Other Account-Activity Controls

These four rules govern specific high-risk transaction types or account-management practices. Each has its own narrow scope, but the exam tests them as a group because they cover supervisory edge cases that the other recommendation rules (KYC, suitability, Reg BI, discretion) do not directly address.

Payments to Unregistered Persons

Members may not pay any commission, fee, concession, or other compensation to any person who is required to be registered but is not.

This rule prevents:

• Paying a person to refer customers in exchange for a commission percentage when that person is not licensed
• Paying former employees who lost their registration for misconduct
• Paying offshore intermediaries who solicit U.S. customers without U.S. registration

The Continuing-Commission Exception

A common application is continuing commissions to terminated reps:

• A rep who is no longer registered (retired, terminated, deceased) may receive continuing commissions on business they originated while registered
• The arrangement must be in a bona fide written contract entered into while the rep was still registered
• The commissions must be on covered business performed while the rep was registered (not on new business after termination)

The terminated rep cannot continue to solicit business or service the customers; the commission stream is for past production only. If the former rep contacts customers, makes recommendations, or otherwise acts as a registered person, the firm is paying an unregistered person and violates the rule.

Think of it this way: The continuing-commission exception is a trailing payment for past work, not a backdoor to pay an unregistered ex-rep for ongoing services. The line is whether the rep is doing anything new. Servicing existing accounts post-termination is "doing something new" and is prohibited.

Exam Tip: Gotchas

• Continuing commissions require a bona fide written contract entered while the rep was still registered. A handshake agreement after termination does not satisfy the rule; the contract must predate termination.
• The terminated rep cannot continue to solicit business or service customers in exchange for the continuing commission. The exception is a trailing payment for past production only.

Holding of Customer Mail

A firm may hold customer mail for a specific time period if:

• The customer provides written instructions that include the time period
• For requests over 3 months, the customer's instructions must include an acceptable reason
• Convenience alone is NOT acceptable beyond 3 months

The firm must also verify the customer's address and contact information at reasonable intervals during the hold to ensure the customer can still be reached if needed.

Acceptable Reasons for Mail Holds Over 3 Months

Examples of acceptable reasons (longer than 3 months):

• Customer is on extended travel (more than 3 months)
• Customer is temporarily relocated for medical treatment
• Customer is deployed military with no permanent forwarding address

Convenience reasons (acceptable up to 3 months only):

• Customer wants to consolidate mail for tax-season delivery
• Customer prefers electronic-only access and wants paper mail held

Exam Tip: Gotchas

• A mail hold over 3 months requires an acceptable reason beyond convenience. A customer who simply does not want paper mail can have it held for up to 3 months; longer requires a specific reason like extended travel or military deployment.
• The firm must verify the customer's address at reasonable intervals during the hold. A firm that never re-verifies a long-term mail hold can be cited under the holding-of-customer-mail rule even if the underlying hold was authorized.

Authorization for Negotiable Instruments

A firm or associated person must obtain the customer's express written authorization before obtaining or submitting for payment any negotiable instrument (check, draft, ACH transfer) drawn on the customer's:

• Checking account
• Savings account
• Share account
• Other similar account

This rule covers situations where the firm initiates a debit from the customer's bank account, such as:

• Periodic ACH debits to fund a brokerage account from a linked bank
• Check-writing privileges where the firm clears checks against a customer's account
• Direct debits for advisory fees

Records Retention

Authorization records must be preserved for 3 years after the date the authorization expires.

Exam Tip: Gotchas

• The negotiable-instrument rule requires express written authorization, not implied or oral. A firm that initiates ACH debits based on a customer's verbal "yes" violates the rule even if the customer wanted the debit.
• Negotiable-instrument authorization records must be preserved 3 years after the authorization expires, not 3 years from creation. A multi-year ACH authorization that expires in 2030 must have records preserved through 2033.

