A pattern day trader (PDT) is defined under FINRA Rule 4210 as any customer who executes four or more day trades within a five-business-day period, provided the number of day trades represents more than six percent of the customer’s total trades in the margin account for that same five-business-day period. Once a client is designated as a PDT, they must maintain a minimum equity of \(\$25,000\) in their margin account on any day they wish to day trade. This equity must be in the account prior to any day trading activities. If a PDT’s account falls below the \(\$25,000\) requirement, they will not be permitted to day trade until the account is restored to the minimum equity level. When a PDT exceeds their day trading buying power, a day trading margin call is issued. According to FINRA Rule 4210(f)(8)(B)(iv), the customer has five business days to meet this call. If the customer fails to meet the day trading margin call within this timeframe, the firm must take specific action. The rule mandates that the account’s day trading buying power be restricted to one times the maintenance margin excess for a period of 90 calendar days. The customer can still conduct other transactions on a fully paid-for basis, but their ability to engage in day trading is severely limited. This 90-day restriction remains in effect even if the customer subsequently deposits funds to meet the call. The restriction can only be lifted after the 90-day period has expired. The supervisor is responsible for ensuring this restriction is properly applied and enforced.

The supervisor’s primary responsibility is to ensure compliance with both FINRA Rule 3270 regarding Outside Business Activities (OBAs) and FINRA Rule 3210 concerning accounts at other broker-dealers. First, the supervisor must confirm that the representative, Anika, has provided the required prior written notice for her OBA as a part-time financial planner. The firm must have already assessed this OBA to determine if it would compromise Anika’s responsibilities to the firm or its customers and must have documented its review and any imposed limitations. Second, and as a separate process, the supervisor must address the request to open a securities account under Rule 3210. This requires Anika to obtain prior written consent from her employing firm before opening the account. The employing firm’s supervisor must evaluate this request, considering the potential for conflicts of interest, especially given the nature of her OBA at the same financial institution. If consent is granted, the supervisor must ensure that Anika has notified the executing firm of her association with the employing member. Furthermore, the supervisor must establish a system to receive duplicate copies of all confirmations and statements for Anika’s external account. This monitoring is crucial for supervising her trading activity and identifying any potential issues, such as front-running or other conduct that could arise from the intersection of her OBA and personal trading. The supervisor’s duty is to manage the risks presented by both activities concurrently and in accordance with distinct regulatory requirements.

The scenario describes a private securities transaction (PST) for which the associated person will receive selling compensation. Under FINRA Rule 3280, a PST is any securities transaction outside the regular course or scope of an associated person’s employment with a member firm. The rule distinguishes between transactions where the representative receives selling compensation and those where they do not. In this case, receiving an equity stake in the development company in exchange for helping to raise capital is considered selling compensation. When an associated person is to receive selling compensation for a PST, the rule imposes specific and stringent obligations on the member firm. The associated person must provide prior written notice to the member firm describing the proposed transaction in detail and their proposed role. The member firm must then explicitly approve or disapprove the representative’s participation. If the firm approves the activity, it must record the transactions on its own books and records and supervise the associated person’s participation as if the transaction were being executed on behalf of the member firm itself. This is a significantly higher supervisory burden than for an uncompensated PST or a standard outside business activity under Rule 3270.

The first step is to determine the account’s status based on the trading activity. The execution of four day trades within a five-business-day period designates the account as a “pattern day trader” (PDT) account under FINRA Rule 4210. Next, calculate the account’s equity at the beginning of the day. Initial Equity = Long Market Value (LMV) – Debit Balance (DR) \[\text{Initial Equity} = \$55,000 – \$30,000 = \$25,000\] Then, calculate the account’s equity at the end of the day after the trading loss. The realized loss of $2,000 reduces the LMV of the account. Ending LMV = Initial LMV – Realized Loss \[\text{Ending LMV} = \$55,000 – \$2,000 = \$53,000\] Ending Equity = Ending LMV – Debit Balance (DR) \[\text{Ending Equity} = \$53,000 – \$30,000 = \$23,000\] According to FINRA Rule 4210, a pattern day trader account must maintain a minimum equity of $25,000 at all times. Since the account’s ending equity of $23,000 is below this threshold, a day trading margin call must be issued for the deficiency. Deficiency = Minimum Equity Requirement – Ending Equity \[\text{Deficiency} = \$25,000 – \$23,000 = \$2,000\] The supervisor must identify that the account is now a PDT account and has fallen below the specific minimum equity requirement for such accounts. This triggers a day trading margin call. Until this call is met, the account’s day trading buying power will be restricted. This situation is distinct from a standard maintenance margin call, which is based on a percentage of the market value, or an initial Regulation T call for a new purchase. The PDT rules impose a stricter, absolute dollar minimum equity level that must be maintained.

