Under Pressure, FINRA Moves To Expand Advisor Background Checks
April 28, 2014 by Kenneth Corbin
In the wake of revelations that hundreds of registered advisors have failed to publically disclose personal bankruptcies, criminal charges and other potentially damaging information, FINRA is moving to toughen the reporting requirements for BrokerCheck, its public-facing system for consumers to vet their financial advisors.
On Thursday, the self-regulatory group’s board of directors approved new rules that would expand requirements for investment firms to conduct background checks on financial advisors.
Under the proposed rules, firms would be required to validate the accuracy and completeness of the information provided by applicants on their Form U4s, which feeds into FINRA’sCentral Registration Depository (CRD). That database in turn provides the information available through BrokerCheck.
The regulatory body has come under fire recently over concerns that BrokerCheck provides too limited a picture of financial professionals’ records and that certain red flags can be omitted or easily expunged. FINRA has acknowledged some of the shortcomings, and in February approved rules to limit advisors’ ability to remove information about customer disputes from the BrokerCheck database.
Thursday’s proposal would require regulated brokerage firms to adopt written policies ensuring the accuracy of an applicant’s Form U4, including a search of public records such as bankruptcies, civil litigation, judgments and liens.
“These are important initiatives to improve the accuracy and totality of details reported on a registered individual’s Form U4,”Richard Ketchum, FINRA’s chairman and CEO, said in a statement.
The new requirements will now be sent to theSEC, which oversees FINRA, for approval.
Along with requiring firms to conduct more stringent background checks, FINRA plans to conduct its own search of public financial records for all registered reps, as well as a separate review of publicly available criminal records for registrants that have not been fingerprinted in the past five years. In addition, FINRA says it will undertake periodic reviews of public records to evaluate the accuracy of registrants’ filings.
FINRA is also considering expanding BrokerCheck to include more information from the CRD, such as whether a broker had previously failed an examination. The regulatory agency says that its chief economist will conduct a study to consider whether there is a “meaningful relationship” between that type of information and “broker misconduct.”
The Public Investors Arbitration Bar Association, an investor advocacy group, has been one of the most vocal critics of BrokerCheck, arguing that FINRA should stop filtering out information from the CRD that is already publicly available through state securities regulators.
In an interview following Thursday’s vote, PIABA President Jason Doss said the association was “encouraged by FINRA taking steps to possibly add additional categories to the BrokerCheck reports.”
He added, however, “I’d like them to just make all the information that’s already publicly available on the BrokerCheck reports.”
FINRA’s study, Doss said, “is a waste of time.” Investors, he said, “should be able to determine what they think is important when they’re choosing they’re financial advisors, and all this information is public. I don’t see the study as being meaningful at all.”
FINRA’s oversight efforts are so tentative, Doss said, because the agency is under pressure from the financial services industry.
“FINRA has to balance the interests of investor protection versus the interest of its members, which is the securities industry,” he said. “And the securities industry does not want all of this information to be easily discovered by the public because some of the information is not favorable to the brokers.”
In a similar vein,David Bellaire, executive vice president and general counsel at theFinancial Services Institute, says that the group supports efforts to “make sure investors have access to accurate, meaningful information relevant to their choice of advisor.”
But Bellaire adds that the “scope and breadth of the proposal” remain unclear, and that as far as its impact goes, he notes that “Many firms are already conducting background checks of some kind.”
