- A branch manager of a state-registered broker-dealer is also a registered agent. The branch manager noticed that one agent in the branch was generating an unusually large number of trades in elderly customers' accounts but did not investigate or report it. The churning was later found to violate the Uniform Securities Act. Which statement best describes the branch manager's exposure under the Act?
Answer: The branch manager is jointly liable if the manager materially aided the violations and knew or should have known of them.
Under USA § 410, control persons and persons who materially aid a violation are jointly liable unless they did not know and could not reasonably have known of the conduct. The branch manager saw red flags and failed to investigate, so the ignorance defense is unavailable. Execution of the trades is not required, sharing commissions is not required, and the manager is not strictly liable merely because of a supervisory title.
A broker-dealer's written supervisory procedures require each agent to obtain the branch manager's prior written approval before participating in any private securities transaction. An agent nevertheless sells limited partnership interests in an unaffiliated issuer to several firm customers, using firm telephones and customer records, and does not tell the firm. Two customers complain to the branch manager that the agent promised guaranteed returns. The manager takes no action and does not report the complaints to the compliance department. The firm discovers the sales only during its next annual inspection.
Which statement best describes the supervisory consequences? Answer: The manager may be disciplined for disregarding the complaints, and the firm may be disciplined because the supervisory system was not reasonably enforced.
Governing authority: FINRA Rule 3110 and FINRA Rule 3280. A broker-dealer's supervisory system must be not only written but also reasonably enforced. The branch manager received customer complaints describing a clear red flag and failed to investigate or report them, so the manager may be disciplined for failure to supervise. The firm is not excused merely because its procedures look adequate on paper; the manager's failure means the firm's supervisory system was not reasonably enforced, and final responsibility rests with the member. The manager's lack of participation or compensation is not a defense, and the duty to act is not limited to procedures that expressly assign complaint review to the manager.
- A state-registered broker-dealer files an agent registration application for a newly hired individual on October 15. The application remains pending; no denial order is in effect and no proceeding is pending, and the Administrator has not set an earlier effective date. To satisfy its obligation to supervise the new agent, when may the broker-dealer permit the individual to begin soliciting securities transactions?
Answer: At noon on the thirtieth day after filing, unless the Administrator sets an earlier effective date.
Under the Uniform Securities Act, an agent registration becomes effective at noon on the thirtieth day after filing if no denial order is in effect and no proceeding is pending; the Administrator may set an earlier effective date. Until that effective date, the individual is not registered, so the broker-dealer may not permit the individual to solicit securities transactions. Filing the application alone does not make registration immediately effective, and a registered principal's review of the individual's orders cannot substitute for registration. The Administrator need not issue a written order approving the application; it becomes effective by operation of law under the statutory conditions. The statement that a properly completed application is effective unless the Administrator objects within ten business days is not the state agent-registration timing rule.
An agent of a broker-dealer registered in the state sold customers unregistered interests in a start-up company and deposited the proceeds in his personal account. The broker-dealer's written supervisory procedures required the branch manager to review the agent's trade blotters monthly and to investigate customer complaints, but for a year the manager did neither, and a customer complaint about missing funds went unanswered. The broker-dealer had no actual knowledge of the sales. The Administrator, finding that it is in the public interest, begins a proceeding to suspend the broker-dealer's registration.
Under the Uniform Securities Act, which statement is correct regarding the proceeding against the broker-dealer? Answer: The Administrator may suspend the broker-dealer's registration because its failure to enforce its own procedures is a failure reasonably to supervise its agent.
Uniform Securities Act § 204(a)(2), failure reasonably to supervise. The Administrator may deny, suspend or revoke a registration only if the order is in the public interest and a statutory ground exists; one ground is that a broker-dealer has failed reasonably to supervise its agents. The firm's procedures required monthly blotter review and complaint investigation, the manager performed neither for a year, and a complaint went unanswered, so supervision was not reasonable, and the Administrator has found the public interest. The statement that the firm made no sales and lacked actual knowledge misses that the ground is the firm's own supervisory failure, which needs no knowledge. The statement that only customers may pursue the firm confuses civil liability under § 410 with the Administrator's separate administrative authority. The statement that no public-interest finding is needed drops the first of the two conditions that every denial, suspension or revocation requires.
