Source: https://www.bigreport.com/resource-center/background-screening/background-screening-in-the-financial-services-industry/
Timestamp: 2019-04-22 12:47:08+00:00

Document:
As the regulation of employment practices in general—and financial services in particular—continues to grow and become increasingly complex, firms operating in this industry are faced with the challenge of determining how best to comply with varying legal requirements that at times seem to be in direct conflict with each other. Statutory and regulatory requirements on the federal level may require institutions to engage in certain practices that are generally prohibited by state or local laws aimed at decreasing discrimination in employment.
This White Paper will first provide an overview of the major background screening and investigation requirements that apply to firms operating in the financial services industry. Then it will highlight some of the potential issues that can arise for employers due to the growing number of antidiscrimination laws being enacted in local jurisdictions, including restrictions on using criminal records and credit history information in employment decisions.
Employers in the financial services industry, such as insurance companies, banks, credit unions and broker-dealers, are subject to various background investigation and screening requirements. The following section provides an overview of the major screening and investigation laws and regulations that apply to these institutions.
Insurance producers and insurance companies are regulated by the Violent Crime Control Act as well as by the various state laws and requirements set by state insurance departments.
Additionally, some states may impose additional investigation requirements, such as requiring insurance companies to reaffirm a producer’s background and fitness to continue to act as an agent for the company when applying to renew that producer’s appointment each year.8 These requirements are completely separate from any federal requirements under 18 U.S.C. § 1033.
Section 19 of the Federal Deposit Insurance Act (FDIA)9 and Section 205(d) of the Federal Credit Union Act (FCUA)10 govern whether an individual may be employed by a federally insured depository institution or an insured credit union, respectively. These institutions are prohibited from employing any person who has been convicted of any criminal offense involving dishonesty or breach of trust, including money laundering or any criminal offense concerning the illegal manufacture, sale or distribution of or trafficking in controlled substances. This would include any person who has agreed to enter into a pretrial diversion or similar program in connection with a prosecution for any such offense.11 If a federally insured institution wants to employ a person who was convicted of a prohibited offense or entered a pretrial diversion program for such an offense, it has to seek a waiver from the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).
The Secure and Fair Enforcement for Mortgage Licensing Act and Regulation Z of the Truth in Lending Act set forth the background investigation requirements for loan originators.
Rule 17a-3(a)(12) of the Securities Exchange Act of 1934 and FINRA Rule 3110(e) set forth background investigation and verification requirements for broker-dealers and FINRA members.
Additionally, Financial Industry Regulatory Authority (“FINRA”) Rule 3110(e): Responsibility of Member to Investigate Applicants for Registration (“Rule 3110(e)”)48 requires member firms to adopt written background check procedures that include a national search of “reasonably available” public records. Rule 3110(e) requires that members investigate the good character, business reputation, qualifications and experience of an applicant before registering the applicant with FINRA and further requires firms to have procedures in place to verify the accuracy and completeness of information contained in the Form U4, which should include a search of reasonably available public records. Rule 3110(e) also addresses the timing of FINRA’s various background check and investigation requirements, and encourages members to conduct all verifications and searches prior to filing the Form U4, whenever possible, as a best practice.
First, Rule 3110(e) clarifies that members must ascertain by investigation the good character, business reputation, qualifications and experiences of an applicant before the member applies to register the applicant with FINRA and before making a representation to that effect on the application for registration. This is essentially a restatement of a previously existing National Association of Securities Dealers (NASD) rule, but with an explicit clarification that firms must conduct this investigation before applying to register the applicant with FINRA.
Second, Rule 3110(e) requires that members “establish and implement written procedures reasonably designed to verify the accuracy and completeness of the information contained in an applicant’s initial or transfer Form U4.” This requirement is elaborated further, stating that a member’s written procedures must, at a minimum, provide for a search of “reasonably available public records.” The public records search can be conducted either by the member firm or through a third-party service provider.
FINRA has stated that the definition of “reasonably available public records” may change over time, but some records it currently believes to be reasonably available include criminal records, bankruptcy records, judgments and liens. This is, however, a minimum or base requirement—“firms may find it necessary to conduct a more in-depth search of public records depending on the applicant’s job function, responsibilities, or position at the firm.”49 These additional public records could include civil litigation and business records.
