FINRA Rule 3110(e) (Supervision: Responsibility of Member Firms to Investigate Applicants for Registration) dictates that member firms must āascertain by investigation the good character, business reputation, qualifications, and experience of an applicantā. In other words, member firms are required to run thorough background checks on all sponsored applicants for registration.
Among other things, the information gained from a thorough investigation is used to update the applicantās Form U4, ensuring that it is accurate and up-to-date. FINRA then uses the information disclosed on Form U4 to determine if an applicant will pose a regulatory risk to the firm and its customers. FINRA also derives the information released through Broker Check from the information in the CRD system. Firms use the information disclosed on Form U4 to determine if they will sponsor an applicant for registration, as well as to evaluate whether an applicant is subject to a statutory disqualification of is a candidate for special supervision.
Gather Information for the Background Check
Member firms must complete a background check on an applicant before filing Form U4. FINRA doesnāt place any limits on the scope of background checks. Member firms must gather all the necessary information to evaluate the applicant, including but not limited to, the following:
- Form U4 responses
- Form U5 responses
- Authorized CRD searches
- Fingerprint results (obtained under SEA Rule 17f-2)
- Communications with prior employers
Such information should be obtained during the pre-hire process. Member firms may also look into private background checks through third party vendors or credit reports, or take letters of reference into consideration. Any background research not conducted by a member firm must also be conducted in accordance with all applicable laws, rules and regulations. All background checks, including those conducted by third party vendors, require the applicantās consent and authorization before it may be conducted.
Review of Form U5
As mentioned above, member firms must review the most recent Form U5 of any applicant who has been previously registered with FINRA or another self-regulatory organization ā including any amendments made after the initial filing. The review must be conducted within 60 days of submitting the applicantās U4. If a firm cannot review the Form U5, it is required to demonstrate that it made reasonable efforts to do so.
Review CFTC Form 8-T
If an applicant has recently been employed by a Futures Commission Merchant, or by an Introducing Broker that is notice-registered with the SEC pursuant to Section 15(b)(11) of the Exchange Act, firms must review the applicantās most recent CFTC Form 8-T ā including any amendments made after the initial filing. Just like Form U5, the review of CFTC Form 8-T must be conducted within 60 days of filing for registration, and if the form cannot be reviewed, firms must demonstrate to FINRA that it has made reasonable efforts to do so.
Conclusion
It is very important for member firms to conduct thorough background checks on applicants for registration. Even if the results donāt affect the firmās decision to hire an applicant or to sponsor them for registration, the information is necessary in order to have an accurate, up-to-date Form U4. Ā The last thing you want to happen is for FINRA to discover that disclosable information has inadvertently been left off of a representativeās Form U4.
Our second article in this series, can be found here:Ā FINRA Rule 3110(e): Form U4 Verification Process