Broker-Dealers Compliance

Broker-Dealers

FINRA Rule 3110(e): Background Check Requirements (2024)

Mar 26, 2024

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InnReg

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7 min read

The FINRA Rule 3110(e) sets forth precise requirements about the steps that member institutions must follow to review applicant backgrounds, employment experience, and criminal and regulatory disciplinary histories before onboarding an employee.

This article summarizes what steps financial services firms must follow and provides a checklist of eight FINRA Rule 3110(e) takeaways for maintaining compliance with FINRA Background Checks regulations.

Regulatory compliance experts with decades of experience created this analysis, not freelance copywriters, third-party agencies, or AI-based tools. We are global regulatory compliance experts.

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What is FINRA Rule 3110(e)?

FINRA Rule 3110(e) defines broker-dealer hiring practices and requires employee background checks.

In 2015, FINRA approved Rule 3110(e), enhancing background screening requirements for member institutions and registered individuals. The revised Rule 3110(e) expanded member firms' obligations to investigate applicants' backgrounds for FINRA registration and to use public records to verify individuals' submitted information.

The original requirement's objective was to determine whether a FINRA-registered firm's employee might pose a risk to customers. The purpose of the added 2015 background checks was to "improve the accuracy and totality of details," according to Richard Ketchum, FINRA CEO.

FINRA Rule 3110

FINRA Rule 3110(e) Scope of Application

FINRA Rule 3110(e) applies to all FINRA-registered firms, including digital broker-dealers or other firms, such as investment advisers or securities issuers carrying out regulated activities

FINRA Rule 3110(e) Obligations

FINRA Rule 3110(e) requires a member firm to investigate an applicant's good character, business reputation, qualifications, and experience before it applies to register the applicant with the Financial Industry Regulatory Authority. It should also perform those checks before filing the U4 Form

Understanding Form U4 and Form U5

In the regulatory framework of the securities industry, Forms U4 and U5 are essential for the registration and termination processes governed by FINRA. Form U4 is utilized for registering new associates with FINRA, while Form U5 is used to formally terminate an individual's registration. Below, we delve into the specifics of each form, outlining their purposes, requirements, and the critical role they play in maintaining regulatory compliance.

What is Form U4?

Form U4 (Uniform Application for Securities Industry Registration or Transfer) is a form required under FINRA Rule 1013. A broker-dealer must file Form U4 for newly hired investment representatives to register them with FINRA as an associate of their firm. Form U4 collects information on every hire such as background, employment experience, and criminal and regulatory disciplinary histories.

Form U4 serves to reveal whether a new associate is subject to a statutory disqualification (due to previous securities violations).



FINRA Form U4
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What is Form U5?

Form U5 is the Uniform Termination Notice for Securities Industry Registration mandated by FINRA for its members. Broker-dealers, investment advisers, or issuers of securities must submit a Form U5 when a registered employee leaves the member firm for any reason: if the employee is fired, quits, or even if they are no longer working within specific jurisdictions.

The date of termination is required on the form, as well as related information to jurisdictions/self-regulatory organizations (“SROs”), along with careful and accurate responses to the disclosure questions.



FINRA Form U5

The Difference Between Form U4 and Form U5

FINRA Rule 3110(e) requires all its member organizations to fill in Form U4 when an investment representative joins the broker-dealer, investment advisers, or issuers of securities. Form U5 is used when the employee leaves.

Representatives of broker-dealers, investment advisers or issuers of securities must be registered with or deregistered from the appropriate jurisdictions and/or self-regulatory organizations (SROs). 

FINRA Background Check: The Requirements of Rule 3110(e)

Regulations place no limits on the scope of a FINRA background check. member firms should do whatever it takes to accomplish a complete applicant evaluation.

Most notable potential sources of FINRA background check information include:

  1. CRD searches

  2. Credit reports

  3. Private background checks

  4. Reference letters

  5. Fingerprint checks

  6. Communication with previous employers

  7. Verifying Investigation Findings

CRD Searches

Member firms use FINRA's Central Registration Depository (CRD) system to check the backgrounds of applicants they are sponsoring for registration. This information is released to the public through BrokerCheck to help investors choose a broker.

Credit Reports

In the US, three nationwide credit reporting agencies (Equifax, Experian, and TransUnion) provide standard credit reports to employers, creditors, and for other purposes outlined by the law.

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InnReg Compliance Consulting and Outsourcing
InnReg Compliance Consulting and Outsourcing

Private Background Checks

Firms also may wish to consider private background checks for this purpose. However, firms must ensure that such investigations are conducted following all applicable laws, rules and regulations and that all necessary approvals and authorizations have been obtained.

Reference Letters

Firms also may wish to consider reference letters for this purpose. However, firms must ensure that such investigations are conducted in accordance with all applicable laws, rules and regulations and that all necessary approvals and authorizations have been obtained.

Fingerprint Checks

Most securities industry personnel are already required to be fingerprinted by FINRA-authorized Electronic Fingerprint Submission (“EFS”) vendors, with some exceptions for those not engaged in or supervising the sale or handling of securities.

