FINRA recently announced a change to the supervision rule to require hiring firms to conduct background checks on new employees.  This rule change raises the question; what have member firms been doing all along. 

In this day and age of instant information, having a new registered representative complete his/her U-4 should have only been a start of the inquiry.  A simple internet search of the new hire or transfer, including publicly available financial and criminal records can yield critical information that may impact the hiring decision.   

The need for a background check becomes even more critical where new hire comes from another member firm and his/her U-5 has an unclear reason for termination. 

The terminating firm will, to avoid liability, only confirm the former registered representative’s status as being associated with the firm.  What should the new firm do?  The upside of FINRA’s rule change is that your regulator has made the decision for you; perform a background check.   pointing.jpg

A few years ago, I had 40+ day arbitration, and it largely dealt with the issue of a representative leaving one firm and going go to another, but the hiring firm and the claimants did not think that the terminating firm did enough in the U-5 to highlight the reason why the person left the firm.  The representative is now spending a few years in federal prison because he conducted a Ponzi scheme.

By changing the supervision rule, FINRA has taken the burden off of firms to consider whether to conduct a background check.  The risk firms have is how much is enough to weed out a criminal. 

From my perspective, the issue will come down to process and the reasonableness of the background search.  Firms should document every step in their background analysis to address those situations where a hire goes bad.  It may also be worth considering the use of a service to aid in this process.  Either way, verifying the worthiness of a new hire must be a critical component in your risk avoidance program.

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