A Positive Step by Regulators


The Financial Industry Regulatory Authority (FINRA) took a positive step last week by proposing mandatory background checks on brokers. The proposal requires firms to verify the accuracy and completeness of the information contained in an applicant’s Form U4 (the Uniform Application for Securities Industry Registration or Transfer). Firms would also be required to search public records to ensure the data is correct.

In essence, when a person applies to work for a brokerage firm, either as a new employee or as a transfer from another firm, the hiring company would have to confirm that the job candidate is not misrepresenting himself. This confirmation process would include checking to see if the candidate is hiding any past criminal activity.

FINRA further proposes searching all publicly available criminal records for any registered individuals who have not been fingerprinted in the last five years. The regulatory body then intends to conduct periodic reviews to ensure the information provided to the public is accurate. FINRA operates the BrokerCheck website, which allows individuals to do a background check of a broker. The database has been the subject of criticism for omitting red flags about brokers.

The majority of brokers and advisers are honest, but, as is the case with any field, there are also some who are malfeasant. The difference between a fraudulent broker and, say, a fraudulent car mechanic is the magnitude of the financial damage they can inflict. A mechanic out to rip off his customers might cost you hundreds or perhaps even a few thousand dollars. A broker out to rip off his clients can cost you a far larger sum. In both cases, the bad apples are in the minority, but it does not take a very large percentage of unethical professionals to give an industry a bad name or to create a long list of unfortunate victims. Thus, it is important that you ask questions and do background research.

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