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 Rule 3110's requirement that a named, registered principal takes responsibility for the action.

How does a principal approve a new account under FINRA Rule 4512?

Under FINRA Rule 4512(a)(1)(B), 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.

Three 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 documented in writing; electronic signatures are acceptable when the firm's system captures date, identity, and the item approved

Exam Tip: Gotchas

• The principal signature under Rule 4512 IS the supervisory approval Function 2.4 is about. That signature is the embodiment of the 3110 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 (FINRA Rule 4515):

• 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 SEA Rule 17a-4

Discretionary authority (FINRA Rule 3260):

• 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 (FINRA Rule 2165):

• 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

• Rule 4515 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 under FINRA Rule 3110?

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 under FINRA Rule 3110?

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.

Rule 3110(d) adds 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.

What is the FINRA Rule 3110 branch office inspection cycle?

The inspection cycle is a common exam point. Memorize the one-year versus three-year split.

Other inspection requirements:

• Inspection reports must be written and reviewed
• Deficiencies must be addressed
• Unannounced inspections are required where a risk-based analysis (red flags, prior findings, complaints) warrants
• The person conducting the inspection may not be assigned to that location and generally may not report to a person assigned to that location (inspector independence)

Memory Aid:

• OSJ + supervising branch = annual (one-year cycle)
• Non-supervising branch = three years (three-year cycle)
• Non-branch location = every three years (presumed) (three-year cycle, risk-based schedule)

Exam Tip: Gotchas

• Inspector independence is required. A branch inspection generally cannot be performed by someone assigned to that office or someone who reports to someone assigned to that office. The rule is aimed at preventing self-review. A branch manager cannot inspect their own branch.

What are the most tested supervisory approval and review rules?

Exam Tip: Gotchas

• Rule 4512 principal signature = new account approval. Without the registered principal's signature, the account is not properly opened.
• Rule 4515 requires the principal be "personally informed of the essential facts" before approving a name or designation change, not just handed a form.
• Rule 3260 discretionary authority 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.
• Inspection cycle: annual for OSJ and supervising branches; every three years for non-supervising branches and non-branch locations. The most common trap is mixing up which office type gets which cycle.