First, determine the status of the margin account before the sale. Long Market Value (LMV) = $120,000 Debit Register (DR) = $70,000 Equity (EQ) = LMV – DR = $120,000 – $70,000 = $50,000 Next, calculate the Regulation T requirement for the initial position. Regulation T Requirement = 50% of LMV = 0.50 * $120,000 = $60,000 Compare the account’s equity to the Regulation T requirement. Since the equity of $50,000 is less than the Regulation T requirement of $60,000, the account is classified as a restricted account. Now, analyze the effect of the sale of securities within this restricted account. The client sells $12,000 worth of securities. According to Regulation T, when securities are sold in a restricted margin account, 50% of the proceeds are released to the Special Memorandum Account (SMA). The funds in the SMA represent the customer’s available buying power or cash that can be withdrawn. Calculate the amount released to SMA: Amount Released = 50% of Sale Proceeds = 0.50 * $12,000 = $6,000. This $6,000 is credited to the SMA and represents the maximum amount of cash the client can withdraw from the account following this transaction. The other 50% of the proceeds must be used to reduce the debit balance. A General Securities Sales Supervisor must understand the rules governing restricted margin accounts to ensure compliance with Federal Reserve Board Regulation T. When an account’s equity falls below the 50% initial requirement set by Regulation T, the account becomes restricted. This does not mean trading must cease, but it does impose specific rules on transactions. For withdrawals or new purchases, the concept of the Special Memorandum Account is critical. When a sale occurs in a restricted account, the firm must retain a portion of the proceeds to improve the account’s status, while a portion is made available to the client. The rule specifies that 50% of the net proceeds of any sale are credited to the SMA. This amount in the SMA can then be withdrawn as cash or used as the basis for purchasing additional securities with a value of twice the SMA amount. A supervisor’s role is to verify that these calculations are performed correctly and that any customer withdrawals are limited to the amount properly released to the SMA, preventing violations of margin regulations.

No calculation is required for this question. Under FINRA Rule 3110, a supervisor has a duty to establish and maintain a system to supervise the activities of each registered person that is reasonably designed to achieve compliance with applicable securities laws and regulations. When reviewing a discretionary account, particularly for a vulnerable client, a supervisor must be vigilant for signs of excessive trading, or churning. Churning is identified by evaluating the broker’s control over the account, the frequency of transactions in light of the customer’s financial situation and objectives, and the broker’s intent to generate commissions. The scenario presents significant red flags for churning: discretionary control, high turnover, and substantial commissions that are inconsistent with the client’s stated objective of income and capital preservation. The supervisor’s most critical initial responsibility is to investigate these red flags promptly and thoroughly. This investigation must include a direct discussion with the representative to understand the rationale behind the trading strategy. This step is fundamental to gathering facts, assessing the representative’s intent, and determining if the activity is a violation of suitability rules or standards of commercial honor before taking further disciplinary or reporting actions. Failing to investigate immediately would be a dereliction of supervisory duty.

The core of this scenario revolves around the specific eligibility requirements for a customer to use a portfolio margin account, as governed by FINRA Rule 4210 and Cboe Rule 10.4. Portfolio margining is a risk-based methodology that calculates margin requirements by analyzing the net risk of an entire portfolio of securities and options, rather than applying fixed percentages to individual positions (as in standard Regulation T margin accounts). Due to the complexity and potential for increased leverage, the eligibility criteria are stringent. A fundamental prerequisite for any customer, retail or institutional, to be approved for portfolio margining is that the customer must first be approved for writing uncovered options. This is because portfolio margining is designed to handle complex strategies that often involve short, uncovered positions. The logic is that if a client is not deemed suitable for the risks of writing naked options, they are certainly not suitable for the integrated risk management environment of a portfolio margin account. Furthermore, before the initial transaction, the member firm must provide the customer with a specific written risk disclosure statement detailing the unique characteristics and risks of portfolio margining and must receive a signed acknowledgment from the customer confirming they have read and understood these disclosures. The supervisor’s primary duty is to ensure these foundational requirements are met before granting approval.

