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 need a Registered Options Principal (ROP), and the supervisory-control rule tests whether that whole system actually works.
The whole unit on one sheet: how supervision is structured, who approves what, and the deadlines the exam loves.
The Supervisory Chain
- Supervisory system: must be reasonably designed to achieve compliance (not a guarantee of perfection). Includes WSPs, designated supervisory personnel, and each registered person assigned to an appropriately registered supervisor. Cannot be delegated to unregistered persons.
- 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.
The One-Liners That 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; options accounts need a Registered Options Principal (ROP), not just any principal.
- Margin needs approval AND signed agreements (margin agreement plus hypothecation consent). Approval alone is not enough.
- 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 for retail; hold the order to the next day and full written discretionary authority is required.
- 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).
Numbers to Lock In
| 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 | 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 What
| Account Type | Who Must Approve | Extra Requirement |
|---|---|---|
| Options | Registered Options Principal (ROP), Series 4 | 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 delivered and acknowledged |
| Municipal | Municipal securities principal (Series 53) or general securities principal (Series 24) | Daily review of muni transactions |
Safeguarding 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.
Top Gotchas
- "Reasonably designed" is not "guarantees compliance": a firm with a solid, implemented system can stay compliant even after a violation.
- Options accounts need a Series 4 ROP; a Series 24 general securities principal alone is not sufficient.
- 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 do not reflect current business (for example, adding options and never updating) equal 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 WSPs kept at each OSJ, and then tests it under the supervisory-control rule with an annual report to senior management. A registered principal approves new accounts, an ROP 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? This is a condensed summary. If it is not enough, read the full Account Supervision and Approvals unit for the complete lesson.