Series 9 and 10 – General Securities Sales Supervisor Exam Key Study Note Set Two

Pre-hire investigations must include, at a minimum, verification of the information provided by the candidate on Form U4 through a review of publicly available sources and contacting previous employers. FINRA Rule 3110 mandates that firms establish and maintain a system to supervise the activities of its associated persons. The pre-hire investigation is a critical first step in this supervisory process. Specifically, firms must check the Central Registration Depository (CRD) to identify any red flags, such as prior disciplinary actions or customer complaints. Fingerprinting is required under Securities Exchange Act of 1934 Rule 17f-2 for most associated persons, and results are checked against FBI records. Failure to conduct thorough pre-hire investigations can lead to violations of FINRA Rule 3110 if unqualified or statutorily disqualified individuals are hired, potentially harming investors and the integrity of the market.

FINRA Rules 3270 and 3280 require registered persons to provide written notice to their firm before engaging in outside business activities (OBA) or private securities transactions (PST). To ensure compliance, firms must implement written supervisory procedures that include a review and approval process for OBAs and PSTs. This process should assess whether the proposed activity could potentially (a) impair the registered person’s ability to perform their duties to customers or the firm, (b) present a conflict of interest, or (c) be viewed by customers or the public as part of the firm’s business. The firm must maintain records of approved and disapproved OBAs and PSTs. For PSTs, if the registered person receives compensation, the firm must supervise the transaction as if it were executed on behalf of the firm. Failure to adequately supervise OBAs and PSTs can result in disciplinary action by FINRA.

When a firm takes disciplinary action against an associated person, it must maintain detailed documentation outlining the nature of the violation, the investigative process, the findings, and the sanctions imposed. This documentation should include written notices to the associated person, any evidence gathered during the investigation (e.g., emails, transaction records, witness statements), and a record of the disciplinary hearing or review process. FINRA Procedural Rule 8310 empowers FINRA to impose sanctions for violations of its rules, ranging from censures and fines to suspensions and expulsions. The firm’s documentation serves as critical evidence in any subsequent FINRA investigation or disciplinary proceeding. Furthermore, firms have a duty to report disciplinary actions to FINRA under Rule 4530, ensuring transparency and accountability within the industry.

The annual compliance meeting should be structured to cover both firm-specific policies and procedures and regulatory CE requirements. For firm-specific training, the meeting should address recent changes in firm policies, new products or services offered, and any areas of supervisory concern identified during the year. For regulatory CE, the meeting must cover topics relevant to the registered person’s activities and responsibilities, as outlined in FINRA Rule 1240 and MSRB Rule G-3(i). This may include updates on new regulations, ethical considerations, and sales practice standards. The firm should document the topics covered, the attendees, and any assessments or evaluations conducted to ensure that registered persons understand the material. The meeting should be interactive and provide opportunities for registered persons to ask questions and clarify any uncertainties.

When delegating supervisory duties, a firm must ensure that the individuals to whom duties are delegated are appropriately registered and qualified to perform those duties. This is particularly critical when supervising other supervisory personnel or unregistered locations. FINRA Rules 3110 and 3120 require firms to establish a supervisory control system that includes written procedures for the delegation of supervisory responsibilities. These procedures should specify the scope of the delegated authority, the responsibilities of the supervisor, and the methods for monitoring the performance of the delegated duties. The firm must also conduct periodic reviews to ensure that the delegated duties are being performed effectively and that any issues are promptly addressed. The firm retains ultimate responsibility for the supervision of its associated persons, even when supervisory duties are delegated.

FINRA Rule 2090, the “Know Your Customer” rule, mandates that firms make reasonable efforts to obtain and verify essential information about each customer to understand the nature of their investment activities. The USA PATRIOT Act’s CIP requirements, under Section 326, necessitate that firms establish procedures to verify the identity of each customer opening a new account. When opening accounts for trusts and discretionary accounts, both KYC and CIP obligations become more complex. For trusts, firms must identify and verify the identity of the grantor, trustee(s), and beneficiaries. For discretionary accounts, firms must understand the investment objectives and financial situation of the beneficial owner, not just the individual exercising discretion. These requirements ensure that firms are not unwittingly facilitating money laundering or other illicit activities through complex account structures.

A Series 9/10 supervisor is responsible for ensuring that associated persons’ registrations and disclosures are current and accurate. This includes reviewing Form U4 and U5 updates, verifying appropriate registration with FINRA and state regulators, and scrutinizing disclosures related to outside business activities (OBAs). FINRA Rule 3270 mandates that registered persons provide written notice to their firm before participating in any OBA. Supervisors must evaluate these OBAs to determine if they create potential conflicts of interest, impede the associated person’s ability to fulfill their duties to customers, or violate securities regulations. Furthermore, supervisors must ensure compliance with FINRA Rule 3280 regarding private securities transactions, requiring associated persons to obtain written approval from the firm before participating in such transactions. Failure to adequately supervise these activities can lead to disciplinary action against both the associated person and the supervisor.

FINRA Rule 3110 and MSRB Rule G-27(d) both mandate that firms establish and maintain a system to supervise the activities of its associated persons and conduct internal inspections. For dual registrant firms, these rules necessitate a comprehensive supervisory system that addresses both securities and municipal securities activities. While FINRA Rule 3110 provides general supervisory requirements, MSRB Rule G-27(d) specifies the frequency and scope of internal inspections, requiring inspections of each office of supervisory jurisdiction (OSJ) at least annually and branch offices at least every three years. The inspection must review for compliance with MSRB rules, including suitability, fair pricing, and disclosure requirements specific to municipal securities. A Series 9/10 supervisor must ensure that the firm’s supervisory procedures and internal inspection program adequately address both FINRA and MSRB requirements, tailoring the inspection scope to the specific activities conducted at each location.