The primary supervisory concern in this scenario is the potential for excessive trading, also known as churning, which is a serious violation under FINRA Rule 3260(a). This rule specifically prohibits registered representatives from inducing transactions in a customer account that are excessive in size or frequency in view of the financial resources and character of such account, particularly when the representative exercises discretion. The three key elements that define churning are present here: the representative has control over the account via discretionary authority, the trading activity is excessive given the client’s conservative objectives, and the activity appears to serve the representative’s interest (generating commissions) rather than the client’s. The client’s profile, an elderly individual with an objective of capital preservation and income, is fundamentally mismatched with a strategy involving frequent trading in speculative securities. A supervisor must recognize that the lack of significant capital appreciation, coupled with high transaction costs, is a major red flag for churning. The supervisor’s duty under FINRA Rule 3110 is to detect such patterns through trade blotter reviews and take immediate corrective action, which would include investigating the activity, communicating with the representative, and potentially placing restrictions on the account. This situation also represents a clear violation of the suitability obligations under FINRA Rule 2111.

Purchase Amount: \$20,000 Regulation T Initial Margin Requirement (50%): \(0.50 \times \$20,000 = \$10,000\) Unmet Reg T Call: \$10,000 Action for Unmet Call: If a customer fails to meet a Regulation T call for an initial purchase in a margin account, the firm must take action on the morning of the business day following the payment deadline (which is typically T+4). The required action is to liquidate the unpaid position. In this case, the unpaid position is the \$20,000 worth of securities purchased. Therefore, the firm must sell \$20,000 of securities. Account Restriction: Following the liquidation, the account must be restricted for 90 calendar days. This restriction means the customer cannot be extended credit and must deposit cash in the account to cover the full cost of any purchase before a buy order can be executed. Under Federal Reserve Board Regulation T, when a customer purchases securities in a margin account, they must deposit at least 50 percent of the purchase price within a specified timeframe, which is two business days after the regular way settlement date (T+2), making the deadline T+4. If the customer fails to meet this initial margin call by the deadline, the broker-dealer is required to take prompt action. The firm must cancel or liquidate the transaction. This typically involves selling the securities that were purchased. The amount to be sold must be sufficient to cover the cost of the unpaid transaction. Following this forced liquidation, the account is placed on a 90-day restriction. During this 90-day period, the firm cannot extend credit to the customer in that account. For any new purchases, the customer must have sufficient cash in the account to cover the full purchase price before the order is entered. This is often referred to as a cash-up-front or fully-paid-for requirement. It is the supervisor’s responsibility to ensure these procedures are followed precisely to maintain compliance with Regulation T. A firm may request an extension of the payment date from its Designated Examining Authority, but this must be done before the deadline expires. Once the deadline passes without payment, liquidation is mandatory.

The primary issue is the representative’s decision to ignore a client’s specific instruction and substitute their own judgment, which constitutes an unauthorized trade, even within a discretionary account. FINRA Rule 3260, which governs discretionary accounts, does not permit a representative to disregard a direct, contemporaneous order from a client. The representative’s action is a serious sales practice violation, not a bona fide clerical or mechanical error. Firm error accounts are intended for correcting legitimate mistakes, such as entering the wrong quantity, symbol, or side of the market (e.g., buy instead of sell). Using the error account to absorb the loss from a representative’s willful decision to contravene a client’s instruction is an improper use of the account. It would effectively have the firm finance the consequence of the representative’s misconduct and could serve to conceal the sales practice violation from proper supervisory and regulatory review. The supervisor’s foremost responsibility under FINRA Rule 3110 is to identify and address the misconduct itself. This involves documenting the event, taking corrective action with the representative, and ensuring the situation is not simply “fixed” by moving the loss to an error account, which fails to address the root cause of the violation.