OTC Equity Recommendation Review

Before recommending any OTC equity security (a stock that does not trade on a registered exchange and is quoted only over-the-counter), a member must:

• Review the issuer's current financial statements
• Review current material business information about the issuer
• Conclude that the available information provides a reasonable basis for the recommendation

A firm cannot make an OTC equity recommendation based on rep enthusiasm alone or on information from an issuer-paid promoter. The firm must do its own due diligence on the issuer's actual financials and current business situation.

Designated Registered Person Requirement

The firm must:

• Designate a registered person to conduct the OTC review
• Document the information reviewed, the date of review, and the reviewer's name

This documentation creates an audit trail. If a recommendation later proves problematic, the firm can demonstrate that a registered person actually reviewed the issuer's filings and reached a documented conclusion.

Delinquent-Filer Inquiry

For issuers that are delinquent in their SEC filings (current annual or quarterly reports overdue), the review must include an inquiry into the circumstances of the failure to file.

A delinquent filer is presumptively higher-risk because the firm cannot rely on current public disclosure. The inquiry might reveal that the issuer is undergoing restatement, has had auditor turnover, or has suspended operations. Without the inquiry, the firm cannot have a "reasonable basis" for the recommendation.

Think of it this way: The OTC equity review duty elevates OTC equity recommendations above ordinary suitability. For OTC stocks, the firm must do issuer-level due diligence, not just customer-level suitability. A rep who pitches an OTC stock without the firm having reviewed the issuer's financials is acting beyond what KYC, suitability, or Reg BI alone would require; the OTC equity rule imposes a separate, product-specific gating duty.

Exam Tip: Gotchas

• The OTC review duty kicks in BEFORE any recommendation of an OTC equity security. The firm cannot do the review later or rely on the rep alone; a registered person must conduct and document the review.
• For delinquent SEC filers, the review must include an inquiry into the circumstances of the failure to file. Without that inquiry, the firm has no reasonable basis for any recommendation regardless of the rep's enthusiasm.

Direct Participation Programs Suitability

A direct participation program (DPP) is a non-corporate entity (typically a limited partnership) that passes income, losses, and tax credits directly through to investors. DPPs are illiquid, complex, and high-risk.

The DPP suitability rule requires a member to have reasonable grounds to believe, based on information obtained from the prospective participant, that:

• The participant is or will be in a financial position consistent with the program's risks
• The participant has sufficient fair market net worth to sustain the risks
• The DPP is otherwise suitable

The information that must be obtained from the prospective participant includes:

• Annual income
• Net worth
• Tax status (DPPs often offer tax benefits that depend on the participant's tax bracket)
• Investment objectives
• Other information the firm needs to assess suitability

This is product-specific suitability layered on top of customer-specific suitability. For DPPs, the firm must obtain financial-position information directly relevant to the program's risk profile. A rep cannot rely on the customer's general profile; the rep must specifically assess whether the customer can absorb the risks of this particular DPP.

Exam Tip: Gotchas

• The DPP suitability rule requires obtaining specific financial information from the prospective participant, not just relying on the customer's general profile. The firm must affirmatively gather income, net worth, and tax status data tied to the DPP's risk profile.
• DPP suitability is layered on top of suitability (or Reg BI for retail customers). The firm must satisfy both. A failure of either layer is a violation.

How These Rules Cover Edge Cases

The four rules in this section cover transaction types and practices not directly addressed by the broader recommendation rules:

• The payments-to-unregistered-persons prohibition covers the compensation edge case
• The holding-of-customer-mail rule covers the mail-handling edge case (holding customer mail beyond convenience)
• The negotiable-instrument authorization rule covers the bank-account-debit edge case (negotiable instruments drawn on customer bank accounts)
• The OTC equity recommendation rule covers the OTC equity recommendation edge case (issuer-level due diligence beyond customer suitability)
• The DPP suitability rule covers the DPP suitability edge case (product-specific financial position requirements)

Exam Tip: Gotchas

• The exam often tests these rules as fact-pattern violations that look like ordinary transactions but trigger product-specific or practice-specific rules. A firm processing an OTC equity recommendation is in the OTC equity recommendation lane regardless of what KYC, suitability, or Reg BI would require.