Verifying the qualifications of a new hire involves several critical steps. First, a thorough pre-hire investigation must be conducted, including a review of the candidate’s Form U4, Form U5, and CRD record. Fingerprinting is mandatory under SEC Rule 17f-2, and the results must be checked against FBI databases. The supervisor must confirm that the individual possesses the appropriate registrations (state and FINRA) for their intended role. Crucially, the supervisor must determine if the candidate is subject to a statutory disqualification as defined in Section 3(a)(39) of the Securities Exchange Act of 1934. This includes past securities violations, felony convictions within the past ten years, and certain injunctions or orders issued by the SEC or other regulatory bodies. If a potential statutory disqualification exists, the firm must follow the procedures outlined in SEC Rule 19h-1, which may involve notifying the SEC and applying for relief from the disqualification. Failure to identify and address a statutory disqualification can result in severe regulatory penalties.

FINRA Rule 8210 grants FINRA the authority to require associated persons to provide information, testimony, and allow inspection and copying of books and records during an investigation. If an associated person refuses to comply with a request under Rule 8210, the Series 9/10 supervisor has a responsibility to escalate the matter to the firm’s compliance department and legal counsel immediately. The supervisor must document the refusal and the steps taken to address it. The associated person’s refusal can be considered a violation of FINRA rules, potentially leading to sanctions under FINRA Rule 8310, including suspension, expulsion, and monetary fines. Furthermore, the supervisor’s failure to adequately address the associated person’s non-compliance could also result in disciplinary action against the supervisor for failing to supervise. The firm may also be compelled to take legal action to enforce FINRA’s request.

FINRA Rule 3310 mandates that every member firm establish and implement a written AML Compliance Program. This program must be approved in writing by senior management and must include, at a minimum: (1) the designation of a qualified AML Compliance Officer; (2) the establishment of internal policies, procedures, and controls designed to detect and prevent money laundering; (3) independent testing of the program’s effectiveness; (4) ongoing training for all appropriate personnel; and (5) customer identification and verification procedures that comply with the USA PATRIOT Act. A Series 9/10 supervisor plays a crucial role in ensuring the program’s effectiveness by monitoring customer account activity for suspicious transactions, ensuring that associated persons are properly trained on AML procedures, and promptly reporting any potential violations to the AML Compliance Officer. The supervisor must also ensure that the firm adheres to its Customer Identification Program (CIP) requirements and properly documents all customer interactions.

FINRA Rule 3110(b)(5) and MSRB Rule G-27(c)(i)(B) both require supervisors to establish and maintain written procedures for reviewing customer complaints. A Series 9/10 supervisor must ensure that all written customer complaints are promptly reviewed and investigated. The review must include an assessment of the validity of the complaint, the potential impact on other customers, and the need for corrective action. All customer complaints must be documented, including the date received, the nature of the complaint, the associated person involved, and the resolution. FINRA Rule 4513 requires firms to maintain records of written customer complaints for at least four years. Furthermore, FINRA Rule 4530 requires firms to report certain customer complaints to FINRA, including those involving allegations of fraud or violations of securities regulations. The supervisor must ensure that all required reports are filed accurately and timely. Failure to properly review and report customer complaints can result in disciplinary action.

FINRA Rule 3210 requires associated persons to obtain their firm’s prior written consent before opening or maintaining an account at another broker-dealer or financial institution where securities transactions can be executed. The Series 9/10 supervisor is responsible for reviewing the associated person’s request, assessing potential conflicts of interest, and granting or denying consent. Potential conflicts of interest include front-running, insider trading, and unauthorized trading. If consent is granted, the supervisor must ensure that the associated person provides duplicate account statements to the firm. The supervisor must then regularly review these statements for any suspicious activity or violations of firm policies and securities regulations. The supervisor must also consider whether the associated person’s activities at the other firm could create a distraction or impede their ability to fulfill their responsibilities to the firm’s customers. Failure to adequately supervise these accounts can expose the firm to significant regulatory and legal risks.

FINRA Rule 3110, which outlines supervisory responsibilities, is directly relevant to the review of retail communications, especially when those communications include claims about professional certifications and designations. A Series 9/10 supervisor must ensure that all such claims are accurate, not misleading, and presented in a fair and balanced manner, as stipulated by FINRA Rule 2210 regarding communications with the public. Specifically, the supervisor should verify that the registered representative actually holds the claimed certification or designation and that it is currently active and in good standing. This verification process should involve checking with the certifying or designating organization directly, as well as reviewing any internal firm records related to the representative’s qualifications. The supervisor must also ensure that the communication clearly and accurately describes the scope and limitations of the certification or designation, avoiding any implication that it represents expertise beyond what is actually conferred. Furthermore, the supervisor should be aware of FINRA’s guidance on the use of professional designations, which prohibits the use of designations that are self-conferred, lack legitimate educational or experience requirements, or are otherwise misleading. If a designation is deemed inappropriate, the supervisor must prohibit its use in retail communications. The supervisor’s review should be documented, including the steps taken to verify the accuracy and appropriateness of the claimed certifications and designations. Failure to adequately supervise in this area could result in disciplinary action against both the representative and the supervisor, as well as potential harm to investors who rely on misleading information.