FINRA fines Infinity Financial for deficiencies in employee background checks
Infinity Financial Services has agreed to pay a $35,000 fine as a part of a settlement with the United States Financial Industry Regulatory Authority (FINRA).
From March 2014 through April 2017, Infinity Financial failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures, reasonably designed to ensure that the firm conducted required background investigations into disciplinary histories, financial circumstances, and qualifications of its new hires.
Infinity Financial’s written supervisory procedures (WSPs) required the firm to: “conduct an extensive interview with the applicant,” conduct a “CRD/background check,” and obtain and review, among other things, the applicant’s Form U4, an FBI Report, a fingerprint card, and the applicant’s Form U5 from his or her previous employing broker-dealer.
Infinity Financial also used a “New Hire & New Registered Rep Checklist” that required the firm obtain and review the applicant’s Form U5, obtain disclosure forms (e.g., outside business activities), fingerprint the applicant, and save the records in the applicant’s personnel file. The New Hire Checklist, (and the Form U4), in contrast to the WSPs, required the firm to verify the applicant’s prior employment by contacting the applicant’s prior employers from the past three years.
The firm’s WSPs and New Hire Checklist did not include a procedure to conduct searches of public records. Because the firm relied upon Google searches and the accuracy of CRD disclosures made by prior employers to investigate applicants, it recruited registered representatives with reportable disciplinary histories and financial events.
In order to verify the accuracy of an applicant’s Form U4, the firm used a “CRD Authorization/Rep Summary” form. This form required applicants to indicate whether they were aware of a pending disciplinary action, customer complaint, regulatory investigation, arbitration, or criminal complaint/indictment against them, but did not clarify that financial events, such as liens or judgments, should be disclosed. Although required by the New Hire Checklist, and the Form U4, Infinity Financial did not contact its applicants’ former employers.
From March 2014 through April 2017, due to Infinity Financial’s inadequate background check procedures, the firm hired 16 registered representatives without conducting a pre-registration search in CRD.
In particular, the firm failed to detect pending bankruptcies, judgments, and tax liens for five registered representatives.
In addition, Infinity Financial failed to seek prior approval for a material change in business.
Infinity Financial’s Membership Agreement, dated November 14, 2013, provided that the firm could employ 41 associated persons (registered and unregistered) having direct contact with customers in the conduct of the member’s securities business, and maintain 36 offices (registered and unregistered).
However, from November 2016 to May 2017, Infinity Financial expanded its business by increasing the number of its associated persons to 60, and the number of its branch offices to 49, thereby expanding beyond what was allowed by its membership agreement by an additional 19 persons and an additional 13 offices. Through these expansions, the firm exceeded the safe harbor by six associated persons and two offices.
On top of the fine, the firm agrees to a censure. It also accepts an undertaking to file a continuing membership application with FINRA, consistent with FINRA Rule 1017, within 30 calendar days of acceptance of this Letter of Acceptance, Waiver, and Consent (AWC).