Brokerage firms must comply with FINRA regulations both when they sell securities and hire brokers.
Did you know that FINRA fined Citigroup $1.25 million for failing to adequately check the backgrounds of employees and hiring three people with criminal backgrounds?
Conducting FINRA background checks protects the public and your firm’s reputation.
At iprospectcheck, we regularly conduct employment background checks for financial firms across the U.S.
Based on our experience, we’ve written this guide about what you should know as a FINRA-regulated firm.
Let’s get started.
What is FINRA and What Role Does it Play?
The Financial Industry Regulatory Authority (FINRA) is a private organization authorized by the government to regulate U.S. broker-dealers and brokerage firms.
FINRA is tasked with protecting investors by identifying, investigating, and rooting out fraud perpetrated by brokerages and registered brokers.
The self-regulatory organization (SRO) was created in 2007 through the merger of the National Association of Securities Dealers (NASD) and the enforcement arms of the New York Stock Exchange (NYSE) and approved by the Securities and Exchange Commission (SEC).
FINRA regulates more than 612,000 registered brokers and 3,394 securities firms that employ them.
It takes enforcement actions against brokers and firms that engage in misconduct and/or insider trading.
In 2021, FINRA reports it took the following enforcement actions:
- Imposed $103 million in fines
- Ordered unethical brokerage firms and brokers to pay $47 million in restitution to harmed investors
- Barred 269 individuals from working as registered brokers
- Suspended 389 individual brokers
- Suspended three registered brokerage firms
- Expelled one registered brokerage firm
- Referred 758 brokerage firms and brokers to the SEC for prosecution for insider trading and fraud
If your firm violates FINRA’s regulations, it could place your organization at risk of fines, penalties, and the potential for suspension or expulsion.
What is a FINRA Background Check?
A large component of FINRA’s regulatory activities is to protect investors by requiring member firms to perform comprehensive background checks on prospective candidates.
Registered financial services firms must screen all applicants and exclude those with disqualifying regulatory violations and criminal convictions even if their positions involve non-registered activities.
At the time an individual applies for registration, member firms must submit a FINRA Form U4 together with the applicant’s fingerprints.
Securities firms are required to confirm the information reported on Form U4 under FINRA Rule 3110((e) by conducting a comprehensive background check.
If an applicant has previously worked for a registered member firm within 30 days, they must review and verify the information on Form U5, which firms must file when a registered broker’s employment terminates.
Brokerage firms must confirm the accuracy of the information reported on these forms by checking publicly available records.
What Does a FINRA Background Check Show?
At a minimum, FINRA background checks must include checks of the following types of records:
- Criminal history
- Civil judgments
- Applicant’s name and address information
- Business records
These are only baseline requirements. Member firms must conduct both name-based and fingerprint-based background checks and should also include other searches for a more comprehensive background check.
The following additional searches should also be conducted:
- Education verification
- Employment verification
- Professional license verification
- Government sanctions checks
- Pre-employment drug screens
Let’s take a look at what might appear on a few of these different searches.
If an applicant has a criminal conviction or a pending criminal matter, a criminal history check reveals the following information:
- Date of offense
- Offense type
- Severity of the offense (felony or misdemeanor)
- Disposition (if available)
- Disposition date (if available)
- Sentence (if available)
Bankruptcies, Liens, and Judgments
Individuals applying to become registered brokers or to transfer their registration are required to disclose personal bankruptcies they have filed within the past 10 years on Form U4.
They must also disclose civil judgments and liens on Form U4.
Verification of these types of information can be completed through a credit report from each of the three major credit reporting agencies, including Experian, TransUnion, and Equifax.
If an applicant has past judgments, liens, or bankruptcies, the information will be reported subject to restrictions under the Fair Credit Reporting Act (FCRA) and state laws.
Applicants must report their employment history for the past five years on Form U4.
Employment verification reveals the following information about each past employer:
- Name and address
- Employment dates
- Positions/titles held
While brokers are not generally required to have bachelor’s degrees, most firms require them.
