Series 24 — General Securities Principal — All Questions

Under FINRA Rule 3110, a broker-dealer's supervisory system must, at a minimum, include:

• a.A guarantee that no rule violations will ever occur
• b.Written supervisory procedures and the designation of qualified principals to carry them out✓
• c.Daily approval of every trade by the firm's CEO
• d.Approval of the firm's business plan by the SEC

Rule 3110 requires a supervisory system reasonably designed to achieve compliance, including written supervisory procedures (WSPs) and designated, appropriately registered principals. A system cannot guarantee zero violations, and there is no requirement for CEO approval of every trade or SEC approval of the business plan.

The SEC's net capital rule (Rule 15c3-1) is primarily designed to ensure that a broker-dealer:

• a.Earns a minimum level of annual profit
• b.Charges customers uniform commission rates
• c.Maintains enough liquid assets to wind down without harming customers✓
• d.Holds all customer securities in physical certificate form

The net capital rule requires a firm to keep minimum net liquid assets so that, if it fails, it can meet obligations and liquidate in an orderly way without loss to customers. It does not mandate profits, set commission rates, or require physical certificates.

The SEC customer protection rule (Rule 15c3-3) requires a firm to safeguard customer assets primarily through:

• a.The reserve formula and possession-or-control requirements for customer cash and fully paid securities✓
• b.Purchasing insurance from a private carrier for each account
• c.Holding all customer funds in the firm's operating account
• d.Reporting each customer's tax basis to the IRS

Rule 15c3-3 protects customers by requiring firms to maintain a special reserve bank account under the reserve formula and to keep fully paid and excess-margin securities in the firm's possession or control. Commingling customer funds with firm operating funds would violate the rule.

Under FINRA Rule 2210, a retail communication that promotes a specific investment product must generally be:

• a.Filed with the SEC before first use in all cases
• b.Sent only to institutional investors
• c.Kept confidential and never retained
• d.Approved by a principal before it is used or filed✓

Retail communications generally require principal approval before first use (or filing). They must be fair, balanced, and not misleading, and firms must keep records of them. Institutional communications and certain correspondence have different, lighter requirements.

Under FINRA Rule 3310, a firm's anti-money-laundering program must be:

• a.Approved by FINRA staff before adoption
• b.Approved in writing by a member of senior management✓
• c.Reviewed only when a customer is suspected of a crime
• d.Limited to accounts of foreign nationals

Rule 3310 requires the AML program to be approved in writing by senior management and to include a designated AML officer, a customer identification program, ongoing monitoring, independent testing, and SAR filing. It applies to the firm's business generally, not only to foreign accounts.

SEC Rules 17a-3 and 17a-4 require that certain electronic records be preserved:

• a.In any editable format the firm prefers
• b.For no more than 90 days
• c.In a non-rewriteable, non-erasable (WORM) format for the required retention period✓
• d.Only at the firm's clearing bank

Rules 17a-3 and 17a-4 dictate which records must be made and how long they must be kept, and they require electronic records to be stored in a non-rewriteable, non-erasable (WORM) format so they cannot be altered. Retention periods commonly run three to six years.

A principal reviewing the firm's compliance program discovers the WSPs have not been updated after a major rule change. The most appropriate action is to:

• a.Revise the written supervisory procedures to reflect the new rule and document the change✓
• b.Wait until the next annual cycle to make any changes
• c.Delete the outdated procedures without replacement
• d.Refer the matter to the SEC for approval before acting

Supervisory procedures must be kept current so the system remains reasonably designed to achieve compliance. When rules change, the principal should promptly amend the WSPs and document the update rather than waiting or leaving a gap.