Quick Answer
Supervision doesn't stop once an account opens. Firms must inspect offices on a set schedule, review transactions in firm and associated-person accounts for insider trading or manipulation, investigate new hires, and conduct an annual compliance review of the whole business, separate from the annual compliance meeting each registered person attends.
The supervision rule imposes these ongoing obligations for inspections, transaction monitoring, hiring due diligence, and annual compliance reviews.
How Often Must a Firm Inspect Its Offices?
Firms must conduct internal inspections of offices on a regular schedule. The required frequency depends on the office type:
| Office Type | Minimum Inspection Frequency |
|---|---|
| Office of Supervisory Jurisdiction (OSJ) | At least annually |
| Supervisory branch office | At least annually |
| Non-supervisory branch office | At least every 3 years |
| Non-branch location | On a regular periodic schedule |
What Inspections Must Examine
- Safeguarding of customer funds and securities
- Maintenance of books and records
- Supervision of supervisory personnel
- Fund and securities transmittal procedures with customer confirmation
- Customer account information changes with documented customer verification
Exam Tip: Gotchas
- OSJs and supervisory branch offices require annual inspections, but non-supervisory branch offices only need inspections every 3 years.
- Every inspection must be reduced to a written report and kept on file for at least three years, except a non-branch location on a longer-than-three-year cycle, whose report stays on file until the next inspection report is written
- The person conducting the inspection generally must be independent of the location being inspected; a firm too small to arrange that must document the factors behind the exception and how the inspection otherwise satisfies the rule
Which Accounts Get Reviewed for Insider Trading or Manipulation?
Members must review securities transactions for potential insider trading or manipulative conduct in these account types:
- Member firm accounts (proprietary accounts)
- Accounts introduced or carried by the member where associated persons have a beneficial interest
- Associated person accounts disclosed under the outside-account-disclosure rule
- Covered accounts: the associated person's spouse; a child who resides in the same household as or is financially dependent on the associated person; and any other related individual (or other person) over whose account the associated person has control
Exam Tip: Gotchas
- Transaction monitoring extends to associated persons' family members and related accounts, not just customer accounts.
- If this review identifies a trade that may violate insider-trading or manipulation rules, the firm must promptly open an internal investigation into it
What Must a Firm Check Before Hiring?
Before hiring, a firm must investigate an applicant's character, reputation, and qualifications:
| Requirement | Deadline |
|---|---|
| Review applicant's most recent Form U5 (if previously registered with FINRA or another SRO) | Within 60 days |
| Verify accuracy of initial or transfer Form U4 | Within 30 calendar days |
- Form U5 is the Uniform Termination Notice. It shows why the applicant left their previous firm and any disclosed regulatory events.
- Form U4 is the Uniform Application for Securities Industry Registration. It contains the applicant's background and disclosure information
- Verifying the Form U4 requires, at minimum, a search of reasonably available public records to confirm the information is accurate and complete
Exam Tip: Gotchas
- The firm must review the Form U5 within 60 days and verify the Form U4 within 30 days. The Form U5 review only applies when the applicant was previously registered with FINRA or another self-regulatory organization; if the firm cannot obtain it, demonstrating reasonable efforts to do so satisfies the rule.
What Is the Annual Compliance Review, and How Is It Different From the Compliance Meeting?
- Firms must conduct a review of their business at least annually on a calendar-year basis
- The review must be reasonably designed to detect and prevent violations of securities laws and FINRA rules
- The review covers the activities of each office, includes a periodic examination of customer accounts, and the firm must keep a written record of the date of each review and inspection
- This is distinct from the supervisory-control annual report; this is a broader business compliance review
Exam Tip: Gotchas
- Do not confuse the annual compliance review of the business (above) with the annual compliance meeting (interview): the meeting is the separate requirement that each registered person participate, at least annually, in an interview or meeting at which compliance matters are discussed.
What Should You Check on Exam Day?
- Can you match each office type (OSJ, supervisory branch, non-supervisory branch, non-branch) to its minimum inspection frequency?
- Do you know which four categories of accounts fall under the transaction-review requirement, including the definition of a "covered account" (spouse, resident/dependent child, other related or controlled person)?
- Can you recall the two hiring-related deadlines: Form U5 review within 60 days, Form U4 verification within 30 calendar days?
- Do you know the annual compliance review is a broader business review distinct from both the supervisory-control annual report and the annual compliance meeting each registered person attends?