In response to comments asking whether the investigation and verification requirements are duplicative, FINRA stated that the requirements are complimentary but are not the same. FINRA noted that the investigation requirement is a principlebased requirement that requires members to use the resources that are necessary and lawful in order to investigate the background of an applicant.52 The verification requirement specifically asks that the member verify the information contained on the Form U4. Although the two requirements are separate, some of the information obtained while satisfying these two requirements may overlap. Thus, for most applicants, FINRA expects that firms will conduct the investigation and verification process concurrently using some of the same information and prior to filing the Form U4.53 This is also a best practice for member firms because it will allow them to avoid any late disclosure fees that may be incurred if the search is conducted after filing the Form U4.
In order to implement Rule 3110(e), firms will first need to identify the information on the Form U4 that can be verified, then establish a written policy that spells out how the firm will verify this information. This process will likely vary firm by firm, but will generally require that members conduct a comprehensive background check, that includes a criminal record check, a credit check, employment history verification, professional designations verification and a regulatory/disciplinary actions search.
In the past few years, the passage of “Ban the Box” legislation, or legislation that limits an employer’s ability to inquire into a job applicant’s criminal history, has been on the rise across the nation, both on the state and local level. “Ban the Box” refers to the box appearing on many employment applications, asking an applicant to check whether he or she has a criminal record. The idea behind the movement is that by deferring the disclosure of past transgressions until an employer is already knowledgeable about an applicant’s qualifications and experiences, an employer is more likely to objectively assess the relevance of such information.
The prohibitions and requirements of each law or policy vary substantially from jurisdiction to jurisdiction and thus require that employers closely analyze the language of the law in each jurisdiction to ensure compliance. But while the laws vary in their application and implementation, they all commonly establish parameters for when, and to what extent, an employer may ask about or use criminal history for employment purposes and generally never prohibit criminal history inquiries (or criminal background checks) altogether. Instead, these laws require such inquiries to be postponed until later in the application process (e.g. after an interview; once an applicant is a finalist for the position or has received a conditional offer).
While many of these “Ban the Box” laws include exceptions if the practices they prohibit are permitted or required by another law, the applicability of such exceptions to financial institutions may be challenging due to the wording of each jurisdiction’s exception as well as the ambiguous nature of background check requirements across the financial services industry. A financial institution’s analysis of the applicability of various “Ban the Box” laws is further complicated by the varying definitions of “employment,” with some definitions covering individuals hired as independent contractors or agents, while others may not.
“Ban the box” laws can include several exceptions that make the law inapplicable in certain situations. While application of these exceptions tends to be fairly straight forward, others may not be as easy to apply. One exception that some jurisdictions provide makes the “Ban the Box” law inapplicable only if another state or federal law requires the organization to engage in practices prohibited by the “Ban the Box” law, such as conducting a criminal records check or asking about criminal history on an employment application. Employers relying on this exception would have to first determine what exactly is required of them by another state or federal law and then look to the language of the “Ban the Box” law to determine whether those other legal requirements are in fact inconsistent with the “Ban the Box” requirements.
The first issue arises when determining what exactly is required by the other state or federal law. For example, does the law outright prohibit an organization from employing an individual with a certain conviction, or does it merely require that the organization more closely assess that individual’s candidacy? Does the law specifically require an organization to ask applicants about criminal history, and if so, does it specify when this must be done? As previously mentioned, “Ban the Box” policies generally do not prohibit criminal history inquiries altogether— instead they typically require employers to delay such inquiries until later in the application process. If the “Ban the Box” law provides an exemption only when an employer is legally required to ask about criminal history on an employment application, this may not provide a blanket exception for some institutions. Whether the institution or positon is exempt would depend on whether the laws and regulations governing that institution require it to ask about criminal history on an initial application, or whether they allow for such inquiries to be delayed until later in the application process. To the extent that any law requiring financial institutions to ask about criminal histories or conduct criminal background checks allows for such practices to be delayed until made lawful by that jurisdiction’s “Ban the Box” law, institutions may be required to comply with those “Ban the Box” requirements depending on the wording of the “Ban the Box” exception.
