New FINRA360 Initiative Improves Data Quality for Regulators and Investors, and Lowers Firm Compliance Risks and Costs
WASHINGTON—FINRA is launching an enhanced disclosure review process for public financial records of individuals seeking registration with a brokerage firm. Beginning on July 9, FINRA will perform a public records review within 15 calendar days after a firm applies to register an individual with FINRA. The review will enhance the quality of information about individual brokers available to investors and reduce costs for the industry, particularly small firms. It is the latest in a series of actions under FINRA360, FINRA’s comprehensive organizational improvement initiative.
“FINRA’s enhanced disclosure review process delivers significant benefits to brokerage firms as well as the investing public,” said Derek Linden, FINRA Executive Vice President, Registration and Disclosure. “Small firms, in particular, should see meaningful cost savings and reduced regulatory burden through this enhancement. The timeliness of FINRA’s review will also help assure investors that the BrokerCheck information about their representative is as accurate, complete and up-to-date as possible.”
When a firm wants to hire a registered representative, it must fill out and submit a Form U4, the uniform registration application, to the Central Registration Depository (CRD), the database for the registrations of firms and individuals in the brokerage industry. Form U4 includes a variety of information on a representative, including financial disclosures, and is used by FINRA and federal and state regulators for licensing and other purposes. The information is also made available to investors through BrokerCheck.
Individual brokers are responsible for providing the necessary information to complete Form U4. In addition, as part of their supervisory obligations, firms must currently validate that the disclosure questions are answered correctly, including financial disclosures regarding bankruptcies, judgments and liens. This requirement has resulted in firms hiring vendors to perform public record checks with respect to those financial disclosures. Separately, several years ago, FINRA adopted a practice of checking public financial records itself to ensure accuracy of the financial disclosures; essentially performing the same review as firms, but on an annual basis.
Beginning on July 9, FINRA will now conduct its public records review at the time that a Form U4 is submitted and contact the applicant’s firm within 15 calendar days of the application if that review indicates that information on the Form U4 may be missing or contains discrepancies. If notified by FINRA of a potential deficiency, the firm must then investigate, and if the information is reportable, submit an amended Form U4.
With this new process, FINRA aims to ensure that firms can more readily accomplish their reporting obligations and that the data collected in CRD and made available to investors through BrokerCheck is more current and reliable. FINRA estimates that firms will save a combined $1.5 million to $3 million per year by avoiding search fees charged by vendors and fees assessed by FINRA for late filings.
While firms can rely on the financial public record reviews performed by FINRA to satisfy the applicable part of FINRA Rule 3110(e) (Responsibility of Member to Investigate Applicants for Registration), FINRA’s review does not relieve firms or registered representatives of their duty to keep their records up to date. Firms should review FINRA’s May 18, 2018, Information Notice – Enhancements to FINRA’s Disclosure Review Process Relating to Public Financial Records, for additional information.
FINRA—the Financial Industry Regulatory Authority—is a not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industry—brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.