Quick Answer
Every firm must maintain a reasonably designed supervisory system with written supervisory procedures (WSPs), designated principals, and each rep assigned to a supervisor. A registered principal approves new accounts, options accounts are approved by the branch office manager, an ROP, or a General Securities Sales Supervisor, and the supervisory-control rule tests whether that whole system actually works.
The whole unit on one sheet: supervision structure, approval authority, and key deadlines.
How Is the Supervisory System Structured?
- Supervisory system: must be reasonably designed to achieve compliance. Includes WSPs, designated supervisory personnel, and each registered person assigned to an appropriately registered supervisor. Cannot be delegated to unregistered persons, except that certain correspondence-review functions may be delegated while the supervisor stays ultimately responsible.
- Principals: the firm designates an appropriately registered principal for each business type; each Office of Supervisory Jurisdiction (OSJ) needs at least one on-site principal.
- WSPs (written supervisory procedures): name the specific individual, the activity, the frequency, and how each review is documented; kept current at each OSJ.
- Supervisory-control rule: the "supervision of supervision": a principal identified to FINRA tests and verifies the system and reports to senior management at least annually.
Which One-Liners Win Points?
- Every OSJ is a branch office, but not every branch office is an OSJ. The OSJ marker is new account approval authority and/or supervision of other offices.
- New accounts are approved by a registered principal. For options, if the branch manager isn't the approver, an ROP or GSSS must sign off within 10 business days.
- Margin needs approval AND signed agreements, secured promptly after the first trade.
- Discretionary authority must be in writing BEFORE any discretionary trading, must name a specific individual, and each order still needs prompt principal approval.
- Time-and-price discretion is same-day only by default; hold the order to the next day and full written discretionary authority is required, unless the customer already gave a specific written, signed, dated extension, or the institutional not-held GTC exception applies.
- The supervisory-control annual report goes to senior management, not to FINRA.
- The customer-protection rule is an SEC rule (FINRA enforces it through inspections).
Which Numbers Matter Most?
| Item | Who / What | Value |
|---|---|---|
| OSJ / supervisory branch inspection | Internal inspection | at least annually |
| Non-supervisory branch inspection | Internal inspection | at least every 3 years |
| Review applicant's Form U5 (only if previously registered) | Hiring firm | within 60 days |
| Verify Form U4 | Hiring firm | within 30 calendar days |
| Suspicious Activity Report threshold | Firm files with FinCEN | funds of at least $5,000 |
| Free-riding freeze (cash account) | Regulation T | 90-day freeze |
| Pattern day trader minimum equity | Margin account | at least $25,000 at all times |
| Pattern day trade trigger | Margin account | 4+ day trades in 5 business days |
| Enhanced supervisory-control report | Large firms (prior-year FOCUS) | $200 million+ gross revenue |
| Carrying firm ACATS validation | Account transfer | within 1 business day |
| ACATS transfer completion | After validation | within 3 business days |
Who Approves Each Account Type?
| Account Type | Who Must Approve | Extra Requirement |
|---|---|---|
| Options | Branch office manager, ROP (Series 4), or General Securities Sales Supervisor | Review financial status, objectives, and options experience |
| Margin | Principal | Signed margin agreement plus hypothecation consent |
| Discretionary | Principal (written acceptance) | Prior written authorization naming an individual |
| Day trading | Principal | Written risk disclosure furnished before opening (not signed) |
| Municipal | Municipal securities principal (Series 53) for overall supervision; a Series 24 has only a narrow books-and-records/new-account role | Daily review of muni transactions |
How Must Firms Safeguard Customer Assets?
- Customer-protection rule: the firm must keep physical possession or control of fully paid and excess margin securities and cannot use them for its own trading.
- Special Reserve Bank Account for the exclusive benefit of customers holds cash or qualified securities to cover net cash owed to customers.
- Drawing a check from a customer account needs specific prior written authorization; a general trading authorization is not enough.
Which Gotchas Trip Students Up?
- "Reasonably designed" is not "guarantees compliance": a firm with a solid, implemented system can stay compliant even after a violation.
- A Series 24 general securities principal alone cannot approve an options account.
- Municipal securities transactions are reviewed daily, more frequent than the general review requirement.
- Free-riding is a 90-day freeze, not a closure: the customer can still trade but must fully pay on the trade date.
- Tipping off a customer that a Suspicious Activity Report was filed is prohibited, even if the customer asks directly.
- An OFAC Specially Designated Nationals (SDN) match requires the firm to block AND report, not just one.
- Outdated WSPs that ignore a new business line (e.g., adding options) are a violation.
- The $200 million large-firm threshold uses the prior calendar year FOCUS report, not the current year.
One-Breath Recap
A firm builds a reasonably designed supervisory system, staffs it with the right principals, writes it down in current written supervisory procedures kept at each Office of Supervisory Jurisdiction, and then tests it under the supervisory-control rule with an annual report to senior management. A registered principal approves new accounts, a branch office manager, a Registered Options Principal, or a General Securities Sales Supervisor approves options accounts, munis get daily review, and customer assets stay segregated under the SEC customer-protection rule. Learn who approves what and the inspection and hiring deadlines, and this unit answers itself.
Need more than the recap? Read the full Account Supervision and Approvals unit.