A broker-dealer’s new hire process can be long and stressful. It is always a firm’s goal to hire the best individual in the applicant pool. Once a firm narrows down its search and decides on a hire, the process is long from over. FINRA has established several regulations that must be followed during a broker-dealer’s new hire process.
Before Registration with FINRA
It is not enough to look at a new hire’s resume and interview them. Even if you feel like the new hire is a good person. FINRA Rule 3110 (e) mandates that all FINRA-member broker firms conduct background verifications for new hires and transfers. This background verification must be done before the Firm applies to register the applicant with FINRA.
After Registration with FINRA
Although the things mentioned in this section can be done before registration with FINRA, it is not required. FINRA gives firms 30 days after filing an applicant’s Form U4 to verify the information contained within. Form U4 contains information such as past employment, bankruptcy, liens, judgments, criminal history, and civil litigation. To verify the information, firms are required to conduct a search of reasonably available public records.
Firms should also have supervisory procedures in place which require new hires to fill out forms that collect information such as social media accounts, securities holdings, and outside business activities. Social media has grown from a way to connect with old friends to one of the most important platforms used for business. If a representative uses social media for business purposes, FINRA requires that a principal from the firm approve the post, referred to as a communication, before it is posted. A new hire form regarding social media should ask which social media accounts the representative has such as Facebook, LinkedIn, Twitter, etc. The form should also inquire into which accounts will be used for business purposes.
New hire forms regarding a broker’s securities holdings are important so that the firm can monitor and ensure that the broker is not front running, inside trading, or making any trades in his personal account that is to the disadvantage of his clients. Once the firm receives notice that the broker has an outside brokerage account, the firm should request monthly account statements from the institution that holds the account so that it can review the statements.
Monitoring outside business activities are just as important as monitoring outside brokerage accounts. An outside business activity is defined as a business activity which is outside the scope of your relationship with the Firm; in which you are employed by or accept compensation from, any other person as a result of any business activity, other than a passive investment. A firm should require all new hires to fill out forms regarding all of their outside business activities. For any new outside business activities started once the applicant is already hired and working, the firm should require pre-approval. There are several reasons why firms should supervise outside business activities. One purpose is to make sure that the representative is not involved in a business that directly or indirectly profits based on the recommendations that are made to clients. Another reason for this supervision is to review and identify inherent conflicts of interest between the outside business activity and firm. The principal should also determine whether the outside business activity will distract the representative from his day-to-day responsibilities.
Attestations regarding social media, securities holdings, and outside business activities are just a few of the disclosures that should be requested from new hires by firms in order to adequately supervise their activities. Firms should develop and occasionally re-visit forms that help collect information from new hires that will allow the firm to better supervise. Transparency is key.
