Two pieces of legislation recently came into effect in New York City that will change the way many employers can conduct and use background checks on applicants' and employees' credit and criminal histories.

The amendments to the New York City Human Rights Law ("NYCHRL") contain significant changes for employers in the City, including investment advisers, which need to ensure their compliance with these requirements. These new laws generally apply to investment advisers that have employees based in New York City, and as a result, employers currently accessing credit and criminal information for hiring and other employment purposes should re-evaluate their existing policies and processes to ensure compliance.

In the first piece of legislation, the New York City Council approved the Stop Credit Discrimination in Employment Act. Passed on April 16, 2015, and signed by Mayor Bill de Blasio on May 6, 2015, the new law prohibits employers of four or more employees from making employment decisions based on an applicant's or employee's consumer credit history, which it calls an "unlawful discriminatory practice." As explained in guidance issued by the New York City Commission on Human Rights ("Commission"), the measure "reflects the City's view that consumer credit history is rarely relevant to employment decisions, and consumer reports should not be requested for individuals seeking most positions in New York City." The law went into effect on September 3, 2015.

While the City intended the act to "be the strongest bill of its type in the country," it does outline a limited number of circumstances in which employers may request or use an applicant's or employee's credit history, some of which are directly relevant to investment advisers and other financial services firms, including:

  • When required by state or federal law or regulations.
  • When required by a self-regulatory organization as defined by the Securities Exchange Act of 1934. The term "self-regulatory organization" means any national securities exchange, registered securities association (such as FINRA) or registered clearing agency. Broker-dealer firms subject to FINRA's regulatory authority may request certain credit check information from registered job applicants under FINRA Rule 3110(e), which became effective on July 1, 2015. That rule requires FINRA members to verify information provided on the applicant's Form U-4, such as disclosures about bankruptcies and outstanding judgments or liens.
  • For positions in which an employee is required to be bonded under city, state or federal law.
  • For positions in which an employee is required to possess security clearance under federal or state law.
  • For nonclerical positions having regular access to "trade secrets" (which is defined under the law and specifically excludes client, customer or mailing lists).
  • For positions that have signing authority over third-party funds or assets of $10,000 or more or that involve fiduciary responsibility to the employer with authority to enter financial agreements on behalf of the employer for amounts of $10,000 or more.
  • For computer security positions where the regular duties allow the employee to modify digital security systems established to prevent the unauthorized use of an employer's or client's networks or databases.

However, employers should be aware that those who claim an exemption as a defense to liability have the burden of proving the exemption by a preponderance of the evidence. Substantial penalties exist for violations of the law – up to $250,000 for willful, wanton or malicious violations and up to $125,000 for other violations – in addition to other remedies available under the NYCHRL.

The second piece of legislation is the Fair Chance Act, which was passed on June 10, 2015, and went into effect on October 27, 2015, amending the NYCHRL to further limit employers from inquiring into or considering an applicant's or employee's criminal history. Guidance from the Commission states that the act, also known as the "Ban the Box" law, is intended to "level the playing field" so New Yorkers who have been convicted of a crime "can be considered for a position among other equally qualified candidates" and "not overlooked during the hiring process simply because they have to check a box" disclosing their history.

In addition to existing related restrictions, the Fair Chance Act prohibits employers from asking about criminal history at any time prior to extending a conditional offer of employment, such as in an initial employment application or interview. In addition, the law bars employers from stating in any job advertisement or publication that employment is dependent on an applicant's arrest or conviction history.

Before taking any adverse action on the basis of criminal history, the law requires employers to:

  • Provide a written copy of the criminal history inquiry to the applicant.
  • Provide a written analysis to the applicant that addresses the factors employers must consider under New York state law before denying employment based on an applicant's conviction record.
  • After providing the applicant all of the required documentation, allow the individual at least three business days to respond and, during that time, hold the position open for the applicant.

However, similar to the Stop Credit Discrimination in Employment Act, the Fair Chance Act also includes exemptions for certain employers. The law does not apply to any actions taken by an employer pursuant to any federal, state or local law requiring criminal background checks for employment purposes or barring employment based on criminal history. For this purpose, "federal law" includes the rules or regulations of a self-regulatory organization as defined by the Securities Exchange Act of 1934, such as FINRA. Employers in the financial services industry, to the extent they must assess whether employees are subject to statutory disqualification due to certain criminal convictions, will be exempt from the requirements of the law. Furthermore, to the extent employers must comply with FINRA Rule 3110(e), which requires member firms to conduct background investigations of applicants for FINRA registration, the law does not apply to such actions. The law also appears to exempt banking institutions subject to the Federal Deposit Insurance Act, which prohibits the employment of individuals convicted of certain offenses without FDIC consent and requires covered employers to inquire into a job applicant's conviction record.

Both of these new laws serve as reminders for employers in New York City to revisit their compliance with the affected acts and update their policies and processes as required.

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