By David Meyer
The Securities and Exchange Commission has approved a FINRA proposal that
requires brokerage firms to strengthen the background checks they conduct
on new brokers. With the new rule, FINRA is attempting to block brokers
from the industry by forcing its member firms to think twice about hiring
brokers with a big book of business but a sketchy regulatory history.
Starting this July, all brokerage firms are required to adopt written procedures
to verify the truthfulness and completeness of a new broker's registration
information. Firms are now required to dig into new brokers' criminal
history, bankruptcy, civil litigation, liens, and business records.
The old rule (NASD Rule 3010(e)) required an investigation into the background
of the broker, but with little detail or guidance as to how the investigation
should be done. Generally, the broker's background was reported to
the firm by the broker filling out his or her own questionnaire. Thus,
the old rule left wide margins for brokers to submit incomplete, misleading,
or flat out wrong information.
Diligent investigation done at the time brokers are hired is an important
part of protecting the public from unscrupulous brokers. There is a high
correlation between brokers with financial difficulties and a history
of prior disciplinary complaints and those who engage in illegal sales
Ponzi schemes and the like.
When a firm has full and accurate knowledge of a broker's disreputable
past, it is armed with the tools to protect the public by either declining
to hire the broker, or to tailor its supervisory procedures to monitor
the broker carefully.