An agent of a broker-dealer plans to serve as a paid member of the board of directors of a local community bank. The position is unrelated to the broker-dealer and will not involve soliciting brokerage business. The agent does not mention the position to his branch manager.
Under FINRA Rule 3270, which statement is correct? Answer: The agent must provide prior written notice to the broker-dealer before accepting the directorship, even though it is unrelated to the firm.
Governing authority: FINRA Rule 3270, a FINRA (self-regulatory organization) rule. A registered person must give the member firm prior written notice before engaging in any outside business activity in which the person is an employee, independent contractor, sole proprietor, officer, director or partner, or receives compensation. A paid bank directorship is such an activity, so prior written notice is required even though the position is unrelated to securities and involves no customers. The rule requires notice, not the firm's approval; the firm must evaluate the activity and may restrict or prohibit it. The statement that no notice is needed because the activity is unrelated ignores that the rule covers any outside business activity. Notice goes to the employing firm, not to the Administrator, and the rule sets no 15-day period. Whether the bank is a customer or the agent receives securities-related compensation does not remove the notice requirement. (FINRA Rule 3290 replaces Rule 3270 from October 25, 2027.)
- An agent registered with a state-registered broker-dealer resigns on June 1. Beginning June 15, without the former broker-dealer's knowledge, the agent accepts orders from former customers and sends them to a competing broker-dealer. The former broker-dealer notifies the Administrator of the termination on July 15. Which statement is true under the Uniform Securities Act?
Answer: The agent's registration was not effective after the association ended, and both the agent and the former broker-dealer had to promptly notify the Administrator.
Under USA § 201(b), an agent's registration is not effective during any period when the agent is not associated with a registered broker-dealer or issuer, and both the agent and the broker-dealer or issuer must promptly notify the Administrator when the association begins or ends. Resignation ended the association, so the agent was unregistered when accepting orders for the competing firm; the former firm's July 15 notice was not prompt. Registration does not run to December 31 after termination, an existing customer relationship does not authorize an unregistered person to take orders, and no Administrator approval of a termination notice is required.
An individual was registered in State X as an agent of a broker-dealer (the first firm). On May 1, she terminates her association with the first firm. On May 15, she begins employment with a different broker-dealer (the second firm), also registered in State X. The second firm files a complete agent registration application for her on May 16. No denial order is in effect and no proceeding is pending, and the Administrator has not set an earlier effective date. She begins soliciting customers for the second firm on May 20.
Under the Uniform Securities Act, which statement is correct? Answer: She may not transact business for the second firm until her new registration is effective; absent an earlier Administrator order, that is noon on the 30th day after filing.
Uniform Securities Act § 201(b) and § 202(a). An agent's registration is effective only while the agent is associated with a particular registered broker-dealer, so a move to a new firm requires a registration filed by that firm. Under § 202(a), a complete application becomes effective at noon of the 30th day after filing if no denial order is in effect and no proceeding is pending, unless the Administrator sets an earlier date. The second firm filed on May 16, so she could not solicit customers on May 20. The statement that the prior registration remains effective is wrong because effectiveness depends on current association with the particular firm. Principal review of solicitations does not substitute for registration. The notice of termination and association is required but is not the equivalent of an effective registration.
A branch manager supervises an agent who fraudulently sells unregistered securities to a customer. The manager did not know about the sales and did not participate in them. However, the manager had received two earlier customer complaints describing the same pattern of conduct and had ignored them. The customer sues the manager and the broker-dealer under the Uniform Securities Act.
Which statement is correct regarding the manager's liability? Answer: The manager may be liable as a control person or material aider because he should have known of the conduct from the complaints.
Governing authority: Uniform Securities Act § 410. A supervisor who fails to act on red flags may be liable as a control person or person who materially aided the violation if he did not know but reasonably should have known of the facts. The manager received complaints describing the same pattern and ignored them, so the statutory defense is unavailable. Lack of actual knowledge or personal participation is not enough, and a financial benefit is not required.
A broker-dealer registered in the state requires each agent to certify quarterly that he has no outside securities activity, has a principal review every agent's accounts each month, and investigates every customer complaint within 10 days. The reviews and investigations were carried out on schedule. An agent nonetheless sold customers promissory notes in a fraudulent offering through a personal account at another firm, filed false certifications, and told customers not to contact the broker-dealer. No complaint or account activity at the broker-dealer suggested the sales. Finding that action is in the public interest, the Administrator moves against both the agent and the broker-dealer.
