December 1, 2020

Volume X, Number 336


November 30, 2020

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New Background Check Obligations for Securities Broker-Dealers Are Coming Soon

Earlier in 2014, the SEC incorporated old NASD Rule 3010 (the “Prior Rule”) – related to employee supervision – into The Financial Industry Regulatory Authority rules as FINRA Rule 3110 (the “New Rule”). On Dec. 30, 2014, the SEC approved a proposed rule change pursuant to which FINRA included in the New Rule a new background check obligation for member firms. The added obligation requires member firms to establish and implement written procedures to verify the accuracy and completeness of the information contained in the registered representative’s initial or transfer Form U4 within 30 days after the Form U4 is filed. Those procedures must provide that the member firm, or a third-party service provider on behalf of the member firm, at least conduct a national search of reasonably available public records for the purpose of achieving that verification.

In addition to imposing this requirement, sub-paragraph (e) of the New Rule: (i) clarifies that the initial background investigation (including checking information concerning a proposed registered representative) shall be conducted before the member firm applies to register the proposed representative, (ii) clarifies that the acquiring firm within sixty days of the filing of the Form U4 must review the candidate’s Form U5 (or other termination filings) if the proposed individual has previously been registered, (iii) makes other updating and conforming changes and (iv) adds Supplementary Material .15 to FINRA Rule 3110 establishing a temporary program to refund Late Disclosure Fees (subject to certain conditions). (The sixty-day period to check prior Form U5 filings allows for the right of the candidate’s previous firm to take up to thirty days to make the U5 filing.)

The amendment to the New Rule becomes effective July 1, 2015. FINRA member firms must now begin to amend their written supervisory procedures to specifically address their new background check obligations and begin discussing with vendors how background searches will be effected and documented to be New Rule compliant

©2020 Greenberg Traurig, LLP. All rights reserved. National Law Review, Volume V, Number 25



About this Author

Richard Cutshall, Greenberg Traurig Law Firm, Chicago, Corporate, Finance and Real Estate Law Attorney

Richard M. Cutshall has experience representing clients in a variety of investment management, corporate, and general securities matters, including the representation of mutual funds and other funds registered under the Investment Company Act of 1940, fund independent directors, unregistered investment companies, federally registered and state registered investment advisers, broker-dealers, and an array of public and private companies. 

Rich represents clients in all aspects of investment company practice, including organizing and forming new...

Steven Feldstein, Greenberg Traurig Law Firm, Philadelphia, Corporate and Finance Law Attorney

Steven M. Felsenstein is an attorney in the Investment Regulation Practice and Co-Chair of the Financial Regulatory and Compliance Practice and focuses his practice on serving clients involved in financial services industries. He advises investment companies registered under the Investment Company Act of 1940, investment advisers registered under the Investment Advisers Act, and other administrators and service providers involved in the industry. Steven also represents broker-dealers and transfer agents registered under the Securities Exchange Act of 1934, and issuers of...

Carl Fornaris, Greenberg Traurig Law Firm, Miami and Washington DC, Finance and Corporate Law Attorney

Carl A. Fornaris is an attorney in firm's Financial Regulatory and Compliance Practice. With 24 years of legal experience, Carl advises banks and their holding companies, investment advisers, securities broker dealers, gaming firms, money services businesses and other financial institutions on all aspects of their business. These include  licensing, capital-raising transactions, acquisitions and divestitures, USA PATRIOT Act/BSA/AML compliance and OFAC sanctions programs (including permissible financial activities in Cuba), critical examination reports and enforcement...