How Many Times Did Your Advisor Fail His Securities Exams?

NEW YORK (MainStreet) — Did your advisor fail the Series 7 twice, before passing it on the third try by the skin of his teeth? And the shorter, but some say more difficult Series 66 – did that one trip up your financial consultant too? If so, the Financial Industry Regulatory Authority (FINRA) wants you to know. In fact, FINRA's chief economist has begun a study to see if there is a meaningful relationship between failed examinations and broker bad behavior.

In a recent report, the Wall Street Journal reviewed the exam records of more than 500,000 brokers working in the financial services industry during the last year. Fully 51,500 stockbrokers had failed a required securities exam on their first test attempt. The Journal's analysis reported that of those who failed the test more than twice, more than three-quarters (77%) were more likely to have committed a felony or financial-related misdemeanor than brokers who passed the exam on the first try.

Regulators are considering mandating that financial firms dig deeper into the backgrounds of current advisors, as well as wannabe brokers, in an effort to provide greater transparency in the industry – and to give consumers more information in order to conduct their due diligence when shopping for an advisor.

Expanded background checks, as well as the investigation of public records, would be included in the new procedures. FINRA is seeking to require securities firms to expand their scrutiny of new applicants who are looking to become registered representatives, as well as those advisors who are transferring from one firm to another, in order to verify the accuracy and completeness of the information contained in an applicant's Form U4.

The Form U4 is the Uniform Application for Securities Industry Registration or Transfer used by FINRA and other self-regulatory organizations, as well as individual states, to track employment and disciplinary data on financial advisors.

FINRA also plans to conduct searches of available public financial records for all registered representatives – as well as criminal records for all advisors who have not been fingerprinted within the last five years. Ongoing periodic reviews of public records would also be conducted.

"These are important initiatives to improve the accuracy and totality of details reported on a registered individual's Form U4," said Richard Ketchum, FINRA Chairman and Chief Executive Officer.

"FINRA would require firms to use publicly available records to verify that information such as criminal and bankruptcy records, civil litigations, judgments and liens are properly reported upon a registered individual's application. FINRA encourages every investor to use BrokerCheck to research the background of individuals they are trusting to invest their money."

The proposed enhanced background check policies have been forwarded to the Securities and Exchange Commission for review and approval.

--Written by Hal M. Bundrick for MainStreet

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