The Financial Industry Regulatory Agency (FINRA) is a non-governmental organization that the Securities and Exchange Commission appoints to oversee exchange markets and brokerage firms. Federal regulations require FINRA member firms to conduct name and fingerprint-based background checks as part of the hiring process. Failure to comply carries severe consequences for employers.
Rule 3110(e) outlines current FINRA background check requirements. This rule expands previous background check practices in two ways. First, it requires firms to verify the accuracy and completeness of the information provided on an applicant’s Form U4. FINRA uses Form U4 to “elicit employment history, disciplinary and other information about individuals to register them.” Second, firms are now obligated to thoroughly investigate an applicant’s good character, business reputation, qualifications, and experience.
What Shows up on a FINRA Background Check?
A member firm’s obligation to thoroughly investigate an applicant includes verifying professional licenses and employment history, screening for evidence of criminal conduct or sanctions, and conducting an extensive search of public records.
The public records search requirement includes basic information such as the applicant’s name and address, criminal records, and civil litigations. It also covers bankruptcy records, lien history, and business records.
It is important to note that Rule 3110(e) requires the public record search to be conducted on a national level—as opposed to a state level—but need only encompass reasonably available public records. A firm may wish to perform a deeper search of public records depending on the nature of the position.
How Far Back Does a FINRA Background Check Go?
There isn’t a blanket requirement dictating the amount of time a FINRA background check must cover. Each component reported on an applicant’s Form U4 has different time requirements. The firm must thoroughly investigate applicants while maintaining compliance with federal and state regulations.
A criminal records search should show all convictions or pending criminal proceedings connected with the applicant unless otherwise sealed. At a minimum, this will give the date, type of offense, and severity of the crime (felony or misdemeanor).
FINRA does have a required reporting period for bankruptcy. Hiring prospects must disclose any personal bankruptcies they have filed in the past ten years. They must also disclose any liens and civil judgments.
The applicant’s U4 must include the past five years of their employment history. The firm should also verify educational history and professional licensure. Government sanctions incurred at any time will also appear.
The Importance of Complying With FINRA as an Employer
Failure to comply with FINRA regulations exposes the employer to significant risk. Non-compliant firms can be subject to hefty disciplinary sanctions. In some cases, individuals may also have to pay fines and face temporary suspensions.
Non-compliance also risks the security of the firm and its clients. The sensitive nature of brokerages means that a security breach has the potential to cause a great deal of damage. A breach caused by insufficient background screenings could be detrimental to a firm’s reputation and future business. The requirements may seem tedious, but they exist to protect both firms and clients.
Best Practices for FINRA Background Checks
FINRA background checks can be a complex process. Compliance is paramount in the securities and trading industry, and FINRA conducts regular audits. Creating policies encompassing the following best practices can help ensure compliance and successful audits.
Understand FINRA
FINRA policy is extensive and updated regularly. Individuals conducting background checks should familiarize themselves with the policy, particularly Rule 3110(e). FINRA provides several resources to help employers understand and stay current, including weekly email updates of FINRA news and regulator policy changes.
FINRA also hosts a Peer-2-Peer Compliance Library, which shares materials from FINRA events. The final tool is the FINRA Compliance Calendar, which shows monthly requirements for filing deadlines as well as conferences and certifications.
Know the Background Check Requirements
Background check requirements have undergone several amendments to expand access to public records of applicants. In addition to fingerprinting and criminal history searches, firms must screen an applicant’s background in financial services. There are several tools available to help with this.
Each state has a Department of Insurance License Verification that employers should use to check license status. The U.S. Treasury Office of Foreign Asset Control provides information about foreign trade bans. Employers should review the Global Sanctions and Watch List to verify that an individual is not violating the Patriot Act. FINRA also offers BrokerCheck, which shows if an individual is banned from working as a broker, and disclosures and licensing information related to investments.
Conduct Regular Compliance Training
Firms must have a formal training program to ensure covered personnel are knowledgeable and up to date on FINRA jobs and product regulations. While firms have leeway in creating and administering their training program, they must include time for employees to complete the mandatory FINRA continuing education training. Staff must complete the training every three years.
Prioritize FINRA Compliance During the Hiring Process
FINRA background checks are often one of the most time-consuming parts of the hiring process. Prioritizing compliance during hiring and onboarding can reduce costs and hiring time. It’s crucial for firms to develop hiring policies that consider FINRA time requirements in their interview and hiring process.
One of the best practices is ensuring candidates understand background screening requirements from the outset. Ensuring they know what information they’ll be required to provide can help them quickly gather and provide accurate information. It may also weed out applicants who would not pass the screening before investing resources in pursuing them.
Contact ScoutLogic to Make Background Checks Simple
FINRA background checks are complex; they require a lot of time and resources, especially for recruiters and large organizations. Outsourcing to a reliable third party like ScoutLogic for large-batch background screenings saves time and money, streamlining the hiring process and reducing time-to-hire.
ScoutLogic offers multiple kinds of background checks beyond criminal record investigations, including reference checking and employment and education verification. Contact ScoutLogic today to streamline your background screening.
David Garcia, co-founder and CEO of Scout Logic, is an industry leader in the bulk background check world. With his strategic acumen and expertise in the HR sphere, specifically in hiring, recruiting, legal compliance, background checks, and resume screening, he’s an invaluable asset and consultant.
David's counsel extends across the boards of ScoutLogic, YipitData, and Supplier.io, drawing from his impactful stints on the boards of Infutor and Avetta. With an extensive 25-year journey, he champions unparalleled B2B commercial leadership within data & analytics, significantly shaping the HR landscape.
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