Communication With Previous Employers

Some applicants will have been previously registered with firms, in which case Form U5, which includes the reasons for termination, becomes the relevant document. The new employer must make reasonable efforts to review a copy of the U5 Form (Uniform Termination Notice for Securities Industry Registration) within 60 days of filing the U4 Form.

Form U5 can be accessed through Finra’s Web CRD, though BrokerCheck remains the best way to uncover information reported by a former employer.

Verifying Investigation Findings

A crucial FINRA Background Check Requirement is the verification process of information contained in Form U-4 — it is complementary but not identical to the investigative process.

Regulator takes a pragmatic approach, recognizing that the evidence may vary from firm to firm in different guises, whether as a state-issued driver's license, a government-issued passport, or an attestation that the firm has communicated with a previous employer over the past three years.

While no specific search method is stipulated, credit reports made available from the three credit reporting agencies (Equifax, Experian, and TransUnion) and national public records databases may satisfy the requirements.

It is mandatory to search all reasonably available public records for the following attributes (see table below).

Those are the minimum base categories. An applicant's role and higher level of responsibilities may call for a deeper, more thorough search. 

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Public Record Types

This section provides an overview of the types of public records relevant to FINRA background checks, along with examples of sources where such information can be obtained.

Names and Addresses

Criminal Records

Bankruptcy Records

Civil Litigation

Judgments

Liens

Key Background Check Categories

FINRA Background Check Disqualifiers

FINRA background check disqualifiers include all felony convictions and certain fraudulent misdemeanor convictions within 10 years. Other disqualifications include injunctions from investment or securities activities and expulsions from financial trade organizations.

Handling FINRA Rule 3110(e) Violations and Consequences

This section explores how to address violations of FINRA Rule 3110(e) and its potential consequences.

Incomplete U4 Form Information

Whenever it is not feasible or practical to verify U4 Form information, firms must document the steps taken and the reasons for incomplete verification.

Firms have a 30-day window to verify after filing Form U4 without incurring late fees, but should try to investigate and verify concurrently. Still, they might need the extra 30 days if, for example, an applicant has been hired for an urgent role or the time window is beyond control, such as illegible fingerprints that require resubmission.

The late disclosure fee is $100 for the first day a form filing is late and $25 for each subsequent day, up to a maximum of $1,575. FINRA assesses the late disclosure fee starting on the calendar day following the last date on which the event was required to be reported under FINRA rules. 

AWC Letters

Letter of Acceptance, Waiver, and Consent (known as AWC letters) is one of the two methods of resolving alleged violations when a FINRA member must choose between litigation or a settlement. If the broker-dealer  chooses a settlement, their proposal to settle is called an AWC Letter.

Three AWC letters issued by FINRA discuss violations of three full-service broker-dealers concerning supervisory issues.

  1. Citigroup: Citigroup failed to adequately check the backgrounds of employees, including a failure to register and properly fingerprint over 10,000 employees in its broker-dealer division, and hired three people with criminal backgrounds over a seven-year period.

  2. National Securities Corporation: NSC failed to establish, maintain, and enforce a reasonable supervisory system and procedures, including a failure to supervise internal communications and maintain accurate books and records.

  3. SW Financial: SW Financial failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures, reasonably designed to achieve compliance with the Exchange Act and FINRA Rules relating to the sale of private placements and excessive trading and churning.


They highlight brokerages’ various obligations to establish, maintain, and enforce a reasonable supervisory system and procedures, including proper documentation of relevant activities, supervision of registered representatives’ activities, and investigation of private placements.

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Conclusion: FINRA Background Check Requirements Checklist for Compliance

In conclusion, we outline 10 key practical takeaways for member firms to maintain compliance with FINRA Rule 3110(e).

  1. Develop a hiring policy

  2. Ensure that personnel records comply with FINRA record retention requirements

  3. Develop a formal training process to ensure your registered employees remain current with FINRA’s regulations about products and jobs and comply with all FINRA requirements

  4. Initiate investigations of registered individuals promptly, allowing time to receive and review the information

  5. Record the reason for any information that cannot be verified

  6. Consider using third-party background check providers to speed up the process

  7. Perform due diligence on third-party providers who search public records

  8. Provide necessary disclosures to candidates before screening (e.g., if using BrokerCheck)

  9. Don't assume the 30-day verification window will waive late disclosure fees for amended filings

  10. Retain all required records that are prepared for audits, which can involve a review of activities, including brokerage and fair trading practices and the transparency and truthfulness of your firm’s marketing and advertising materials.

FINRA Rule 3110


Need help with support and information on background check requirements or how to design the right compliance program to meet FINRA Rule 3110(e) requirements for hiring? Reach out today for a free consultation: info@innreg.com

InnReg has experience with FINRA Rule 3110(e) and its various requirements around hiring practices and employee background checks, and can assist you in managing the many precise requirements relating to the review of applicant backgrounds, employment experience, and criminal and regulatory disciplinary histories before onboarding.

FINRA Rule 3110
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