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FINRA Background Check Rule Goes Into Effect 7/1/15

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FINRA Background Check Rule Goes Into Effect 7/1/15; May prevent Bernie Madoff types from ripping off investors.

A new FINRA (Financial Industry Regulatory Authority) background check rule goes into effect on July 1, 2015 which is good news for investment firms and ordinary investors. Why? We have all heard of Bernie Madoff. Just the sound of his name congers up images of a greedy, ruthless, scrooge-like character ready to steal every last dime of unsuspecting investors. According to a March 3, 2014 article by Debbie Stephenson, “10 Famous Investment Scams,” Bernard L. Madoff Investments Securities LLC lost an estimated $65 billion of investor’s money. In the article, Stephenson writes, “Madoff sent fake balance statements to every investor so that it appeared their money was doing well and multiplying. As the markets crashed, investors began pulling out their investments and Madoff couldn’t provide. Investors were tricked out of $65 billion through Madoff’s Ponzi scheme. He was sentenced to 150 years in prison and $170 billion in restitution.”

FINRA (Financial Industry Regulatory Authority) is dedicated to investor protection and market integrity through effective and efficient regulations of the securities exchange industry. In an effort to protect investors from Bernie Madoff types and thousands like him, FINRA has proposed Rule 3110(e), a background check rule, which has been approved by the U.S. Securities and Exchange Commission and will take effect July 1, 2015. Rule 3110(e) requires that each member “ascertain by investigation the good character, business reputation, qualifications and experience of an applicant before the member applies to register that applicant with FINRA and before making a representation to that effect on the application for registration.” The rule requires firms conduct a mandatory search of “reasonably available public records” that currently include at least criminal records, bankruptcy records, judgments and liens.

FINRA encourages firms to conduct the verification process, including the public records search, prior to filing a broker’s Uniform Application for Securities Industry Registration or Transfer (Form U4). However, FINRA does state that the new background check rule must be completed within 30 days of a U4 being filed. Their goal is to improve the accuracy and validity of the broker profiles contained on the Web CRD – the central licensing and registration system for the U.S. securities industry and its regulators and FINRA’s BrokerCheck database which can be reviewed by investors before hiring a financial adviser.

FINRA acknowledges that the scope of what is considered reasonably available public records may change over time and that the inclusion of criminal records, bankruptcy records, judgments and liens is a minimum or base requirement. Some highlights of the proposal text regarding the background check rule are as follows:

“A firm may find it necessary to conduct a more in-depth search of public records depending on the applicant’s job function, responsibilities or position at the firm. Firms also may wish to consider private background checks, credit reports and reference letters for this purpose.”

There has been some industry opposition to the background check rule citing the time-consuming nature of sifting through records, and confusion over ambiguous language. Overall, however, most industry comment letters supported the proposal with only a few suggestions or requests for clarifications.

Through the implementation process, the background check rule verification procedures could vary firm by firm with some opting to review a consolidated report from a specialized background investigation provider. This could aid brokerage firms with the onerous task of navigating the new regulations and of complying with the time-consuming requirement of conducting acceptable verifications and complying with the background check rule. A reputable background investigation provider will ensure that such background investigations 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.

While the FINRA background check rule may take some time for financial industry professionals to grow accustomed to, it is necessary to protect the investment firm from unscrupulous employees and the investing public who are only too willing to put their trust in them.


10 Famous Investment Scams by Debbie Stephenson,

Investment News:

SEC (FINRA Release)

Comment Letters:

Text of Proposed Rule Change: (P. 3- P. 68)

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