Investor Protection: FINRA’s issuance of Regulatory Notice 07-55 once again reminded member firms of their solemn obligations under FINRA rules to conduct “extensive, thorough and diligent investigation of an applicant’s background” to determine, among other things, “whether a prospective employee is subject to a statutory disqualification or whether he or she may present a regulatory risk for the firm and customers.” As will be explained, this wasn’t the first such warning.

In admonishing it’s industry members to preemptively avoid sales practice abuses and investor claims generally through prudent hiring, FINRA resurrected NASD Notice to Members 97-19 (NTM), an April 1997 directive on “‘best hiring practices’” that over ten years ago recommended the following steps which might ultimately protect investors:

(1) discuss with the applicant the nature of the applicant’s prior customers and the types of securities sold while associated with prior employers; (2) obtain from the applicant explanations regarding any customer complaints and regulatory actions to determine the merit, to the extent practicable, of each before hiring; (3) ask applicants about the existence of and nature of any pending proceedings, customer complaints, regulatory investigations or arbitrations not listed in CRD [(Central Registration Depository, reporting on the employment background and regulatory history of industry registrants]; and (4) involve compliance and legal staff, as appropriate, in the hiring process, and designate an individual (above the branch manager lever) or a committee to review the customer complaints, disciplinary actions or arbitrations before hiring a registered person with such a history.

The recent Regulatory Notice does not mention, as far as we can tell, the historical reason NTM 97-19 was promulgated, but we will.

See our next Securities Fraud Hotline Posting for more. . .