Before making a hiring decision, newly registered investment adviser representatives should conduct thorough background checks and address any pre-hire compliance issues prior to extending an offer of employment and onboarding. This includes verifying the information reported on FINRA’s Form U4 as well as the Form ADV. These forms require certain disclosures and this information is useful in conducting a substantive background investigation. The following are pertinent disclosure topics and what to consider when conducting a comprehensive background investigation:
Qualification Examinations: Prior to engaging in securities transactions, representatives (and typically supervisors) must acquire the proper licenses and registration in order to conduct business. Proper licensing and credentials are required to conduct business as a financial professional. Registration is required in the states in which the firm wants to conduct business. (Note: there are certain limited exceptions).
Professional Designations: Designations ought to be from an accredited program and require a certain amount of education and study. The following are examples of accredited programs: Chartered Financial Consultant (ChFC®) and Certified Financial Planner (CFP™).
Employment History: Consider the employment history of the candidate. If the individual has been with multiple firms within a short amount of time, this may warrant further discussion. Situations such as: moving from one problem firm to another, or moving from one firm to another to obtain upfront money may be cause for concern. Additionally, if the individual was “termed for cause” it would be beneficial to identify the facts and circumstances to understand the conduct that was involved. Further, inquire about any gaps in employment or a significant amount of time unemployment.
Other Business Activities: If the individual has an outside business activity, depending on what it is, a conflict of interest may arise that is inconsistent with your Firm’s business. The following are examples of outside business activities: employment with another entity, board of director/committee positions, and investments including passive ownership.
Criminal Disclosures: Felony and misdemeanor charges reflected on the U4 or through conversation, may warrant further discussion and/or documentation. The following are examples of criminal disclosures that may give rise for concern: theft, fraud, robbery, multiple DUI offenses, drug offenses, bad checks, violent crimes.
Regulatory Action: Review any action by a state, federal or financial regulator and determine the underlying cause and the result. This includes: sanctions, suspensions, fines, and any bar/ban from the financial industry or otherwise.
Complaints: Clients may file a complaint which are reportable and could result in a settlement or disciplinary action. The following are types of conduct that is prohibited (not an inclusive list) and may result in a customer compliant: suitability, unauthorized trading, excessive trading, and misappropriation, failure to follow instructions, misrepresentation, and manipulation. When reviewing complaints review for: multiple complaints, patterns of sales practice conduct violations, dollar amount of the allegation, contribution to any settlement, and time frame.
Bankruptcy/Liens: Bankruptcy and liens are reportable items and public record. When reviewing the background of a potential representative for hire, consider if there will be any negative impact your firm and/or reputation, if the representative will be able to adequately manage client funds, and/or may be indicative of a larger problems such as gambling.
There are certain circumstances whereby a bankruptcy or lien may not have a negative impact on employment such as: medical treatments/illness, divorce, or job loss. Additionally, documentation to show that the lien/bankruptcy has been satisfied would indicate that the individual resolved the matter.
Civil Judicial Injunction: The requirement to report a disciplinary action is contingent on the details and the significance of the event including: any violation of federal or state regulation, sales practice violation which resulted in an arbitration award, and/or resulted in any censure, fine, jail time, suspension, or bar.
Background investigations of potential hires are instrumental in avoiding detrimental hiring decisions as well as prevent possible regulatory actions and/or reputational consequences. Note: Actions that are pending or settled, are generally disclosed on an adviser’s Form ADV and Form U4.
Resources
Andrea Penn is a Senior Consultant at NCS Regulatory Compliance and can be reached by calling 561-570-1822 or by e-mailing her at apenn@ncsregcomp.com.
NCS Regulatory Compliance has been assisting broker-dealers and investment advisers with industry critical compliance responsibilities for over 25 years. We continue to provide products and services to thousands of firms in the financial services industry. If you have questions related to compliance obligations, compliance requirements, or other compliance topics, please contact us at 800-800-3204 or info@ncsregcomp.com.