Under the Uniform Securities Act, which statement is correct? Answer: The Administrator may suspend the agent's registration but not the broker-dealer's, because the firm's supervision was reasonable and was carried out.
Uniform Securities Act § 204(a)(2), failure reasonably to supervise. The supervision ground reaches a broker-dealer that fails to supervise its agents reasonably; it does not make the firm answerable for every violation an agent commits. This firm had procedures suited to the risk, carried them out on schedule, and received no complaint or account activity pointing to the sales, which the agent concealed with false certifications, so the supervision ground is not met against the firm. The agent's willful fraud is a ground against the agent, subject to the public-interest finding. The statement that an agent's violation by itself shows failed supervision, and the statement that the firm is strictly accountable for its agents, both replace the reasonableness standard with strict liability. The statement that neither registration may be suspended because the sales went through another firm's account ignores that the agent's own fraud is a ground for action against him wherever the sales were booked.
A broker-dealer operates one branch office staffed by a branch manager who is a registered principal and also the branch's highest-producing agent. The manager personally approves every new account and order ticket of the four agents in the branch. The manager's own customer orders are executed but are not reviewed by any other principal. The firm has several other registered principals at its main office, but its written supervisory procedures name the branch manager as the sole supervisor for the branch.
Under FINRA Rule 3110, which statement is correct? Answer: The firm violates supervisory requirements because the branch manager's own customer transactions must be reviewed by another qualified principal rather than only by the manager himself.
Governing authority: FINRA Rule 3110, a FINRA (self-regulatory organization) rule rather than federal law. A member must establish and maintain a supervisory system reasonably designed to achieve compliance, and final responsibility rests with the member. A producing manager's own customer transactions must be reviewed by another qualified principal so that no one supervises his own business; the limited exception for a firm too small to provide another principal does not apply, because this firm has other principals. Written procedures and principal registration do not cure the absence of independent review. The claim that a producing manager may supervise his own business is inconsistent with the rule. The statement that a manager may not approve other agents' transactions misstates the rule; the defect here is the unreviewed own-account activity.
- Under the Uniform Securities Act, which statement is true regarding an agent of a state-registered broker-dealer after the broker-dealer's registration is revoked?
Answer: The agent's registration is not effective while the agent is not associated with a registered broker-dealer, so the agent must stop transacting securities business.
Under USA § 201, an agent's registration is association-specific: it is not effective during any period when the agent is not associated with a registered broker-dealer or issuer. Once the state-registered broker-dealer's registration is revoked, the agent is no longer associated with a registered broker-dealer, so the agent may not continue to transact securities business as an agent. The registration does not remain effective until December 31, there is no 30-day wind-down period, and a separate order against the agent is not what makes the registration ineffective.
- An examination of a state-registered broker-dealer finds that one of its agents violated the Uniform Securities Act by churning the accounts of eleven customers. The firm's supervisory system consisted of an annual email reminding agents to follow securities laws; it did not review recommendations, account activity, or complaints, and the principal had no actual knowledge of the churning. Under the Uniform Securities Act, which statement is true?
Answer: The Administrator may discipline the firm if its supervision was unreasonable, even though the principal had no actual knowledge of the churning.
Under USA § 204, the Administrator may discipline a broker-dealer when it is in the public interest and a statutory ground exists, including failure reasonably to supervise a person who commits a securities-law violation. The firm's annual-email-only system was not reasonably designed to prevent churning, and the principal's lack of actual knowledge is not a defense to an unreasonable supervisory system. Customer loss is not required for administrative discipline, and state supervision obligations are not limited to the Investment Advisers Act.
An agent obtains written discretionary authority from a customer and immediately begins placing trades in the customer's account. The broker-dealer's branch manager is aware of the arrangement but has not reviewed or accepted the account in writing, and no principal has approved any of the trades.
Under FINRA Rule 3260, which statement is correct? Answer: The arrangement violates the rules because the firm must accept the discretionary account in writing and principals must promptly review the orders.
Governing authority: FINRA Rule 3260. Discretionary trading requires both written customer authorization and written acceptance of the account by the member before the first discretionary order. In addition, each discretionary order must be promptly reviewed and approved by a principal. The customer's written authorization alone is not enough; the manager's awareness and later review do not satisfy the preconditions. Customer initials on order tickets are not the required control; the principal approval is.