This scenario does not require a mathematical calculation. The solution is based on the application of supervisory principles under FINRA and MSRB rules. The primary responsibility of a General Securities Sales Supervisor when reviewing a proposed discretionary transaction is to ensure the trade is suitable for the client, in this case, the Chen Family Irrevocable Trust. This falls under the purview of MSRB Rule G-19 and FINRA Rule 2111. While the trustee, Mr. Chen, is a sophisticated municipal securities professional, the investment objectives, risk tolerance, and financial profile of the trust itself are the governing factors for suitability. The discretionary nature of the account, governed by FINRA Rule 3260, places a heightened obligation on the firm and its supervisor to act in the best interest of the client. The supervisor must independently assess whether the purchase of non-rated municipal bonds aligns with the trust’s documented investment policy and risk parameters. The trustee’s professional status does not absolve the firm or the supervisor of this fundamental duty. The supervisor’s approval must be based on a diligent review of the transaction’s appropriateness for the trust as a distinct entity, not on the presumed expertise of the trustee. Other rules, such as MSRB Rule G-28, govern the procedural aspects of opening and maintaining an account for an employee of another member firm, but the suitability of each transaction is a separate and paramount supervisory concern.

The logical determination of the correct supervisory action is as follows: 1. Identify the core issues presented in the scenario: a) high volume of transactions in a discretionary account, and b) a significant investment in a product managed by a representative’s relative. 2. Analyze the first issue under relevant rules. A high volume of trading in a discretionary account, regardless of individual trade suitability, is a primary indicator of potential churning, which is a violation of FINRA Rule 3260(a) and MSRB rules. The supervisor’s duty under FINRA Rule 3110 is to detect and prevent such excessive trading that is not in the client’s interest. 3. Analyze the second issue. The investment in a fund managed by the representative’s brother-in-law constitutes a significant, material conflict of interest. This must be managed and disclosed under FINRA Rule 2010 (Standards of Commercial Honor) and MSRB Rule G-17 (Conduct of Municipal Securities and Municipal Advisory Activities). The trading activity could be motivated by this relationship rather than the client’s best interest. 4. Synthesize the analysis. The combination of potential churning and an undisclosed conflict of interest in a discretionary account, especially for a potentially vulnerable client, requires an immediate and decisive supervisory response. Simply reviewing individual trades or documentation is insufficient. 5. Conclude the most appropriate action. The most critical and comprehensive supervisory action is to launch a formal inquiry into both the trading pattern for churning and the conflict of interest. To protect the client from further potential harm during the investigation, a temporary restriction on the representative’s discretionary authority over the account is a necessary and prudent step. A General Securities Sales Supervisor has a duty under FINRA Rule 3110 to establish, maintain, and enforce a system to supervise the activities of its associated persons. This includes the review of discretionary accounts to prevent violations such as churning. Churning is defined as excessive trading in a customer’s account by a broker for the primary purpose of generating commissions. The determination of churning is not based on a specific number of trades but on the character of the account, the customer’s financial situation and objectives, and whether the representative exercised control over the account. In a discretionary account, control is explicit. Therefore, a supervisor must scrutinize the frequency and nature of transactions for patterns that suggest the representative’s interests are being placed ahead of the client’s. Furthermore, MSRB Rule G-17 requires municipal securities professionals to deal fairly with all persons and not engage in any deceptive, dishonest, or unfair practice. A representative directing discretionary trades into a fund managed by a close relative creates a serious conflict of interest that could compromise this duty of fair dealing. The supervisor’s primary responsibility upon discovering such red flags is to investigate thoroughly and take immediate steps to halt the questionable activity to protect the client and the firm.

A pattern day trader (PDT) is defined under FINRA Rule 4210 as any customer who executes four or more day trades in five consecutive business days, provided the number of day trades is more than six percent of the total trades in the account for that same five day period. Once an account is designated as a PDT account, it is subject to special margin requirements. The primary requirement is that the account must maintain a minimum equity of at least $25,000. This minimum equity must be in the account before the customer can engage in any day trading activities. If the account’s equity falls below the $25,000 requirement, the customer is not permitted to engage in day trading until the account is restored to the minimum equity level. In the scenario where a customer’s account is identified as a PDT account but has equity below the required $25,000, the member firm must issue a day trading minimum equity call. The customer then has five business days to deposit the necessary funds or securities to meet the $25,000 minimum. During this five day period while the call is outstanding, the customer’s day trading buying power is restricted. It is limited to two times the maintenance margin excess based on the previous day’s closing positions. If the customer fails to meet the call within the five business days, the account’s day trading privileges must be suspended for 90 days, or until the call is met. During this 90 day restriction, the account is typically limited to trading on a cash available basis and cannot engage in day trading. The supervisor’s role is to ensure these procedures are followed precisely.

