The New York City Council recently passed two amendments to the New York City Human Rights Law that substantially limit New York City employers' ability to run criminal and credit checks on employees and applicants. At the same time, banks and financial services companies are in many cases obligated by law to conduct background checks on employees.
How do these various conflicting requirements reconcile with one another? Answer: with difficulty.
Fair Chance Act
The Fair Chance Act, which took effect Oct. 27, 2015, amended the New York City Human Rights Law to prohibit employers from conducting a criminal background check or examine a potential employee's arrest or conviction record until after the employer has made a conditional employment offer.
Any decision to deny employment based on a criminal record must be consistent with Article 23-A of the New York Corrections Law, which requires that there be a direct relationship between one or more of the previous criminal offenses and the employment sought or held by the individual, and if granting or continuing employment would involve an unreasonable risk to property or the safety or welfare of individuals or the general public.
Before taking any adverse employment action based on the inquiry, the FCA requires the employer to provide a written series of questions to the applicant to demonstrate that the employer is considering only the legitimate factors identified in Article 23-A in assessing eligibility for employment. The employer must perform a written analysis and provide a copy to the applicant, including supporting documents that formed the basis for an adverse action and the reasons for taking any adverse action. The employer must also allow the applicant no less than three business days to respond, and holds the position open for the applicant.
By its terms, the FCA does not apply if federal, state or local law, or a self-regulatory organization (SRO), requires the employer to conduct criminal background checks for employment purposes or to bar employment in a particular position based on criminal history.
Credit Discrimination Act
The Stop Credit Discrimination in Employment Act (SCDEA) took effect Sept. 3, 2015. It generally prohibits employers from requesting or using a potential or existing employee's credit history—including credit reports, credit scores, and other information regarding a person's credit, bankruptcies, judgments or liens—when making hiring, promotion, firing and other employment determinations.
The SCDEA does not, however, restrict an employer who is required by state or federal law or regulation, or by an SRO, to use an individual's consumer credit history for employment purposes. This exemption only applies to those positions regulated by SROs; employment decisions regarding other positions must still comply with the SCDEA.
Jobs Exempted
What jobs are exempt from application of FCA and the SCDEA?
Employees of FDIC-Insured Banks. Section 19 of the Federal Deposit Insurance Act prohibits, without written consent of the Federal Deposit Insurance Corporation (FDIC), any person convicted of any criminal offense involving dishonesty, breach of trust or money laundering, or who has agreed to enter into a pre-trial diversion or similar program in connection with a prosecution for such offense, from becoming employed with, or continuing employment with, or otherwise participating directly or indirectly in the affairs of, an insured depository institution.
Thus, FDIC-insured banks are generally exempt from application of the FCA.
Loan Originators
The Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) applies to national and state banks, branches of foreign banks, credit unions, and other financial institutions. It requires that mortgage loan originators who originate residential mortgage loans obtain an appropriate license.
A residential mortgage loan means any loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling or residential real estate upon which is constructed or intended to be constructed a dwelling (including manufactured homes) and includes refinancings, reverse mortgages, home equity lines of credit, and other first and additional lien loans.
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 an MLO.
Regulation Z of the Truth in Lending Act generally applies to "loan originators" involved in consumer credit transactions secured by a dwelling (including any real property attached to the dwelling). Regulation Z defines "Loan Originator" more broadly than under the SAFE Act.
All loan originators who must be licensed pursuant to the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) and the Truth in Lending Act (TILA) must receive background checks, including credit checks.
The organization must determine that the employee has not, during the past seven years, been convicted of or pleaded nolo contendere to a felony in a domestic or military action, and has never been convicted of or pleaded nolo contendere to a felony involving an act of fraud, dishonesty, a breach of trust, or money laundering.
Also, the individual must have demonstrated financial responsibility, character, and general fitness that indicates that he or she will operate honestly, fairly and efficiently. This involves an assessment of outstanding judgments and tax liens and other information related to their credit history.
FINRA Registered Positions
FINRA Rule 3110(e) requires each member to investigate the good character, business reputation, qualifications and experience of an applicant before the member applies to register the applicant with FINRA. Each member is required to establish and implement procedures to verify the accuracy and completeness of Form U4 (Uniform Application for Securities Industry Registration or Transfer), which "at a minimum, provide for a search of reasonably available public records to be conducted by the member, or a third-party service provider, to verify the accuracy and completeness of the information contained in the applicant's initial or transfer Form U4."
Complying with FINRA Rule 3110(e) necessarily requires a member to run a comprehensive background check, including a criminal record and credit check, on FINRA registered employees and applicants for a FINRA registered position. Accordingly, financial services companies are exempt from compliance with the FCA and SCDEA with respect to their FINRA registered employees or applicants for a FINRA registered position.
