Large BD Mistakenly Relied on Bank Affiliate to Conduct Background Checks
FINRA fined a large broker-dealer $1.25 Million for failing to conduct adequate background checks on over 10,000 non-registered associated persons over a 7-year period. For these non-registered persons, the BD relied on less comprehensive background checks conducted by its bank affiliate, which was required by the banking laws. The required Exchange Act background checks include a review of regulatory actions in addition to criminal activity. A FINRA official warned that “member firms must live up to their responsibility as a gatekeeper protecting investors from bad actors.”
This case is similar to an action against another bank-affiliated broker-dealer back in 2017. Large firms with multiple regulated affiliates must ensure compliance with each regulatory regime. Compliance with one financial services statute does not necessarily mean compliance with another. Firms should hire compliance specialists with substantive backgrounds in the applicable laws and regulations.