The primary supervisory responsibility in this scenario is to investigate the strong evidence of a prohibited borrowing arrangement between the representative and the customer, which falls under FINRA Rule 3240. The pattern of large cash withdrawals by the customer followed by commensurate deposits into the representative’s personal brokerage account at another firm constitutes a significant red flag that requires immediate inquiry. FINRA Rule 3240 generally prohibits registered persons from borrowing money from or lending money to their customers. There are very specific and limited exceptions, such as when the customer is an immediate family member or a financial institution whose regular business includes lending, and even in those cases, the member firm must have written procedures permitting such arrangements. The scenario provides no indication that any exception applies. A supervisor’s duty under FINRA Rule 3110 (Supervision) mandates the investigation of such red flags to prevent and detect violations. While the existence of an outside brokerage account under FINRA Rule 3210 is a compliance point, the more severe and immediate issue is the source of the funds being deposited into that account, which points directly to a potential violation of the borrowing rule and possible financial exploitation of a client. The supervisor’s most critical, initial action must be to address this potential misconduct directly by investigating the nature of the fund transfers.

The situation described involves a registered person knowingly trading a security for their personal account immediately before the firm issues a research report that is likely to affect the security’s price. This specific activity is prohibited by FINRA Rule 5280, Trading Ahead of Research Reports. This rule explicitly forbids a member firm or its associated persons, who have knowledge of a forthcoming research report, from establishing, increasing, decreasing, or liquidating a position in the subject security or any related derivative for their own account before the research is publicly disseminated. The rule’s purpose is to prevent associated persons from personally profiting from the non-public information contained within the firm’s research. This conduct also violates FINRA Rule 2010, which requires members to observe high standards of commercial honor and just and equitable principles of trade. Upon discovering this activity, the supervisor has an immediate obligation under FINRA Rule 3110, Supervision. This rule mandates that firms establish and maintain a system to supervise the activities of their associated persons that is reasonably designed to achieve compliance with applicable securities laws and regulations. The supervisor must promptly initiate a thorough internal investigation into the trade, document all findings, and preserve all related evidence. Based on the investigation’s outcome, the supervisor must take appropriate disciplinary action against the representative, which could range from a formal warning to termination. Furthermore, depending on the severity and the firm’s policies, the event may need to be reported to FINRA on the representative’s Form U4 or U5 and potentially as a significant event under FINRA Rule 4530.

The correct procedure for handling a trade error is to move the erroneous transaction to the firm’s designated error account. In this scenario, the 500 shares of the incorrect company, TECK, must be journaled from the client’s account to the firm’s error account. The client’s account is then made whole by reversing the original debit for the incorrect purchase. Any subsequent loss or gain on the TECK position is borne by the member firm, not the client or the registered representative personally. Allowing the representative to personally deposit funds to cover the loss would be a violation of FINRA Rule 2150, which prohibits sharing in the losses of a customer’s account. After the error is rectified and the client’s account is restored to its pre-error state, the originally intended trade for the correct company, TECH, can be placed. However, this new trade must be executed at the current market price. Executing the trade at the previous day’s price would constitute a guarantee against loss, which is a prohibited practice. The supervisor’s primary responsibility under FINRA Rule 3110 is to ensure that established written supervisory procedures for handling trade errors are followed precisely to maintain compliance and protect all parties. This includes proper documentation of the error and the corrective actions taken.

The required supervisory action is to prevent the execution of the trade that would classify the client as a Pattern Day Trader (PDT) due to insufficient equity. Under FINRA Rule 4210, a client who executes four or more day trades within a five-consecutive-business-day period is defined as a Pattern Day Trader. A day trade is the purchase and subsequent sale of the same security on the same day in a margin account. Once a client is identified as a PDT, they are required to maintain a minimum equity of $25,000 in their margin account at all times. This is a strict requirement and is distinct from standard Regulation T initial margin or house maintenance margin requirements. In this scenario, the client has already executed three day trades and is attempting a fourth. The client’s account equity is $18,000, which is below the $25,000 minimum. FINRA rules require member firms to have procedures in place to identify and prevent clients who do not meet the minimum equity requirement from engaging in pattern day trading. Therefore, the firm must not allow the fourth day trade to be completed. The supervisor’s responsibility is to ensure the firm’s systems and controls are working correctly to block the transaction. The account’s day-trading buying power must be restricted until the client deposits sufficient funds to meet the $25,000 equity threshold. Allowing the trade and then issuing a call is a violation of the firm’s preventative obligations.

