Navigating the FINRA Background Check With Confidence

Cindy Ellis - July 11, 2023

Much like their name suggests, the Financial Industry Regulatory Authority (FINRA) is a private, not-for-profit organization that regulates member brokerage firms and exchange markets. FINRA is authorized by Congress to oversee and regulate brokerage firms on its behalf.

Effective July 1, 2015, FINRA required that brokerage firms verify the accuracy and completeness of information provided in background checks.

Under these new regulations, FINRA:

• Reviews the information disclosed on Form U4 to determine whether an applicant presents a risk for the firm or customers
• Uses the reported information to determine whether an applicant is subject to a statutory disqualification
• Conducts background checks on applicants being considered for sponsorship for registration

FINRA uses information sent to the Central Registration Depository (CRD) for their in-depth background checks and releases it to the public through BrokerCheck. BrokerCheck is a tool that allows investors to run their own background checks on individuals and firms.

FINRA itself is regulated by the United States Securities and Exchange Commission (SEC).

The Role of FINRA in Financial Industry Regulation

FINRA protects investors by regulating the United States securities industry. It offers oversight over all securities firms that:

• Do business with the public
• Offer professional training, testing, and licensing of registered persons
• Offer arbitration and mediation services
• Are contracted by the New York Stock Exchange, NASDAQ Stock Market, or other stock exchanges and industry utilities for market regulation

All firms dealing in securities must be a member of FINRA or another self-regulatory organization (SRO).

Central Registration Depository (CRD)

FINRA maintains a database known as the CRD that contains information on broker-dealer firms, financial professionals, and anyone involved in the securities industry in the U.S.

The CRD’s goal is to increase transparency to firms and the public, giving them greater access to information while encouraging brokers to act with greater integrity. It contains information about complaints, enforcement actions, education, licensing, and professional certifications.

In short, it lets users run a short, industry-specific background check on brokers and financial advisors.

BrokerCheck

FINRA’s BrokerCheck program searches the data collected in the CRD.

When used to research brokerage firms, BrokerCheck provides:

• An overview of the firm
• Information on the firm’s ownership
• Firm history
• A description of the firm’s operations
• Arbitration awards
• Regulatory or disciplinary events

When used to research individual brokers, BrokerCheck provides:

• A summary of the broker’s credentials
• The broker’s qualifications, including current registrations, licensing, and industry exams
• Past employment data, going up to 10 years prior
• Customer disputes or disciplinary events

Effectively, BrokerCheck empowers the public to hold their brokers accountable and gives them the information they need to select brokers with honesty.

Removing Information from the CRD

FINRA allows information to be expunged from the CRD under certain conditions. FINRA limits this to inaccurate customer dispute information on an individual broker’s record. This allows brokers to protect themselves from inaccurate allegations while maintaining accurate and open information for investors and other people.

FINRA Audits or Examinations

Also known as examinations, FINRA audits occur on a one-, two-, or four-year schedule. Every FINRA-registered firm receives an examination at a minimum of once every four years.

FINRA inspect all registered financial service firms’ fair trading and brokerage practices as well as their broker registrations. They also ensure that a firm’s marketing materials are transparent and honest.

In 2022, FINRA issued $48.1 million in fines. In the past, FINRA has fined firms for failing to conduct adequate background checks.

One notable case occurred in 2019, when FINRA announced that Citigroup would be fined $1.25 million for failing to run thorough background checks on over 10,000 employees. This resulted in the hiring of three convicted criminals over the course of seven years.

Along with this, in 2017, FINRA found that J.P. Morgan Securities had incomplete background checks on 95 percent of non-registered associate employees between 2009 and 2017. At least four employees who would have originally been disqualified from employment due to criminal convictions had maintained long-term jobs at J.P. Morgan.

Mediation and Arbitration

One of FINRA’s most important functions is giving investors an avenue of recourse when confronting malicious or harmful financial advisors. When a broker violates FINRA’s rules, an investor can file a claim through FINRA.

Mediation and arbitration are alternatives to lawsuits.

During mediation, a mediator helps both parties reach an agreement. Mediation is not legally binding, however, and both parties can walk away without facing any sanctions.

However, arbitration is legally binding and enforced by FINRA. Arbitration cases work similarly to legal trials. Although there is no judge, a neutral financial professional or panel of professionals determines the factual and legal issues of a case. Arbitration does allow investors to receive compensation and mitigate their financial losses.

The History of FINRA

The National Association of Securities Dealers (NASD), SRO, preceded FINRA and was responsible for the regulation of the securities industry in the United States. It was founded in 1939 and was recognized by the Securities and Exchange Commission (SEC) as the official self-regulatory body for the securities industry. Eventually, in 2007, it merged with the member regulation, enforcement and arbitration functions of the NYSE to form FINRA.

Like FINRA, the NASD was created in order to protect investors and promote fair and transparent markets. It established rules and regulations governing securities firms and professionals, including broker-dealers. Also like FINRA, it enforced these rules through investigations, disciplinary actions, and fines.

The New FINRA Background Check Requirements

Trust and integrity are paramount in the financial industry. FINRA conducts comprehensive background checks on people seeking registration or employment in the securities industry. The revised regulations around the FINRA background check place a higher level of responsibility on firms.

Under the old FINRA background check requirements, a FINRA-regulated firm carried the obligation to investigate an applicant’s character, business reputation, qualifications, and experience.

The new regulations stipulate that a firm now also has the duty to verify the provided background information. There’s no real limitation on the scope of this, so long as the search is in compliance with all applicable laws and is carried out with the right authorizations.

The new FINRA background check is an extensive, multi-step process. Due to the nature of the search, it’s entirely possible that during the course of a firm’s research, overlapping information appears. The background check is intended to provide a firm with a general overview of an applicant’s character.

