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, registered principal takes responsibility for the action.

How does a principal approve a new account 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 registered principal accepting the account. This is the core supervisory approval Function 2.4 tests.

Several facts matter for the exam:

• The approving principal must be appropriately registered for the type of business in the account (a Series 26 principal for investment-company and variable-contracts accounts)
• The signature confirms the firm's 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)
• Approval is given promptly and documented in writing; electronic signatures are acceptable when the firm's system captures date, identity, and the item approved
• The approval requirement applies to the firm's new accounts whether they are opened in person, by mail, or online

Exam Tip: Gotchas

• The principal signature under the customer account information rule IS the supervisory approval Function 2.4 is about. That signature is the embodiment of the supervision rule's supervisory system for account opening. Without it, the account is not properly opened under FINRA rules.

What principal approvals are required for changes to existing accounts?

Ongoing account changes require the same principal-approval discipline as the initial opening.

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 firm must accept the account in writing via a registered principal before exercising discretion
• A registered principal 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.
• 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

• Customer account information rule principal signature = new account approval. Without the registered principal's signature, the account is not properly opened.
• 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 via a registered principal. 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. A registered principal approves new accounts (promptly, in writing, however the account is opened), and the firm keeps account information current and documents ongoing changes per its procedures.