Pre-Hire Investigation and Fingerprinting

Now that you know who must register, the firm has to confirm the applicant is fit for the industry before filing Form U4. Two rules govern the pre-hire workflow: FINRA's background-investigation duty for applicants, and the SEC fingerprinting requirement.

The Background-Investigation Duty for Applicants

The supervisory-system requirement imposes an affirmative duty on the firm to investigate the applicant. The duty has four parts:

• A check sufficient to ascertain the good character, business reputation, qualifications, and experience of the applicant
• Written procedures reasonably designed to verify the accuracy and completeness of the Form U4, providing for a search of reasonably available public records
• If the applicant was previously registered with FINRA or another self-regulatory organization (SRO), review of the applicant's most recent Form U5
• If the applicant was recently employed by a Futures Commission Merchant or introducing broker that is notice-registered with the SEC, review of the applicant's most recent CFTC Form 8-T

Procedural requirements:

• The rule's written procedures requirement covers verifying the applicant's initial or transfer Form U4; the firm embeds those procedures in its WSPs (written supervisory procedures)
• The good character, business reputation, qualifications, and experience determination comes before the firm applies to register the applicant. The Form U5 (and any Form 8-T) review is due within 60 days of the filing date, unless the firm can demonstrate to FINRA that it made reasonable efforts to do so, and the public-records verification of the Form U4 within 30 calendar days after filing
• Records of the investigation are part of the firm's books and records subject to the broker-dealer record retention requirement

Exam Tip: Gotchas

• The background-investigation duty is the firm's, not the applicant's. An applicant who self-discloses everything truthfully on Form U4 does not eliminate the firm's separate duty to verify and investigate. The firm is on the hook if it accepts an unverified Form U4 and a disqualifying event later surfaces.

The SEC Fingerprinting Requirement

Every B/D must fingerprint each partner, director, officer, and employee and submit fingerprints to the U.S. Attorney General. In practice, prints flow to the FBI through FINRA's CRD system.

The ordinary personnel exemption requires all three conditions:

• The person does not sell securities
• The person does not regularly have access to keeping, handling, or processing securities, monies, or their original books and records
• The person does not directly supervise those sales or access-related activities

The firm must make and keep current an exemption notice, with accessible copies at its principal office and the office employing the exempt personnel. The notice is retained for inspection, not routinely filed with the SEC. Occasional access is not a separate exemption category.

Recordkeeping:

• Fingerprint-card records must be preserved for at least 3 years after termination of employment, but the notice records that support a fingerprinting-exemption claim must be kept for the life of the firm (the two retention periods are different, and the exam tests the split)
• Prior fingerprints under another law can satisfy the requirement for the present employment if they were processed by the Attorney General or designee and the required processed cards or substitute records are maintained

Think of it this way: The fingerprinting test is not "does this person sit at a customer-facing desk?" The test is "does this person have access to securities, customer money, or original firm books and records?" A back-office cashier who handles nothing customer-facing still has access to securities and money, so the cashier is fingerprinted.

Exam Tip: Gotchas

• The fingerprinting exemption is narrow. A back-office employee who handles securities or original books and records, such as a cashier or stock-transfer clerk, is not exempt. The test is access to securities, money, or records, not whether the person is customer-facing.
• Fingerprint records are kept for 3 years after termination. This is not the 6-year general books-and-records period; the 3-year fingerprinting retention is a separate, shorter window under the broker-dealer recordmaking requirement.

Form U4 Disclosure History

Pre-hire information collected on Form U4 includes:

• 5-year residential history
• 10-year employment history
• Disclosure of prior regulatory, criminal, civil judicial, customer complaint, financial (bankruptcy or lien), and termination events

Filing an inaccurate or misleading Form U4 violates the accuracy-of-membership-information requirement (Filing of Misleading Information as to Membership or Registration). Violations attach to both the firm and the individual, and the rule includes an ongoing duty to correct.

Exam Tip: Gotchas

• 5 years residential, 10 years employment. Two different timeframes appear on the same form and are commonly swapped on the exam.
• Customer complaints, bankruptcies, and liens are disclosure events on Form U4 even if the matter never resulted in a regulatory action. Disclosure obligations are broader than discipline obligations.

What Should You Check on Exam Day?

• Can you name the four elements of the background-investigation duty, including the public-records search and prior Form U5 or CFTC Form 8-T review?
• Do you know the fingerprinting test is access to securities, money, or records, not whether the person is customer-facing?
• Can you distinguish the fingerprint-card retention period of 3 years after termination from the life-of-the-firm retention for exemption notice records?
• Can you state the Form U4 disclosure history windows: 5 years residential history and 10 years employment history?