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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

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About this Author

Richard Cutshall, securities exchange commission attorney Greenberg Trauirg, corporate governance lawyer, mutual funds counsel

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 Felsenstein, Finance Attorney, Greenberg Traurig, investment company act counsel, Securities exchange commission lawyer, FINRA law
Shareholder; Co-Chair, Investment Regulation Group; Co-Chair, Financial Regulatory and Compliance Practice

Steven 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 securities under the Securities Act of 1933.

Steven represents clients in connection with administrative proceedings conducted by the SEC and FINRA, and participates in related actions. Steven’s prior practice includes experience as a staff member in the Division of Corporation Finance and as a Branch Chief in the Division of Investment Management at the U.S. Securities & Exchange Commission.

Carl A. Fornaris, Financial Attorney, Greenberg Traurig, non-U.S. loan counsel, FINRA lawyer, financing transaction law
Shareholder; Co-Chair, Financial Regulatory and Compliance Practice

Carl A. Fornaris is Co-Chair of the firm's Financial Regulatory and Compliance Practice. With more than 20 years of legal experience, Carl concentrates his practice on the representation of financial services firms in all aspects of their business. In particular, he represents U.S. and non-U.S. firms on finance and corporate matters, and provides supervisory and compliance counseling for institutions regulated by the Federal Reserve, OCC, FDIC, FinCEN, CFPB, SEC, FINRA, Florida Office of Financial Regulation and other state supervisory authorities.