After seeking comments last fall, the Securities and Exchange Commission (“SEC”) recently approved the Financial Industry Regulatory Authority’s (“FINRA”) proposed rule governing member firms’ verification and investigation of associated persons applying for registration with a member firm. Specifically, the Rule, which is based largely on NASD Rule 3010(e), requires member firms to investigate the qualifications and experience of its applicants as well as adopt written procedures designed to verify the accuracy of the disclosures contained in an applicant’s Uniform Application for Securities Industry Registration or Transfer (“Form U4”).
The investigation procedures mandated by the newly approved Rule 3110(e) require member firms to ascertain an applicant’s employment history, registration history, and disclosure events before the firm may file a Form U4 to register that applicant with FINRA. In adopting the Rule’s investigatory provisions, FINRA specifically declined to adopt limitations on the scope of the investigations that firms may permissibly conduct. Instead, FINRA wanted to ensure that member firms were able to obtain all information necessary to fully and accurately evaluate its applicant’s background.
Furthermore, after an applicant’s Form U4 is filed with FINRA, the Rule provides member firms thirty (30) days to verify and authenticate its applicant’s background information and credentials. While this verification requirement is new, it stems from the long-standing principle that a firm sponsoring an applicant for registration with FINRA must take appropriate steps to verify the information contained in the applicant’s Form U4. The Rule provides firms discretion in implementing practicable verification procedures, and FINRA has stated that it does not expect firms to verify all information contained in an applicant’s Form U4, especially where such verification is unreasonable or cost prohibitive.
The amendments incorporated into FINRA Rule 3110(e) are intended to reduce subsequent employment disputes and protect customers and their investments. The Rule’s effective date has been noticed for July 1, 2015.