UPDATE 1-Wall Street watchdog mandates broker background checks

Thu Apr 24, 2014 5:46pm EDT

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By Neha Dimri and Suzanne Barlyn

April 24 (Reuters) - Wall Street's self-funded regulator said brokerage firms would have to conduct their own background checks on new recruits after critics pointed to gaps in disclosures by some brokers with checkered histories.

Financial Industry Regulatory Authority (FINRA), which has a database containing information on each registered broker's employment history, said it also plans to perform an initial check for financial problems, such as bankruptcies, for all brokers.

The watchdog will also conduct a search of publicly available criminal records of brokers who have not been fingerprinted within the last five years, it said in a statement on Thursday. (link.reuters.com/hep78v)

"I'm surprised it's not already required," said Jason Doss, president of the Public Investors Arbitration Bar Association, a group of lawyers whose members represent investors in securities arbitration cases.

The announcement by FINRA comes at a time when it is facing heightened scrutiny from legal groups and the media over the quality of its online disclosure system - BrokerCheck, a free tool to help investors choose a broker.

FINRA oversees 633,000 stockbrokers. Firms are already required to fingerprint newly hired brokers, whether they are first entering the industry or switching jobs.

FINRA sends the fingerprints to the U.S. Justice Department to check for arrest information in a national criminal database. But that search does not check for financial problems.

Morgan Stanley and Bank of America's Merrill Lynch unit already conduct their own criminal and financial background checks, spokespeople said. The process is typical among the largest brokerage firms, say compliance professionals.

But after a broker clears those hurdles, firm policies often rely on the broker to self-disclose events such as tax liens, bankruptcies and criminal problems, which can occur years after the initial background checks. Brokers have been fired for not making those disclosures and then disciplined by FINRA, but not all are caught.

FINRA's chief economist has also launched a study to see if it should include additional data on BrokerCheck, such as details about licensing exams that brokers have failed, it said. The regulator is looking into whether there is a "meaningful relationship" between the data and broker misconduct. FINRA's has expanded the scope of data in its BrokerCheck system several times in recent years.

The measures by FINRA on Thursday require approval from the U.S. Securities and Exchange Commission, which oversees the regulator and changes to its rules. (Reporting By Neha Dimri in Bangalore; Additional reporting by Suzanne Barlyn and Sarah N Lynch; Editing by Savio D'Souza)

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