finrasecsmallA rule recently approved by the Securities and Exchange Commission will require much more involved background checks on FINRA-registered representatives (investment broker-dealers). In addition to criminal background checks and verification of previous employment and licensure, the new rule requires searches for civil litigation, bankruptcies, liens and judgments, corporations and sole-proprietorships, and state and federal regulatory histories.

This requirement will apply to both captive (employee) registrants and independent contractors who hang out their own shingle but are registered under a brokerage house.

Imperative has been doing this sort of due diligence for private equity clients for fifteen years and it looks like we’ll be doing a lot more of it in the future!

Recently, the SEC approved FINRA’s proposed new Rule 3110(e) relating to background investigations of registered persons.  FINRA Rule 3110(e), which replaces NASD Rule 3010(e) and goes into effect on July 1, 2015, streamlines and clarifies the rule language by providing that “each member shall ascertain by investigation the good character, business reputation, qualifications and experience of an applicant before the member applies to register that applicant with FINRA and before making a representation to that effect on the application for registration.”  The rule further clarifies that a firm is required to review a copy of an applicant’s most recent Form U5, if available.  Most importantly, the rule requires that firms adopt “written procedures that are reasonably designed to verify the accuracy and completeness of the information contained in an applicant’s Form U4 no later than 30 calendar days after the form is filed with FINRA.”


FINRA’s New Background Investigation Rule Will Likely Increase Firms’ Costs and Potentially Increases Exposure for Firms in Customer Disputes | The National Law Review.