Background Investigation

The first step of the FINRA background check is the investigation process, during which the firm researches an applicant’s employment history and other professional information. Once this step is completed, the individual can provide a Form U4.

Form U4

The Form U4 discloses employment history as well as past convictions, disciplinary actions, or other derogatory marks. The information on the Form U4 must align with the data from the background check.

Public Records Check

Within 30 calendar days of filing Form U4, the firm is then responsible for a public records check. They must use “reasonably available public records” to verify the information on the Form U4.

“Reasonably available public records” may include information about an applicant’s name and address, criminal records, bankruptcy filings, business records, and more. While not mandatory, FINRA also advocates that firms perform research pertaining to job function, responsibilities, and future position.

When undertaking a background check to comply with FINRA’s requirements, firms are recommended to start the public record check as early as possible. While public records are freely available, accessing them can be time-consuming. Certain types of information, such as court records or criminal historym can take weeks to process and locate.

A firm seeking to collect as much industry-specific background information as possible might contact:

• Department of Insurance License Verification (by state): Check the status of an applicant’s insurance license.
• U.S. Treasury Office of Foreign Asset Control (OFAC): Learn whether or not they can conduct business with an embargoed country or region.
• Securities and Exchange Commission (SEC): Obtain information about their operations and finances.
• FINRA BrokerCheck: Run an industry-specific background check.
• National Association of Securities Dealers Central Records Depository (NASD-CRD): Access information about their employment history, registrations, and disclosures.
• Global Sanctions and Watch List: Learn whether or not someone cannot be employed due to Patriot Act restrictions.

While online information brokers can instantly compile background reports for individuals, this information cannot be used as part of an employee background check. This is in order to protect your privacy and prevent harassment or discrimination. A firm can use a third-party vendor that follows the appropriate legal guidelines to conduct background checks on FINRA’s behalf.

In 2018, FINRA launched an enhanced public records review that lowered costs for small firms and reduced regulatory burdens.

Although firms are still responsible for conducting their own public records searches, FINRA announced that as soon as a Form U4 is filed, they would run a public records review. Then, they would contact the firm within 15 days if the applicant was missing information or had discrepancies.

Form U5

Within 60 calendar days, the firm must review the applicant’s Form U5, which discloses their reasons for leaving a firm. The applicant must file one within 30 days of the individual’s end date.

Conducting Your Own Background Check

Online tools like Information.com are an easy-to-use alternative to the FINRA background check. However, as a word of caution, these do not replace FINRA background checks. Instead, they excel at being used for more informal purposes, such as investigating new friends, neighbors, or romantic partners.

You can also run a search on yourself. Although the FINRA background check is more concerned with industry-specific information, running your own search can help you anticipate what might appear and handle it appropriately.

Employers use background checks to determine whether or not you pose a risk to their organization. If your employer chooses not to hire you due to information that appears in your background check, they must provide you with a copy of the report. They also must give you a “Summary of Rights” with the contact information for the background reporting company.

Using Online Tools

Information.com uses your name, phone number, address, or other public data to access your public records, social media, and other public information to compile an easy-to-read report.

The Fair Credit and Reporting Act (FCRA) prohibits using Information.com’s background check for harassment, identity theft, or other malicious acts. People search engines can be used to find long-lost relatives and old friends, search for sex offenders nearby, reconnect with old lovers, and figure out who’s been calling you.

The Freedom of Information Act (FOIA) gives people the right to access public information. This includes births, marriages, deaths, professional and business licenses, lawsuits, traffic violations, and court records.

Everything can be accessed for free or a small fee by going to the corresponding government agency. For example, to look up someone’s criminal record, you would need to go to the Federal Bureau of Investigation.

In addition to FOIA, each state has their own Freedom of Information legislation. Information.com simplifies the process and saves you time and energy by pulling all the necessary records up at once.

Scrubbing Social Media Profiles

Although your social media profiles may have nothing to do with your job, be aware that FINRA may have a different opinion. Certain activities can be considered marketing and advertising, which makes them fall under FINRA’s jurisdiction.

Running a background check on yourself lets you see old social media posts, delete profiles, and clean up your online presence in order to best represent yourself.

Correcting False Information on Your Background Check

If you’ve discovered incorrect information on your background check, be proactive and take steps to fix it early on.

Contact your state’s Bureau of Identification with a request to change or remove the error. Depending on the mistake, they may ask you to provide supporting documentation.

Knowing Your Background Check Rights

While it is completely legal for an employer to run a background check on you, they cannot ask for private information such as medical information or genetic background.

If your prospective employer wants to run a background check, they must follow certain rules:

• They must disclose that the information from the background check will influence the hiring decision
• They must provide you with that information in writing and in a standalone document
• They must get your written permission

If they choose not to hire you due to the background check, they must also tell you:

• The name, address, and phone number of the background reporting company
• That the background reporting company was not involved in the hiring decision
• That the background reporting company cannot disclose to you the specific reasons for your denial
• That you have the right to dispute the information on your background check
• That you have the right to receive a copy of the background report within 60 days

If your background report has an error, correct it and ask that the company send a new version to your employer. Don’t forget to inform them about the mistake.

The Importance of a Clean FINRA Background Check

The securities industry operates within a framework of rules and regulations designed to maintain fairness, transparency, and investor protection.

FINRA requires thorough background checks in order to verify that professionals meet certain standards set forth by regulatory bodies. Applicants must have the necessary qualifications, experience, and character to contribute to a trustworthy financial marketplace.

Even unintentional FINRA violations can place a firm at risk for severe penalties, which can make a firm cautious of hiring anyone who looks like a potential liability.

Online tools like Information.com give you the opportunity to clean up your public information and take control of your background check results. Then, you can present yourself as the best possible candidate.