SEC Approves Consolidated FINRA Regarding Background Checks


The SEC approved FINRA’s proposed rule change to adopt NASD Rule 3010(e) (Qualifications Investigated) relating to background checks on registration applicants as FINRA Rule 3110(e) (Responsibility of Member to Investigate Applicants for Registration) in the consolidated FINRA rulebook. FINRA Rule 3110(e) includes new provisions relating to the verification of information in the Form U4 (Uniform Application for Securities Industry Registration or Transfer). The SEC also approved FINRA Rule 3110. 15 (Temporary Program to Address Underreported Form U4 Information), which establishes a temporary program that will issue a refund to members of Late Disclosure Fees assessed for the late filing of responses to Form U4 Question 14M, subject to specified conditions. FINRA Rule 3110(e) becomes effective on July 1, 2015.

FINRA Rule 3110(e) requires that a firm adopt written procedures reasonably designed to verify the accuracy and completeness of the information contained in an applicant’s Form U4 by no later than 30 calendar days after an initial or a transfer Form U4 is filed with FINRA. This new requirement is based on an underlying requirement in the Form U4 that the person signing the form on behalf of the firm certify that he or she has taken appropriate steps to verify the accuracy and completeness of the information contained in and with that form. FINRA Rule 3110(e) expressly requires that a firm’s written procedures specify the firm’s process for verifying the information in the Form U4 and that the firm complete that verification process by no later than 30 calendar days after the Form U4 is filed.

In addition, FINRA Rule 3110(e) requires that a firm’s verification process must, at a minimum, provide for a national search of reasonably available public records conducted by the firm or a third-party service provider to verify the accuracy and completeness of the information contained in an applicant’s Form U4. The requirement to conduct a public records search must be satisfied by no later than 30 calendar days after an initial or a transfer Form U4 is filed with FINRA. This public records search is a new requirement, and it is a mandatory component of the overall verification process.

According to FINRA, a firm could comply with the requirement to conduct a national search of reasonably available public records in several ways. For example, a firm may satisfy the requirement by:

  1. reviewing a credit report from a major national credit reporting agency that contains public record information (such as bankruptcies, judgments and liens) and the applicant’s fingerprint results;
  2. searching a reputable national public records database, such as LexisNexis, a division of Reed Elsevier, Inc. , and reviewing the applicant’s fingerprint results; or
  3. reviewing a consolidated report from a specialized provider, such as Business Information Group, Inc. (BIG), that includes criminal and financial public records.

Firms must ensure that such public records searches are conducted in accordance with all applicable laws, rules and regulations, including federal and state requirements, and that all necessary approvals, consents and authorizations have been obtained. The verification requirement, including the public records search, applies to an initial Form U4 or a transfer Form U4.

FINRA has established a temporary refund program to address concerns regarding the assessment of the Late Disclosure Fee in circumstances where an unsatisfied judgment or lien has been satisfied, and at the time it was unsatisfied was of a relatively low amount (under $5,000) and was reportable prior to the August 13, 2012, introduction of the procedures regarding the application of the Late Disclosure Fee to the reporting of judgments and liens on the Form U4. The refund program also addresses circumstances where the failure to report related to a mistaken belief that satisfying a judgment or lien shortly after learning it was unsatisfied (within 30 calendar days of when it became unsatisfied) obviated the need to report the matter. Specifically, as stated in FINRA Rule 3110. 15, FINRA will issue a refund to firms of Late Disclosure Fees assessed for the late filing of responses to Form U4 Question 14M (unsatisfied judgments or liens) if the Form U4 amendment is filed between April 24, 2014, and December 1, 2015, and one of the following conditions is met:

  1. the judgment or lien has been satisfied, and at the time it was unsatisfied, it was under $5,000, and the date the judgment or lien was filed with a court (as reported on Form U4 Judgment/Lien DRP, Question 4A) was on or before August 13, 2012; or
  2. the unsatisfied judgment or lien was satisfied within 30 days after the individual learned of the judgment or lien (as reported on Form U4 Judgment/Lien DRP, Question 4. B.)

The refund program has a retroactive effective date of April 24, 2014, and it will automatically sunset on December 1, 2015.

FINRA Rule 3110(e) becomes effective on July 1, 2015. FINRA Rule 3110. 15 became retroactively effective on April 24, 2014, and it will automatically sunset on December 1, 2015.