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 investigation must, at a minimum, include:

• Verification of the information on Form U4, as required by the FINRA By-Laws' applicant-qualifications provision (Article V)
• A search of the CRD and BrokerCheck record for prior employment, disclosures, and registrations
• Contact with prior employers, including the most recent prior employer at a minimum
• A check sufficient to ascertain the good character, business reputation, qualifications, and experience of the applicant

Procedural requirements:

• The firm must establish written procedures for the investigation, embedded in its WSPs (written supervisory procedures)
• The investigation must be completed and the firm satisfied with the result before Form U4 is filed
• 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.

Permitted exemptions (each requires the firm to file a notice claiming the exemption):

• Persons whose work is not directly involved with securities (for example, facilities, food service, building maintenance)
• Persons not regularly handling securities, money, or original books and records
• Persons whose access to securities, money, or records is occasional and limited

Recordkeeping:

• Fingerprint cards and notice statements must be preserved for at least 3 years after termination under the broker-dealer recordmaking requirement's fingerprint and notice retention provision
• A second fingerprinting is not required if the person was already fingerprinted in connection with the present employment under another law

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.