For example, federally insured depository institution are required to perform a “reasonable inquiry” regarding an applicant’s history to avoid hiring or permitting participation by a person with a covered conviction, and FDIC guidance indicates that this would include asking about convictions on a written employment application. Alternatively, while insurance companies are required to attempt to identify whether any present employees or prospective employees have been convicted of any felonies involving dishonesty or breach of trust, the VCCA does not explicitly state that insurance companies must ask about criminal histories on initial employment applications. Thus, if a jurisdiction only exempts those institutions that are required to ask about criminal histories on employment applications, an insured depository institution operating in that jurisdiction would arguably be exempt, but an insurance company in the same jurisdiction would have to undertake a more detailed legal analysis.
This exemption is also tricky for financial institutions because background check laws may not explicitly require institutions to ask about criminal records or conduct criminal background checks, but such practices may be understood as what is generally required to comply with broader statutory or regulatory requirements. For example, the aforementioned FDIC guidance to banks and federally insured institutions states that asking about criminal histories on employment applications helps satisfy the “reasonable inquiry” requirement, but neither FDIC nor NCUA guidance states that a criminal background check is mandatory. Thus, such institutions would have to make a determination on whether this vague legal requirement is sufficient to exempt them from complying with a jurisdiction’s “Ban the Box” law that either prohibits criminal background checks altogether or requires such checks to be delayed until later in the application process.
To illustrate the complexities with this “if required by another state or federal law” exception, we can look to the City of Philadelphia’s “Ban the Box” law, which prohibits employers from making “any inquiry regarding or to require any person to disclose or reveal any criminal convictions during the application process. … The application process shall begin when the applicant inquiries about the employment being sought and shall end when an employer has extended a conditional offer of employment to the applicant.” The law further provides that “no employer shall maintain a policy of automatically excluding any applicant with a criminal conviction from a job or class of jobs.” Finally, the law states that its prohibitions “shall not apply if the inquiries or adverse actions prohibited herein are specifically authorized or mandated by any other applicable law or regulation.” A financial institution operating in Philadelphia would have to determine whether background check laws governing it “specifically authorize or mandate” that it inquire into criminal histories before making a conditional offer of employment or that it exclude candidates based on certain criminal convictions before engaging in such practices in this jurisdiction.
Another issue arises in the financial services/ insurance industry when determining whether “employment” includes those individuals working as agents or independent contractors. Some jurisdictions explicitly define “employment” to include individuals who are independent contractors or agents, while others provide no guidance on the issue.
Los Angeles defines “employment” to include contracted work, contingent work, work on commission and work through the services of a temporary or other employment agency. The “Ban the Box” laws in all of these jurisdictions arguably cover independent contractors.
Alternatively, the “Ban the Box” law in Portland, Oregon states that: “‘Employ’ means to engage or use the personal service of another person on a full-time, part-time, temporary or seasonal basis, where the Employer reserves the right to control the means by which such service is performed.” While this definition does not explicitly exclude independent contractors, it could arguably be interpreted as excluding such individuals considering independent contractors must typically be given independent discretion to determine how services are performed. Thus, organizations operating in these jurisdictions would have to make a determination on whether the law applies to such positions and adjust their practices accordingly.
Similar to the “Ban the Box” laws limiting criminal history inquiries, a growing number of jurisdictions are now passing laws that prohibit employers from considering credit history information in making employment decisions. Unlike the “Ban the Box” laws, which allow criminal history inquiries to be made later in the application process, credit history laws tend to prohibit credit history inquiries altogether. Such laws also include exceptions for certain institutions, or for certain positions within institutions, as well as for when credit inquiries are required by other laws, but these exceptions can give rise to the same issues highlighted above.
One additional issue for financial institutions arises when determining which applicants or employees are exempt from a particular credit restriction law. The wording of these exemptions varies by jurisdiction and may exclude an institution as a whole or more narrowly exempt only certain positions within the institution. Thus, such laws require that organizations closely analyze the language of the exemptions provided in each jurisdiction to determine whether the organization as a whole qualifies for an exemption or whether the exemption is limited to only certain positions within the organization. If only certain positions within the organization are exempt, it is important that the organization determine which positions fall into the exempt category, and then have clearly defined policies and procedures in place so as to ensure continued compliance for nonexempt positions.
