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FINRA firms now permitted to rely on FINRA's verification process for Rule 3110(e)'s "Search of Public Records" requirement

On May 18, 2018, FINRA issued an Information Notice titled, "Enhancements to FINRA's Disclosure Review Process Relating to Public Financial Records," announcing that it will permit firms to rely on its verification process for purposes of compliance with Rule 3110(e)'s requirement to conduct a search of public records relating to bankruptcies, judgments and liens.

The announcement follows the credit bureaus' decisions last year and earlier this year to remove all civil judgments and tax liens from credit reports, leaving firms with significant concerns and confusion on how to comply with Rule 3110(e)'s "search of public records" requirement. More information on Rule 3110(e) is available here.

Specifically, beginning on July 9, 2018, FINRA will conduct a public records search within fifteen calendar days from the date of an applicant's Form U4 (Uniform Application for Securities Industry Registration or Transfer) and provide member firms any information resulting from such a search if such information is different from what was reported in the applicant's Form U4. If a member firm does not receive notice from FINRA regarding the results of its public records search within fifteen calendar days after the filing of an applicant's Form U4, the firm is deemed to have satisfied its obligation to conduct a public records search of information relating to bankruptcies, judgments and liens for that applicant.

Currently, FINRA conducts a search of public financial records for all registered persons on an annual basis to verify the accuracy and completeness of information relating to bankruptcies, judgments and liens reported to the Central Registration Depository (CRD®) system via the Form U4. Beginning on July 9, 2018, FINRA is enhancing its disclosure review process to enable it to also conduct a public records search of information relating to bankruptcies, judgments and liens within fifteen calendar days from the date of an applicant's initial or transfer Form U4.

If FINRA's search reveals information different from what was reported in an applicant's initial or transfer Form U4, FINRA will notify the member firm with which the applicant is associated within fifteen calendar days from the date the Form U4 is filed. If the firm files an amended Form U4 with updated disclosure, FINRA will not assess a late disclosure fee, provided that the amended Form U4 is filed no later than 30 calendar days after the applicant first learns of the event.

Notably, with respect to credit reports, FINRA re-iterated the positon it took in Regulatory Notice 15-05 and stated that member firms could comply with the requirement to conduct a search of public records by other means, including by reviewing a credit report from a major national credit reporting agency that contains public financial record information. FINRA acknowledged that the major national credit reporting agencies recently instituted changes that resulted in the exclusion of certain judgments and liens in credit reports. "Firms have asked whether these recent changes impact their ability to rely on credit reports. FINRA notes that the ability of member firms to rely on credit reports from major national credit reporting agencies for purposes of compliance with FINRA Rule 3110(e) is not affected by these changes."

Thus, as an alternative to relying on FINRA's verification process for compliance with Rule 3110(e)'s public records search requirement, it appears FINRA has taken the position—at least for now—that firms can still rely on credit reports for purposes of compliance even though they no longer include liens and judgements.

To read FINRA's announcement in full, please click here

Source: FINRA, 5/18/2018

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