Further, Rule 17a-3(a)(12) of the Securities Exchange Act of 1934 (SEA) requires members and broker-dealers to make and keep current certain books and records with respect to "associated persons" of the firm, including an executed "questionnaire or application for employment" containing information regarding the "associated person," including, without limitation, a record of any arrests and indictments for any felony or certain enumerated misdemeanors (e.g., securities, banking, insurance or real estate related crimes, fraud, false statements or omissions, wrongful taking of property, bribery, forgery, counterfeiting, extortion), and the disposition of such arrests and indictments.1
Accordingly, FINRA members and broker-dealers are required to include in their employment applications and questionnaires for employees—other than employees whose functions are solely clerical and ministerial—questions that seek and contain a variety of information regarding prior arrests and indictments, and the ultimate disposition of such arrests and indictments.
Arguably, FINRA members and broker dealers are exempt from compliance with the FCA with respect to all of their employees because FINRA and applicable SEA rules make it clear that they (and their employees) are subject to "statutory disqualification" if any of the firm's employees—whether or not registered—have been convicted of certain crimes.
For example, Article III, Section 4 of FINRA's By-Laws states that a person is subject to a "statutory disqualification" with respect to membership, or association with a member, as such term is defined in Section 3(a)(39) of the Exchange Act.2 The terms "person associated with broker or dealer" and "person associated with a member" are expansive and include "any employee" of such member or broker-dealer.3
For purposes of determining "statutory disqualification," the term "employee" includes those employees whose functions are solely clerical or ministerial. The list of disqualifying events includes any felony conviction within the past 10 years, certain specified felony or misdemeanor convictions, violations of various securities law, and injunctions entered to enjoin a person from performing a securities-related function. Generally speaking, a person who is subject to statutory disqualification may not associate with a FINRA member in any capacity unless and until approved in an Eligibility Proceeding.
Likewise, the SEA prohibits FINRA members and broker-dealers from associating with persons who have certain criminal convictions without the consent of the SEC, including those who perform merely clerical or ministerial positions.4 Covered criminal convictions include any felony conviction within the past 10 years, or certain specified felony or misdemeanor convictions.
These rules would appear to affirmatively require these employers to determine whether any applicants or employees have been convicted of covered offenses and therefore are subject to statutory disqualification, which would make the entire firm subject to disqualification.
SCDEA Exemptions
The SCDEA—which, again, limits employers' ability to use credit checks in making employment decisions—like the FCA, acknowledges that certain employers may be exempt from its application.
According to the Interpretive Enforcement Guide issued by the New York City Commission on Human Rights, the SCDEA exemption for employers complying with rules and regulations promulgated by a self-regulatory organization (SRO) (such as FINRA) only exempts employers required by FINRA to use consumer credit history when confirming the completeness and accuracy of an applicant or employee's disclosures to FINRA or when making employment decisions about individuals required to register with FINRA.
The commission takes the position that this exemption does not extend to employment decisions regarding individuals not required to register with FINRA, including, but not limited to, those who perform functions that are supportive of (or ancillary or advisory to) those for whom registration is required, or who engage solely in clerical or ministerial activities.
The New York City Commission on Human Rights has indicated that SCDEA exempts only those employers required by FINRA to use consumer credit history when confirming the completeness and accuracy of an applicant or employee's disclosures to FINRA or when making employment decisions about individuals required to register with FINRA.
However, SCDEA applies to employment decisions regarding individuals not required to register with FINRA, including those who perform functions that are supportive of (or ancillary or advisory to) those for whom registration is required, or who engage solely in clerical or ministerial activities.
Financial services companies are also exempt from the SCDEA with respect to (i) non-clerical employees with regular access to trade secrets (as defined in the SCDEA), (ii) executive-level employees (such as the Chief Financial Officer and Chief Operating Officer) with responsibility for funds or assets worth $10,000 or more, and (iii) senior executives (such as the CTO or a senior information technology executive) who control access to all parts of a company's computer systems.
Conclusion
Financial institutions, already under heightened scrutiny with respect to their compliance procedures, have to balance competing obligations imposed by federal and state banking regulators, on the one hand, and local anti-discrimination lawmakers, on the other. This is not a simple task; financial services companies must take care to sort through these competing rules, to avoid liability from regulators on both ends of these issues.
Endnotes:
1. "Associated person" means any partner, officer, director, or branch manager of such broker or dealer (or any person occupying a similar status or performing similar functions), any person directly or indirectly controlling, controlled by, or under common control with such broker or dealer, or any employee of such broker or dealer…". See 17 C.F.R. 240.17a-3 (12)(i)(G). These records must be kept for all employees other than employees "whose functions are solely clerical and ministerial." 17 C.F.R. 240.17a-3(h)(4).
2. 15 U.S.C. §78c(a)(39).
3. 15 U.S.C. §§78c(a)(18) and (21)(emphasis added).
4. 15 U.S.C. §§78o(b)(4)(B) and (6).
Philip M. Berkowitz is a shareholder and U.S. co-chair of Littler’s International Law Practice Group. He is based in the firm’s New York City office. This article is reprinted with permission from the March 10, 2016 issue of the New York Law Journal. © ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