While some positions within a FINRA firm may be exempt, the SCDEA may continue to apply to a FINRA member’s employment decisions regarding individuals not required to register with FINRA or who are not otherwise regulated by FINRA.62 Employers must be aware of the nuances of these exceptions and must have procedures in place to ensure compliance with credit history restrictions when appropriate.
Financial institutions, including insurance companies, banks, credit unions and broker-dealers, now face the growing challenge of navigating a complex labyrinth of federal and state background screening and investigation requirements. State and local antidiscrimination laws contribute to this complexity by prohibiting practices that firms regularly engage in, such as considering criminal records and credit history information in employment decisions, either in compliance with legal requirements or to otherwise protect the interests of their various stakeholders.
While many “Ban the Box” laws include exceptions if the practices they prohibit are permitted or required by other laws, applying such exceptions is challenging for many institutions due to the wording of each jurisdiction’s exception as well as the ambiguous nature of many background check laws in the financial services industry. Institutions must determine what exactly the various state or federal background investigation laws require of them, and then look to the language of the “Ban the Box” laws in each jurisdiction to determine whether their legal requirements are in fact inconsistent with the “Ban the Box” requirements.
A financial institution’s analysis of the applicability of various “Ban the Box” laws is further complicated by the varying definitions of “employment”—institutions must analyze the definition of this term in each jurisdiction to determine whether the law applies to individuals hired as independent contractors or agents.
Financial institutions may also run into similar challenges when determining the applicability of credit history restriction laws and the accompanying exceptions, and should ensure that any such exceptions are being applied appropriately, including when the language of any such exception only excludes certain positions within the institution (rather than the institution as a whole).
Finally, as background screening laws and regulations on both the state and federal level continue to change and evolve on a daily basis, institutions would be well-advised to dedicate resources to monitoring such changes and to ensure that revisions to these practices and policies are made accordingly.
2 Guidelines for State Insurance Regulators to the Violent Crime Control and Law Enforcement Act of 1994: United States Code §§ 1033 – 1034, National Association of Insurance Commissioners 8 (2011), available at http://www.naic.org/documents/prod_serv_legal_sir_op.pdf.
3 Id. at 34. Additional guidance on what crimes involve dishonesty or a breach of trust can be obtained from the NAIC’s Guidelines for State Insurance Regulators available here: http://www.naic.org/documents/prod_serv_legal_sir_op.pdf. Additional guidance on crimes involving dishonesty or a breach of trust can be obtained from the Federal Deposit Insurance Corporation’s statement of policy for Section 19 of the Federal Deposit Insurance Act available here: https://www.fdic.gov/regulations/laws/federal/98sop19.pdf. This provides the FDIC’s positions on interpreting a federal law which contain elements similar to 18 U.S.C. §§ 1033 and 1034.
8 Arkansas requires every licensed entity which appoints an insurance producer in the state to annually file with the Insurance Commissioner a renewal appointment under the Producer License Model Act (Ark. Code Ann. § 23-64-219 and § 23-64-514(b)). The insurance company’s renewal of a producer’s appointment indicates that the appointing company has reviewed the producer’s background and fitness to continue to act as an agent of the company. See 2012 Company Appointment Renewals for Producers, Arkansas Insurance Department (March 4, 2013), available at http://www.insurance.arkansas.gov/Legal/Bulletins/2-2012.pdf.
9 12 U.S.C. § 1829.
10 12 U.S.C. § 1785.
12 Jennifer L. Mora & Jonathan Shapiro, Background Screening in the Financial Services Industry, LITTLER MENDELSON P.C. 9 (Mar. 3, 2016), available at https://www.littler.com/ events/background-screening-financial-services-industry [hereinafter referred to as “Littler Mendelson”].
16 Federal Deposit Insurance Corporation, Application Pursuant to Section 19 of the Federal Deposit Insurance Act 5 (Feb. 28, 2017), available at https://www.fdic.gov/formsdocuments/6710-07.pdf.
17 See 12 U.S.C. § 1829(2).
18 Littler Mendelson supra note 12, at 10.
19 63 Federal Register 230, 66177, available at https://www.fdic.gov/regulations/laws/federal/98sop19.pdf.
