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Regulation and Compliance > State Regulation

Are background checks becoming an IA registration requirement?

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The state of Massachusetts has requested comment on a proposal to require background checks as part of its investment-advisory registration system. This would make Massachusetts the latest in a small number of states that check advisor criminal records before issuing a license to do business.

According to William Galvin, Secretary of the Massachusetts Securities Division, the state is looking at requiring advisors to fill out a form giving the state permission to query its Criminal Offender Record Information (CORI). In effect, this would end the state’s honor system for disclosing criminal convictions on its U-4 registration form.

Although confined to investment advisors operating in Massachusetts, the move, if implemented, might signal a trend toward greater use of background checks for investment advisors and other financial professionals. In effect, this would raise the stakes for advisors who have black marks on their records or who are contemplating breaking the rules in the future.

In light of this development, the National Ethics Association recommends that advisors:

  • Take utmost care to provide full disclosures on investment advisor registration forms. If you’re contemplating omitting material information, think again.
  • Redouble your efforts to maintain a clean background. Don’t cut corners, follow all applicable suitability regulations, and avoid churning and other prohibited sales practices.
  • Deepen your commitment to ethics and professional development. Expanding your knowledge base will help you do business properly and remain outside regulatory scrutiny.

The key is to prevent complaints, lawsuits and regulator sanctions before they enter your permanent record. Advisors with clean backgrounds have nothing to fear from being background checked. And they probably stand to gain from the removal of scam artists who can’t pass one.

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