Conducting education verification can confirm whether an applicant has the requisite business and financial knowledge for a position.
Education verification shows the following information:
- Name and address of each education institution attended
- Dates of attendance
- Whether a degree was conferred and type of degree
Professional License Verification
Applicants must list any professional designations they have earned on Form U4.
Professional license verification provides the following information about an applicant’s license or certification:
- License/certificate type
- Issuance date
- Expiration date
- Disciplinary sanctions
Government Sanctions Checks
You should perform the following sanctions checks on prospective brokers:
The U.S. Treasury Department’s Office of Foreign Asset Control (OFAC) maintains a database of blocked individuals or suspected terrorists.
This check will show whether an applicant has worked for a targeted country, is a known or suspected terrorist, is a narcotics trafficker, or poses a national security threat.
FINRA’s BrokerCheck provides licensing information about applicants.
This check will show whether an applicant has been suspended or debarred from working as a broker.
SEC Action Lookup
The SEC offers Action Lookup, which is a searchable database that reports investment professionals who have received court or SEC orders against them.
FINRA Background Check Requirements
Financial firms are required to investigate the backgrounds of broker applicants and verify the information they report on Form U4.
Once this investigation and verification process is completed, the firms can then submit Form U4 to FINRA’s Central Registration Depository (CRD).
The CRD reviews the information on Form U4, checks discrepancies, and verifies whether the applicant qualifies for registration or is statutorily disqualified.
In 2015, amendments to FINRA Rule 3110(e) were approved. The amendments place additional requirements on financial firms for checking their applicants’ backgrounds.
Requirements of Rule 3110(e)
Before the rule was amended, firms regulated by FINRA had to investigate an applicant’s experience, qualifications, business reputation, and character.
With the amendments, however, firms must also both investigate an applicant’s background and confirm the information included on their Form U4 before submitting it to the CRD.
The 2015 amendment changed when a firm must investigate an applicant’s background.
They are now required to investigate their applicants’ backgrounds before they agree to apply to register them with FINRA and file their Form U4s.
On Form U4, member firms must certify that they have investigated the applicant’s business reputation, character, qualifications, and experience and verify that the information included on Form U4 is accurate and complete.
The scope of the background investigation is not limited. According to FINRA Regulatory Notice 07-55, financial firms are instead directed to obtain all information necessary to investigate their applicants’ reputation, character, experience, and qualifications.
FINRA Regulatory Notice 15-05 states that firms should investigate the following:
- The applicant’s information and disclosures reported on Form U4 or Form U5
- Results from searches of CRD
- Fingerprint-based background check
FINRA also recommends firms consider conducting private background checks, checking the credit reports of applicants, and reviewing reference letters.
Applicants for Non-Registered Positions
Firms also are obligated to investigate the backgrounds of other prospective candidates for positions that don’t require registration under FINRA Art. III, Sect. 3(b).
Compliance with the Fair Credit Reporting Act (FCRA) and other laws
When conducting the FINRA background check, the agency states in Regulatory Notice 15-05 that firms must ensure their background checks are conducted in compliance with the FCRA and other state and federal laws.
Under the FCRA, employers must disclose to applicants that they conduct background checks and obtain their applicants’ written consent before they can be conducted.
If a background check reveals negative information about an applicant, the firm must complete the steps of the adverse action process before making a final decision not to hire them.
Firms must also ensure their background checks comply with state laws.
Verification of Form U4
Firms must verify the information their applicants report on Form U4.
FINRA requires member firms to have written policies and procedures for how they verify that the information reported by applicants is accurate and complete.
The verification process must be completed within 30 days of filing Form U4 with the CRD. If a firm learns that there are discrepancies between the information reported by an applicant on Form U4 after it has been filed, it must file an amended form.
The verification process should include a national search of public records completed by the member firm or a third-party background check provider.