No calculation is required for this question. The primary responsibility of a General Securities Sales Supervisor is to ensure that all activities within their purview comply with industry regulations and firm policies. Under FINRA Rule 3110, a supervisor must implement and maintain a system to supervise the activities of each registered person. When reviewing discretionary accounts, this supervision must be particularly rigorous. The core issue in this scenario is the intersection of discretionary authority and the suitability obligations under FINRA Rule 2111 and MSRB Rule G-19. While a registered representative has been granted discretion, every transaction must still be suitable for the client based on their investment profile, which includes their financial situation, risk tolerance, and investment objectives. A significant concentration in a single, thinly-traded municipal revenue bond, especially for a client with a conservative profile, raises a substantial suitability concern. The lack of liquidity and the specific risks associated with a single revenue project may not align with a conservative objective. The supervisor’s most critical task is to assess whether the use of discretion resulted in a portfolio that is no longer appropriate for the client. This involves scrutinizing the concentration level, the risk characteristics of the specific bond, and the rationale for the trades in the context of the client’s documented profile. The fact that the firm’s research department has not covered the security adds to the supervisory burden, as the basis for the representative’s decision requires closer examination.

The primary supervisory responsibility in this scenario is to assess the suitability of the proposed investment strategy in the context of the client’s specific needs and objectives, as mandated by FINRA Rule 2111 and MSRB Rule G-19. The client is a special needs trust, which implies a very low risk tolerance and a critical need for capital preservation and stable, reliable income to fund the beneficiary’s ongoing medical and living expenses. The proposed strategy involves a heavy concentration in long-duration, non-rated municipal revenue bonds from a single project. This strategy introduces multiple, significant, and inappropriate risks. First, concentration risk is extremely high, as the entire portfolio’s performance is tied to a single, speculative venture. Second, credit risk is substantial because the bonds are non-rated, indicating a higher probability of default. Third, long-duration bonds carry significant interest rate risk; a rise in interest rates would cause a substantial decline in the bonds’ principal value, jeopardizing the trust’s capital. The high tax-exempt yield does not compensate for the profound risk to principal, which is the paramount concern for this type of trust. A supervisor’s duty under FINRA Rule 3110 and MSRB Rule G-27 is to prevent such unsuitable recommendations, especially in a discretionary account where the firm has a heightened fiduciary responsibility. Therefore, the correct supervisory action is to reject the proposed strategy outright and mandate the development of a diversified, high-quality, and lower-risk portfolio that aligns with the trust’s stated objectives before any trading can be approved.

The core issue involves a registered representative’s failure to comply with FINRA Rule 3270, which governs Outside Business Activities (OBAs). This rule mandates that any registered person must provide prior written notice to their member firm before engaging in any business activity outside the scope of their relationship with the firm. The notice allows the firm to fulfill its supervisory obligations under FINRA Rule 3110. Upon discovering an undisclosed OBA, the supervisor’s primary responsibility is to ensure the firm evaluates the activity. This evaluation is critical to determine if the activity could compromise the representative’s responsibilities to the firm and its customers. The firm must consider several factors: whether the activity will interfere with the representative’s duties, be viewed by the public as part of the member’s business, create conflicts of interest, or require separate registration. Based on this comprehensive assessment, the firm must then make a documented decision. This decision could be to approve the activity, approve it with specific conditions or limitations, or prohibit it altogether. This entire process—the assessment, the considerations, and the final documented decision—is the fundamental supervisory requirement. While other actions, such as updating the representative’s Form U4 to reflect the OBA and potentially taking disciplinary action for the failure to provide prior notice, are also necessary, they follow from this initial, critical evaluation of the activity itself. The firm cannot properly supervise or report an activity it has not first assessed.