20 Littler Mendelson supra note 12, at 10. If an insured depository institution determines that a “covered person” needs to apply to the FDIC for written permission to become an institution affiliated party or participate in the affairs of an insured depository institution, there are two methods for doing so. The first method involves an insured depository institution filing a Section 19 application on behalf of a prospective director, officer, or employee (Sponsorship). If an insured depository institution refuses to file a Section 19 application on behalf of a covered person, a second method allows that individual to seek a waiver of the requirement that an insured depository institution file a Section 19 application on his or he behalf (Individual Waiver). More information on this process is available here.
24 Consent is automatically granted and no waiver application is required where the covered offense is considered de minimis. “A covered offense is considered de minimis if it meets all of the following requirements: 1) only one conviction or pretrial diversion program entry for a covered offense; 2) offense was punishable by imprisonment for a term of one year or less and/or a fine of $2,500 or less ($1,000 under the NCUA rules) and the individual served three days or less of actual jail time (no period of incarceration under the NCUA rules); 3) conviction or program entry was at least five years before; and 4) offense did not involve an insured depository institution or credit union.” Id at 13. Additional information on what constitutes a “de minimis” offense is available here.
25 Littler Mendelson supra note 12, at 15.
26 The SAFE Act defines a mortgage loan originator as an individual who (1) takes a residential mortgage loan application and (2) offers or negotiates terms of a residential mortgage loan for compensation or gain. The term mortgage loan originator does not include an individual who performs purely administrative or clerical tasks on behalf of an individual who is a mortgage loan originator.” Berkowitz, infra note 47.
27 Littler Mendelson supra note 12, at 17.
28 “Secure and Fair Enforcement for Mortgage Licensing Act of 2008” (Pub. L. 110-289), § 1505(a).
29 Littler Mendelson supra note 12, at 17.
30 12 CFR Part 1026 (“Reg. Z”).
31 Littler Mendelson supra note 12, at 20.
33 12 CFR Part 1026, § 1026.36(a), https://www.consumerfinance.gov/eregulations/1026-36/2016-14782_20160627#1026-36-a.
34 Littler Mendelson supra note 12, at 19.
35 12 CFR Part 1026, § 1026.36(f)(3), https://www.consumerfinance.gov/eregulations/1026-36/2016-14782_20160627#1026-36-f-3.
36 See Official Interpretation to 12 CFR Part 1026, § 1026.36(f)(3), https://www.consumerfinance.gov/eregulations/1026-36/2016-14782_20160627#1026-36-f-3-i-A.
37 12 CFR Part 1026, § 1026.36(f)(3)(ii)(A), https://www.consumerfinance.gov/eregulations/1026-36/2016-14782_20160627#1026-36-f-3-ii-A.
38 Littler Mendelson supra note 12, at 22.
39 12 CFR Part 1026, § 1026.36(f)(3)(ii)(A), https://www.consumerfinance.gov/eregulations/1026-36/2016-14782_20160627#1026-36-f-3-ii-A.
42 Littler Mendelson supra note 12, at 22. See also Official Interpretation to 12 CFR Part 1026, § 1026.36(f)(3)(ii)(B), https://www.consumerfinance.gov/eregulations/1026-36/2016-14782_20160627#1026-36-f-3-ii-B.
45 See Official Interpretation to 12 CFR Part 1026, § 1026.36(f)(3)(ii)(B), https://www.consumerfinance.gov/eregulations/1026-36/2016-14782_20160627#1026-36-f-3-ii-B.
47 Philip M. Berkowitz, Background Checks in Banks, Conflicts with New Laws, Littler Mendelson P.C. (Mar. 10, 2016), https://www.littler.com/publication-press/press/background-checks-banks-conflicts-new-laws.
49 See Regulatory Notice 15-05, FINRA 4 (2015), available at http://www.finra.org/sites/default/files/notice_doc_file_ref/Notice_Regulatory_15-05.pdf.
54 Littler Mendelson supra note 12, at 27.
58 Berkowitz, supra note 47.
61 Berkowitz, supra note 47.

References: § 1033
 § 23
 § 23
 § 1829
 § 1785
 § 1829
 § 1505
 § 1026
 § 1026
 § 1026
 § 1026
 § 1026
 § 1026
 § 1026