How to Comply With FINRA: 5 Best Practices
1. Use FINRA-Provided Compliance Tools
Firms regulated by FINRA can use the following compliance tools provided by FINRA:
- Books and Records Requirements Checklist – Includes information about the books and records broker-dealers must create and retain
- Compliance Calendar – Reports monthly requirements for filings, certifications, deadlines, and conferences
- Regulatory Newsfeed and Email Subscriptions – Firms can subscribe to weekly emails to receive current information on FINRA news and regulatory changes
2. Partner with a Reliable Background Check Provider
It’s critical to ensure your background checks are conducted properly and comply with the FCRA and FINRA’s regulatory requirements.
One of the best ways to ensure your background checks are comprehensive, accurate, current, and FCRA-compliant is to partner with a reliable third-party background check service like iprospectcheck.
We help you stay compliant by staying up-to-date with all regulatory and statutory changes, including those concerning notices, consent, and others.
3. Have Detailed, Written Policies and Procedures for Background Checks
FINRA requires member firms to have written policies and procedures for how they investigate and verify the information reported by applicants.
Make sure your firm has a written background check policy in place that tracks FINRA’s requirements as well as other federal and state background check laws.
4. Include a Social Media Policy
Regulated firms and brokers must ensure their social media posts cannot be considered to be advertising or marketing materials. If they are, they are regulated and could subject you to fines and penalties.
This makes it important for your firm to include a written social media policy that includes the types of online activities that are prohibited for your employees.
5. Enforce Compliance with FINRA
Your firm must have a formal training process to ensure your registered employees remain current with FINRA’s regulations about products and jobs.
Your training program should focus on ensuring your employees comply with all requirements under FINRA.
If employees violate their regulatory requirements, you should take disciplinary action and report them to FINRA.
Employees should also be given time to complete continuing education classes with FINRA every three years.
6. Be Prepared for Audits
Make sure you retain all required records and are prepared for audits. During a FINRA audit, the following activities of your firm will be reviewed:
- Brokerage and fair trading practices
- The transparency and truthfulness of your marketing and advertising materials
- Currency of your brokers’ registrations
All of your brokers should have current registrations and be up-to-date with their continuing education requirements, including managers.
FINRA Disqualification Criteria
FINRA will disqualify a prospective broker for the following reasons:
- Felony convictions for 10 years following the conviction date
- Certain misdemeanor convictions for 10 years from the conviction date
- Temporary or permanent injunctions for unlawful securities or investment banking activities
- Suspensions, bars, and expulsions from participating in a self-regulatory organization or a foreign equivalent
- SEC bars and suspensions
- Commodity Futures Trading Commission (CFTC) bars and suspensions
- SEC or CFTC revocations or denials of registration
- Findings that a member has made false statements to the SEC, an SRO, or another authority
- Final orders from a state securities commission, bank supervisory agency, federal banking agency, or state insurance commission barring the person from associating with a regulated firm or a final order based on laws against manipulative, deceptive, or fraudulent conduct
- SEC, SRO, or CFTC finding that the person willfully violated federal securities laws or aided or abetted someone else who violated them
- Associations with people who have been disqualified
How Far Does a FINRA Background Check Go?
FINRA background checks completed by third-party background check providers must comply with the FCRA and other laws.
The FCRA includes a seven-year restriction for jobs paying annual salaries of less than $75,000 for the following information:
- Arrests that didn’t result in convictions
- Civil judgments
However, if your firm offers positions paying $75,000 or more, the FCRA’s time limitation won’t apply.
The FCRA’s restrictions also don’t apply to employment history, education history, and other relevant information.
iprospectcheck: Your Trusted Partner for FINRA Background Checks
As a FINRA-regulated financial firm, you must ensure your background checks comply with your regulatory requirements and other laws.
At iprospectcheck, we conduct FINRA background checks for securities firms and brokerages across the U.S.
To learn more about our background check services and to receive a free quote, call us today: (888) 509-1979
DISCLAIMER: The resources provided here are for educational purposes only and do not constitute legal advice. Consult your counsel if you have legal questions related to your specific practices and compliance with applicable laws.