Required Reviews, Approvals, and Documentation

Now that the supervisory system framework is in place, this section covers the specific written approvals and documented reviews that make an account legally open, an account change valid, and a transaction defensible. These are the concrete signatures Function 2.4 tests.

Every written approval in this section traces back to the supervision rule's requirement that a named person takes responsibility for the action. Which person depends on the rule.

Who signs the new-account acceptance record under the customer account information rule?

Under the customer account information rule, the member must maintain a record of each account containing the signature of the partner, officer, or manager showing that the account was accepted under the firm's own policies and procedures.

Several facts matter for the exam:

• This general acceptance signature is separate from any product-specific supervisory review, which an appropriately registered principal performs (a Series 26 principal for investment-company and variable-contracts business)
• The signature confirms the firm's written supervisory procedures (WSPs) for account opening have been followed: Customer Identification Program (CIP) completed, Know Your Customer (KYC) essential facts documented, suitability profile captured, and required disclosures delivered (Reg BI, Form CRS, mutual fund prospectus, variable contract prospectus)
• Acceptance is documented in writing; electronic signatures are acceptable when the firm's system captures date, identity, and the item approved
• The requirement applies to the firm's new accounts whether they are opened in person, by mail, or online

Exam Tip: Gotchas

• The account-information rule names a partner, officer, or manager, not "a registered principal." This is the single most reversed fact in this unit. An answer choice saying a registered principal must sign the general new-account acceptance record is naming the wrong actor.
• Do not read "not a principal" as "no supervision." The person still signs under the firm's written procedures, and any product-specific review still belongs to a properly registered principal.

What approvals are required for changes to existing accounts?

Ongoing account changes require written approval, but the rules name different approvers.

Changes in account name or designation (the customer account records rule):

• No change in account name or designation may be made unless authorized by a qualified and registered principal
• The principal must be personally informed of the essential facts relied upon
• The principal must document approval in writing on the order or similar record
• The essential facts relied upon must be preserved per the broker-dealer recordkeeping rule

Discretionary authority (the discretionary-accounts rule):

• The firm must receive prior written authorization from the customer
• The member, or a duly designated partner, officer, or manager, must accept the account in writing before anyone exercises discretion
• That same person must approve every discretionary order promptly

Other account changes requiring review:

• New trusted-contact information
• Beneficiary changes
• Power of attorney (POA) filings
• Address changes

These are documented and reviewed per the firm's WSPs.

Senior-investor exploitation holds (the senior-investor protection rule):

• A firm may place a temporary hold on a disbursement or transaction from the account of a specified adult when the firm reasonably believes financial exploitation has occurred, is occurring, has been attempted, or will be attempted
• The hold must be approved consistent with the firm's WSPs

Exam Tip: Gotchas

• Account name or designation changes cannot happen without a registered principal "personally informed of the essential facts." The principal cannot rubber-stamp the change based on a summary slip; the rule requires actual knowledge of why the name or designation is changing.

How must a firm review correspondence and internal communications?

The firm must have procedures for the review of written correspondence (including electronic) and internal communications relating to the firm's investment banking or securities business.

Key requirements:

• Review must be conducted by a registered principal
• Review must be evidenced in writing (paper or electronic)

Procedures must be designed to identify:

• Customer complaints
• Customer instructions
• Customer funds and securities
• Communications requiring review under other FINRA rules or federal securities laws

A principal may delegate specific review functions to non-registered persons. The principal remains responsible for the performance of those reviews.

Exam Tip: Gotchas

• Correspondence review is a registered-principal function. Delegation of the mechanical review to non-registered staff is permitted, but the named principal retains responsibility. "I did not see it; the mailroom clerk reviewed it" is not a defense.

How must a firm review transactions for compliance?

The firm must have procedures for the review by a registered principal, evidenced in writing, of all transactions relating to the firm's investment banking or securities business.

The supervision rule's manipulation-detection provisions add a specific obligation: procedures reasonably designed to identify and investigate potentially manipulative and suspicious trading, including potential:

• Insider trading
• Front-running

The rule applies to the accounts of:

• Associated persons and their family members
• Customer accounts

Questionable trades trigger a prompt internal investigation.

How does supervision cover ongoing account maintenance?

Supervision does not stop once the account is open. The firm keeps the account's information current and reviews ongoing changes per its written supervisory procedures.

• Keep customer information current. When a customer reports a change in financial situation or investment objectives, the firm updates the account record so recommendations stay suitable.
• Holding of mail. A firm may hold a customer's mail for a stated period when the customer instructs in writing and the firm follows its procedures, including keeping the ability to deliver important information to the customer. A held-mail arrangement does not remove the firm's duty to send statements at the required frequency, and a firm may never decide on its own to withhold statements.
• Third-party authority. A power of attorney grants written authority to act on the account and must be documented per the firm's procedures. This is different from a trusted contact, who may be reached about the account but has no authority to transact.
• Address changes. Routine address changes are processed and documented per the firm's procedures; firms commonly confirm the change with the customer to guard against unauthorized changes.

Exam Tip: Gotchas

• Account maintenance is supervised, not just account opening. Name or designation changes, acceptance of discretion, and powers of attorney all require principal action; routine updates like address or objective changes are documented per the firm's procedures.

What are the most tested supervisory approval and review rules?

Exam Tip: Gotchas

• Each rule names its own approver. The customer account information rule names a partner, officer, or manager for the general new-account acceptance record. The customer account records rule names a qualified and registered principal for a name or designation change. The discretionary-accounts rule names the member or a designated partner, officer, or manager. Correspondence and transaction review belong to a registered principal.
• The customer account records rule requires the principal be "personally informed of the essential facts" before approving a name or designation change, not just handed a form.
• The discretionary-accounts rule requires BOTH a customer's prior written authorization AND the firm's written acceptance. One without the other fails the rule.
• Correspondence review is a principal function. Delegation to non-registered staff is allowed, but the principal is still on the hook.
• Supervision spans account opening and maintenance. The firm keeps account information current and documents ongoing changes per its procedures.

What Should You Check on Exam Day?

• Can you name who signs the general new-account acceptance record: a partner, officer, or manager, not "a registered principal"?
• Do you know that a name or designation change requires a qualified, registered principal who is personally informed of the essential facts, not just a summary slip?
• Can you state the two-part test for discretionary authority: the customer's prior written authorization AND the firm's written acceptance before anyone exercises discretion?
• Do you know that a principal may delegate correspondence review to non-registered staff but still remains responsible for it?
• Can you explain why holding a customer's mail never removes the firm's duty to send statements at the required frequency?