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Changes to FINRA Rule 3110 Put Brokers Under Stronger Microscope

Changes to FINRA Rule 3110 Put Brokers Under Stronger Microscope

Do you know all you need to know about the brokers who work for your firm? Would you know if any of them have a criminal record, or have left a trail of customer complaints at firms they’ve worked for before?

Now that FINRA has approved a new amendment to Rule 3110 (a.k.a. the Supervision Rule), compliance requirements for broker background checks are more stringent, and firms hiring brokers are taking note.

The amendment still requires final approval from the SEC, but here’s what to expect:


Firms Need to Perform More Vigorous Broker Background Checks

Firms are now required to check the background of applicant brokers during their registration with FINRA, including first-time applications and transfers between firms.

Background checks include verifying the accuracy and completeness of the information provided by the applicant broker in their Form U4, which is the document used to start and terminate a broker’s FINRA registration. The U4 also provides critical information about the individual broker for FINRA’s BrokerCheck system, which helps investors find red flags that may indicate broker misconduct before trusting them with investing money.

The U4 form calls for information about a broker’s employment and criminal history. To verify the accuracy of the information on the form, firms now need to search publicly available records for the broker, and compare the records with the information listed on the broker’s U4 form. Items to verify include criminal and bankruptcy records, civil litigations, and judgments and liens.

FINRA also requires firms to have written procedures in place that show how the firm verifies the accuracy of a broker’s Form U4.


FINRA Will Also Perform Thorough Broker Background Checks

FINRA is also planning to compare publically reported information for brokers against public court documents and financial records, to make sure registered brokers comply with the regulator’s disclosure rules. FINRA will also search publicly available criminal records for all registered brokers who haven’t been fingerprinted within the last five years.

Once these initial searches are complete, FINRA will continue to hold periodic review of broker public records, to verify the accuracy and completeness of information made available to investors, regulators and firms. This will include a thorough review of FINRA’s database to identify instances where the regulator sees under-reporting.

FINRA expects its efforts will help further assess a registered broker’s individual compliance with reporting requirements, along with those of their firm.


What Does This Mean for Your Firm?

While many large brokerage firms already conduct their own background checks, these changes are an important step for investor protection across the industry. If you haven’t done so already, get ready to take more intensive steps to investigate the background of your potential broker hires.

While there likely will be more effort involved in these background checks, more thorough assessments can be a big benefit. After all, if your firm takes extra measures to ensure the hiring of only advisors whom your clients can trust, your firm will end up strengthening its brand reputation in the long run.


This post originally appeared on the Smarsh, Inc. blog.


Jimmy Douglas serves as Director of Alliances and Industry Relations at Smarsh. To see his other posts, visit here.

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