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Large BD Mistakenly Relied on Bank Affiliate to Conduct Background Checks

 

FINRA fined a large broker-dealer $1.25 Million for failing to conduct adequate background checks on over 10,000 non-registered associated persons over a 7-year period.  For these non-registered persons, the BD relied on less comprehensive background checks conducted by its bank affiliate, which was required by the banking laws.  The required Exchange Act background checks include a review of regulatory actions in addition to criminal activity.  A FINRA official warned that “member firms must live up to their responsibility as a gatekeeper protecting investors from bad actors.”

This case is similar to an action against another bank-affiliated broker-dealer back in 2017.  Large firms with multiple regulated affiliates must ensure compliance with each regulatory regime.  Compliance with one financial services statute does not necessarily mean compliance with another.  Firms should hire compliance specialists with substantive backgrounds in the applicable laws and regulations.

Bank-Affiliated BD Fined $1.25 Million for Inadequate Employee Screening

FINRA fined a large bank-affiliated broker-dealer $1.25 Million for failing to conduct adequate background checks on over 8,000 associated persons over an 8-year period.  The broker-dealer relied on its bank affiliate to conduct screening of its non-registered associated persons but the bank only screened for bank disqualifying criteria, not the broader categories of disqualification pursuant to Section 3(a)(39) of the Exchange Act and FINRA rules.  Also, the firm completely failed to fingerprint over 2000 employees prior to employment.  Four employees were retained despite statutory disqualifications.  FINRA’s EVP of Enforcement warned, “Firms have a clear responsibility to appropriately screen all employees for past criminal or regulatory events that can disqualify individuals from associating with member firms, even in a non-registered capacity.”

OUR TAKE: FINRA has previously warned that it would review how firms screen for brokers with disciplinary records.  The regulator wants to put pressure on the industry to drive out the bad brokers.