FINRA’s board of governors passed a series of amendments that will significantly change how the industry handles background checks. The goal of these amendments is to create a stronger review of financial advisers to prevent fraud in the industry. Firms and registered representatives need to understand these changes so they can prepare and stay compliant.
Why Changes Are Going into Place
FINRA decided that companies need to spend more time verifying the information on the U4 Forms of registered representatives. These forms are where registered representatives list their financial and background history like any criminal records, legal judgments, bankruptcies, and credit settlements. New applicants fill out a U4 when they sign up while existing reps need to update their U4s whenever their situation changes.
In the past, broker/dealers were not required to verify the information on U4s and it was up to registered representatives to be honest. As a result, a few dishonest advisers omitted information or misrepresented their backgrounds and were approved to manage investments when they shouldn’t have.
Expanded Background Checks for New and Existing Hires
FINRA is now placing more responsibility on firms to verify the information that registered representatives list on their U4 Forms. Now, broker/dealers must perform their own background checks for new applicants to make sure the information on their U4s is correct.
In addition, firms need to set up procedures to regularly review the backgrounds of existing registered representatives to make sure they keep their records up-to-date and don’t overlook recent problems.
New FINRA Investigation into Existing Reps
On top of the extra vigilance from firms, FINRA will also be conducting its own background checks. To start, FINRA will begin going through the criminal records and public financial records of registered representatives who haven’t been fingerprinted in the last five years. This is another step to make sure that all records are correct and to encourage firms to quickly handle their own checks.
More Background Tools for Clients
Consumers will also have more ways to research their financial advisers going forward. At the end of 2013, FINRA released a new, enhanced version of BrokerCheck. This online program allows clients to review the backgrounds of potential investment advisers. By searching through this program, clients can see a broker’s employment history, industry registrations, and whether or not the broker has had any customer complaints.
FINRA updated the BrokerCheck program to make it more user-friendly and created better graphics to show a broker’s history. FINRA also created a widget so that this program can now appear on third-party websites; firms can now add this program to their website for potential clients. In the past, clients had to visit the websites of FINRA or the SEC to use this tool.
These changes will take some adjustments and a little getting used to, but should help both firms and clients avoid running into problems with dishonest representatives.