access to public records databases and the relatively low cost of hiring a third-party service provider to conduct such a search,” the rule filing states.
Peter Chepucavage, general counsel at Plexus Consulting Group, disagreed with Finra’s sanguine cost calculation.
“The staff is underestimating how challenging this will be for a small to medium-sized firm,” Mr. Chepucavage said. “It’s easy for Goldman Sachs or Bank of America Merrill Lynch [to conduct background checks]. For a small broker-dealer, hiring a third-party provider becomes expensive.”
Ken Springer, a former FBI agent who conducts background investigations for companies, said a review of a new hire could range from $250 to more than $5,000, depending on the position.
Even though most firms already review their applicants, the Finra rule increases the stakes.
“They’re going to have to step it up a little more,” said Mr. Springer, president of Corporate Resolutions Inc.
Mr. Springer investigates whether people have worked for companies they don’t disclose, have a criminal record or history of regulatory violations, or have been involved in a pattern of lawsuits, among other areas.
“It’s not what they tell you, it’s what they don’t,” Mr. Springer said. “It’s all about avoiding headline risk.”
Holes may exist in U4 forms already on file.
“You can’t just assume because someone’s registered that they are fully vetted,” Mr. Springer said.