Finra Takes Over Broker Background Check Duties From B-Ds

In a move that it says could save broker-dealer firms as much as $3 million annually, Finra has announced that beginning July 9 it will take over the financial background checks that firms are required to perform and submit on new brokers they register. The self-regulatory organization will perform the background checks for free.

Currently, firms themselves fulfill required public records background checks or hire outside firms to check for any bankruptcies, judgments or liens on the brokers they are registering. Brokers who have run into financial problems in their own lives are seen by regulators as more likely to commit sales abuses and fraud against customers.

While an event such as a judgement does not automatically preclude a broker from being hired by a firm, the event must be reported so that regulators, investors and firms are informed and can increase supervision of the broker.

“The timeliness of Finra’s review will also help assure investors that the BrokerCheck information about their representative is as accurate, complete and up to date as possible,” said Derek Linden, Finra executive vice president of registration and disclosure. “Small firms, in particular, should see meaningful cost savings and reduced regulatory burden through this enhancement.”

By taking over background checks, Finra will get to know who is entering the business that much faster. Before, companies had to perform background checks on the brokers they had hired within 30 days after the brokers submitted information for the registration application. Finra has now promised to turn around the background checks in 15 calendar days. The initiative will improve data quality for regulators and investors, and lower firm compliance risks and costs, Finra said.

If Finra finds discrepancies or missing information regarding what a broker reported about bankruptcies, judgments or liens, the regulator will send its findings back to the firm within 15 days.

The background check service is a result of feedback Finra got from firms about their operational challenges over the past year as part of the Finra360 comprehensive initiative to create greater, more cost-effective regulatory efficiencies.

The new service capitalizes on and expands the comprehensive, once-a-year reviews Finra had already began performing on brokers’ public financial records to ensure accuracy several years ago.

Finra estimates that firms will save $1.5 million to $3 million per year by avoiding search fees charged by vendors and fees assessed by Finra for late filings.