Stockbroker Background Checks

The Financial Industry Regulatory Authority (FINRA) is considering a new rule that would govern the hiring process pertaining to stockbrokers and other brokerage firm employees. The proposed rule would mandate that brokerage firms perform an in-depth background investigation on new employees before bringing them on board.

Part of the provision would require investment advisory firms to verify the information found on a brokerÕs public disclosure form, which is referred to in the industry as the U4. The U4 document is supposed to include prior disciplinary actions, stock fraud arbitrations, employment history and criminal records pertaining to a particular stockbroker. The information is also publicly available via FINRA's BrokerCheck website so that investment customers can research a broker's history before deciding to entrust their life savings to his or her care. However, some groups say that this disclosed information is often inaccurate or incomplete.

Investor Rights Advocates Found Discrepancies in FINRA Broker Background Disclosures

FINRA's BrokerCheck website and broker U4 forms have recently come under scrutiny, especially by the Public Investor Arbitration Bar Association (PIABA), due to missing disciplinary information and discrepancies found. FINRA's proposed rule is in response to these criticisms. By requiring brokerage firms to perform detailed background searches on new hires, and by requiring firms to independently verify the information on U4's, FINRA hopes to bring BrokerCheck information back into compliance with disclosure rules.

A spokesperson for PIABA commented that it is unsettling to think that brokerage firms were not already required to perform background investigations on new stockbrokers. However, what is important to note is that changes are hopefully going to be made, and soon. Indeed, any efforts to bring more transparency to the investment industry and stockbroker disciplinary backgrounds will help investors make better choices with regard to selecting a trustworthy advisor.

Critics Say that Some Limitation on Disclosures Is Important

If PIABA advocates get their way, BrokerCheck will eventually make even more information available to investors, such as tax leans, old bankruptcies, firings and internal investigations performed on a broker. All of this information is already available via the Central Registration Depository (CRD), but FINRA is selective about what information from a CRD report it makes available through BrokerCheck.

Still, there are critics advocating against increased disclosure. They say that numerous securities fraud claims are filed against stockbrokers, which end up getting denied or dismissed in arbitration. Opponents say that it is unfair to a broker's career prospects to include information about allegedly frivolous lawsuits on their U4 documentation. In spite of these protests, it does appear that FINRA is heading in the direction of bringing increased disclosure and transparency to its publicly available stockbroker background information.