A Stamp of Approval from FIRNA

A Stamp Of Approval From FINRA - January 22, 2015

Last September, the Financial Industry Regulatory Authority (FINRA) proposed a new rule that would improve the quality and depth of background checks performed by member firms when hiring new investment advisers. The proposed rule was granted accelerated approval by the Securities and Exchange Commission on December 30, 2014.

The New Rule

FINRA Rule 3110(e) was adopted based on NASD Rule 3010(e), with some changes to clarify the language. The new rule requires that member firms:

  • Conduct an investigation into the good character, business reputation, qualifications and experience of an applicant prior to applying to register the applicant with FINRA and prior to making a similar representation on the application for registration.
  • Review the applicant's most recent Form U5, which relates to any previous registration with FINRA or another self-regulatory organization.
  • Document a written procedure to verify the accuracy and completeness of the information enclosed in the Uniform Application for Securities Industry Registration or Transfer (Form U4) within 30 calendar days of filing with FINRA.
  • Conduct a search of reasonably available public records at a minimum in order to verify the information contained in Form U4. The public record search must also be conducted within 30 calendar days of filing with FINRA.

The new rule will be implemented on July 1, 2015 and is expected to improve the screening process for investment advisers.

The Importance of Policy

Although FINRA only applies to companies within the financial services industry, employers from all industries should take notice. Adopting and implementing a written background screening policy for your company is essential for a number of reasons, namely compliance, consistency, and effectiveness.

Your background check policy should be designed in compliance with local, state, and federal law and the guidelines documented by the Equal Employment Opportunity Commission (EEOC). This means that your background check policy should detail the types of checks that are required for each position within your organization. It is also important that your policy does not apply blanket exclusions for applicants with criminal records as it may have a disparate impact on certain protected classes. Your legal counsel should be consulted when writing and reviewing your background check policy.

A background check policy also helps by maintaining consistency in screening across your entire organization. A properly implemented policy will ensure that background checks are coherent across all branches and locations of your organization. For example, if a customer service representative in Oregon is required to undergo a 5-year criminal record check at the county and state level, a customer service representative in Florida should be subject to the same level of investigation.

Lastly, a background screening policy should be reviewed on a regular basis to ensure that it remains effective. The review should take place a minimum of once per year and should take into account any legislative changes, new technology that would improve the accuracy or quality of results, and seek to identify any potential gaps in the screening process.

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