A few years ago, (see Asgard Regulatory Brief – Late Disclosure Review May 15, 2015), FINRA had conducted a retrospective review related to judgements and liens that were not reported under Question 14M of the Form U4.  At that time many firms received Disclosure Review inquiries related to potential unreported bankruptcies, judgements or liens that went back as long as fifteen years.  Each firm, along with the impacted registered person, was required to provide documentation or information responsive to the inquiry.  As it turned out, many registered persons did not report prior bankruptcies, judgements or liens on their Form U4 at the time they were hired by the member firm or did not continue to keep their respective Form U4 current while in the member firms employ.

This retrospective review resulted in fines and penalties to member firms and registered persons.  In addition, this review resulted in firms maintaining inaccurate books and records.  FINRA rules require each member firm to investigate its applicants for registration.  FINRA Rule 3110(e) states: “Each member shall 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 also “requires the member to develop written policies and procedures, at a minimum, which provides for a search of reasonably available public records to be conducted by the member or a third-party service provider, to verify the accuracy and completeness of the information contained in the applicant’s initial or transfer Form U4.”

Currently, FINRA conducts a search of public financial records for all registered persons on an annual basis to verify the accuracy and completeness of information related to, among other things, bankruptcies, judgements and liens reported to CRD system via the Form U4.

Beginning on July 9, 2018, FINRA will conduct a public records search within fifteen calendar days from the date of an applicant’s Form U4 and provide the member firm any information resulting from such a search if such information is different from what was reported in the applicant’s Form U4.

What happens if FINRA identifies a difference in reported information?

If conflicting information is revealed by FINRA from what was reported in the initial or transfer Form U4, FINRA will notify the member firm within fifteen calendar days from the date the Form U4 was filed. If the firm files an amended Form U4 with updated disclosure information, FINRA will not assess a late disclosure fee, provided that the amended Form U4 is filed no later than 30 calendar days after the member first learns of the reportable event.

Reliance

Firms may rely on FINRA’s verification process for purposes of compliance with the requirements under FINRA Rule 3110(e) to conduct a search of public records relating to bankruptcies, judgments or liens.  If the member firm does not receive notice from FINRA regarding the results of its public records search within fifteen calendar days after the filing of the registered representatives Form U4, the firm is deemed to have satisfied its obligations to conduct a public records search of information relating to bankruptcies, judgements and liens for the applicant.

Win-Win!!

FINRA notes, that under FINRA Rule 3310(e), firms also must conduct a search of reasonably available 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 the CRD system pursuant to Rule 17f-2 under the Securities Exchange Act of 1934 or by reviewing a report from a third-party provider that includes public records relating to criminal matters.

What does this all mean?

This means potential savings for small firms with respect to the costs to conduct background checks as well as from fines related to the unreported infraction.

Conclusion

This guidance underscores FINRA’s objective maintaining its investor protections mandate while also taking into consideration the costs of compliance for small member firms.  It is imperative that all member firms ensure that it maintains written policies and procedures with respect to disclosure and provide training and education to its registered persons to ensure that all bankruptcies, judgements or liens are reported as required.

Please contact an ARG Analyst with any questions regarding this matter.