Starting July 1, member firms are required to have written procedures to verify the accuracy and completeness of the information in a registered representative’s U-4 within 30 days of the U-4 being filed with FINRA. The question that arises is whether the expense of this new type of “investigation” is worth it.
In short, member firms will have to do more than a simple internet search of a potential hire, particularly if the firm finds something on the new hire. For example, what do you do if the new hire was sued in the past?
Under this new requirement, it is fair to say that you will have to do more than just look at a docket. Instead, it is likely that, in order to comply, you will have to review documents filed in the case to see if there were allegations against the new hire such as for fraud or other things that would present cause for concern.
This heightened analysis will certainly take time and money to complete. If you are hiring a big producer, then the analysis is probably only a minor inconvenience, but what about if the new hire is not a big producer? How much is enough?
Undoubtedly, firms will likely need to have bright line tests for when they will keep reviewing, as opposed to declining to hire a person with a complicated past. There will certainly be a market for other firms to conduct this analysis for you. Either way, member firms have to do more than a passing glance at a new hire’s U-4.
There is likely going to be a fair amount of question regarding how much is enough of a review. Nevertheless, get your written procedures in place and have a game plan for how you will review the veracity of a new hire’s U-4. Otherwise, you face the risk of suit for negligent hiring and the wrath of your regulator.
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