Enhancements to FINRA’s Disclosure Review Process Relating to Public Financial Records

Background

A critical part of the registration process in the securities industry is the background investigation of applicants for registration and the timely and accurate reporting of information to the Central Registration Depository (CRD) system via the Form U4 (Uniform Application for Securities Industry Registration or Transfer).

When a firm wants to hire a registered representative, it must fill out and submit a Form U4, the uniform registration application, to the 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 with the financial disclosure questions, essentially performing the same review as firms, but on an annual basis.

As of July 2018, FINRA now conducts its public records review at the time that a Form U4 is submitted and contacts 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 its 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.

To date, these enhancements: (1) reduced the costs to firms associated with conducting these public records checks; (2) resulted in more timely reporting of disclosure information to the benefit of regulators, investors and firms, with financial disclosure being provided to BrokerCheck 62% faster than the previous year; and (3) resulted in a significant reduction (45%) of late disclosure fees related to judgments and liens.

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.

Summary Actions

• Published Information Notice 5/18/18, detailing enhancements to FINRA’s disclosure review process.
• Enhanced the disclosure review process to enable FINRA to conduct a public records search of information relating to bankruptcies, judgments and liens within 15 calendar days from the date of an applicant’s initial or transfer Form U4.
• Implemented process to notify member firms if FINRA’s search reveals information different from what was reported in an applicant’s Form U4.