As I’m sure you already know from reading our previous blogs on the subject, FINRA Rule 3110(e) (Responsibility of Member to Investigate Applicants for Registration) requires that member firms must “ascertain by investigation the good character, business reputation, qualifications, and experience of an applicant” prior to submitting a Form U4 and requesting to associate and register such an applicant with the firm. However, as recently announced, FINRA has made enhancements to its disclosure review process that will make this verification easier than ever. Such enhancements will allow member firms to rely upon FINRA’s verification process for purposes of compliance with the requirement to conduct a search of public records relating to bankruptcies, judgments and liens.
By enhancing the disclosure review process, FINRA hopes to:
- Reduce the cost to firms associated with conducting these public records checks (which frequently involve finding and hiring a third-party vendor);
- Benefit regulators, investors, and firms by more timely reporting of disclosure information; and
- Significantly reduce the number of late disclosure fees related to judgements and liens.
Previously, FINRA conducted a search of public financial records for all registered persons on an annual basis, to verify the accuracy and completeness of information provided via Form U4 related to bankruptcies, judgements, and liens.
Beginning in July 2018, FINRA will now conduct a public records review when an applicant’s initial or transfer Form U4 is filed with FINRA. If the review reveals information that is different from the information given on the applicant’s Form U4, FINRA will notify the member firm with which the applicant is associated within fifteen (15) calendar days from the date an applicant’s Form U4 was filed. If the firm files an amended form U4 with updated disclosure information within 30 calendar days of being notified, FINRA will not assess any late disclosure fee.
Additionally, as mentioned before, these enhancements make Rule 3110(e) much easier to comply with. If a member firm does not receive notice from FINRA regarding the results of its public records search within 15 calendar days of filing an applicant’s Form U4, the firm is deemed to have satisfied its obligation to conduct a public records search of information related to an applicant’s bankruptcies, judgements, and liens.
This does not entirely remove the burden of investigation from the firm. Under Rule 3110(e), firms must also conduct a search of reasonably available public records to identify criminal matters required to be reported on Form U4. Firms may satisfy this obligation by reviewing an applicant’s fingerprint results obtained through FINRA’s CRD system pursuant to Rule 17f-2 under the Securities Exchange Act of 1934. Or firms may review a report from a third-party provider that includes public records relating to criminal matters.
It is important to note, if a firm will begin relying on either or both of the notices from FINRA (financial and/or criminal) for purposes of compliance with FINRA Rule 3110(e), firms should review their procedures and make any necessary updates accordingly.
For more information on this topic, please consult FINRA Information Notice – Enhancements to FINRA’s Disclosure Review Process Relating to Public Financial Records.