The core issue is determining whether a disciplinary action by a foreign financial regulatory authority constitutes a statutory disqualification under U.S. securities laws. Section 3(a)(39) of the Securities Exchange Act of 1934 defines statutory disqualification. This definition is broad and includes not only certain criminal convictions but also being barred or suspended from association with a member of any self-regulatory organization. Crucially, the definition extends to actions by a foreign financial regulatory authority that result in a bar or suspension, provided the foreign authority’s action is equivalent to one that would be disqualifying if it occurred in the U.S. In this scenario, the candidate was suspended for two years by the UK’s Financial Conduct Authority (FCA), a recognized foreign financial regulator. The reason for the suspension, “conduct inconsistent with just and equitable principles of trade,” is a direct parallel to FINRA’s own standards of conduct. Therefore, a supervisor must treat this as a potential statutory disqualification. The fact that the suspension period has ended does not erase the underlying disqualifying event. If the member firm wishes to hire this individual, it cannot do so unilaterally. It must file a Membership Continuance Application (MCA) with FINRA. FINRA will then review the application and, if it makes a determination to allow the association, it must file a notice with the SEC under Rule 19h-1, which allows the SEC to review the SRO’s decision. Simply documenting the event or placing the individual under heightened supervision without regulatory approval is a severe violation of supervisory and registration requirements.

1. Identify the nature of the event: A representative executed a trade for a quantity (10 contracts) greater than what was appropriate for the client’s discretionary account strategy (5 contracts). This constitutes a bona fide error for the excess 5 contracts. 2. Analyze the proposed correction for the excess contracts: The representative correctly proposes moving the 5 excess contracts to the firm’s error account. The firm is responsible for any profit or loss resulting from the liquidation of positions in its error account. 3. Analyze the proposed “goodwill gesture”: The representative proposes crediting the client’s account for the loss incurred on the 5 excess contracts. While the firm is obligated to make the client whole for the financial harm caused by the error, characterizing this reimbursement as a “goodwill gesture” is problematic. 4. Apply relevant regulations: Cboe Rule 9.12 and FINRA Rule 2150 explicitly prohibit members and associated persons from guaranteeing a customer against a loss or sharing in the profits or losses of a customer’s account. While making a client whole for a bona fide error is required, framing it as a “goodwill gesture” can be interpreted as an improper guarantee. The action itself (reimbursement for the error) is correct, but the documentation and communication must be precise. The reimbursement is not a “gesture”; it is a required correction for which the firm is liable. 5. Determine the appropriate supervisory action: The supervisor must approve the transfer of the 5 excess contracts to the error account. However, they must reject the “goodwill gesture” language and ensure the transaction is documented strictly as the correction of a bona fide error. The firm absorbs the loss on the 5 unauthorized contracts as a direct result of its agent’s error, not as a guarantee to the client. This distinction is critical for regulatory compliance. The core responsibility of the General Securities Sales Supervisor, who also holds a Registered Options Principal registration, is to ensure that all actions, including the correction of errors, comply with industry regulations. Cboe Rule 9.12 and FINRA Rule 2150 are strict in their prohibition of guaranteeing a customer against a loss. While a firm must rectify its mistakes and make a client whole for any financial harm resulting from a bona fide error, the process and documentation are paramount. Moving the erroneous portion of the trade to the firm’s error account is the standard and correct procedure. The firm then bears the financial consequence of that error. The critical supervisory failure would be to allow this corrective action to be framed in a way that suggests an ongoing promise to cover losses, such as a “goodwill gesture.” The supervisor must ensure the action is documented as a liability settlement for a specific, documented error, thereby distinguishing it from a prohibited guarantee. This maintains the integrity of the firm’s relationship with the client and adheres to the standards of commercial honor.

Step 1: Identify the relevant activity. The sale of promissory notes, even without compensation, constitutes a private securities transaction (PST) under FINRA Rule 3280. Step 2: Determine the supervisory requirements based on compensation. The scenario explicitly states the associated person, Anika, will receive no compensation. Step 3: Apply the specific provision of FINRA Rule 3280 for non-compensated PSTs. This rule requires the associated person to provide prior written notice to the member firm. The notice must describe the proposed transaction in detail and the person’s proposed role. Step 4: Determine the firm’s obligation upon receiving the notice. The rule mandates that upon receipt of the written notice, the member firm must consider whether the associated person’s participation will require the firm to treat the transaction as its own. The firm must also provide the associated person with prompt written acknowledgement of the notice and may, at its discretion, impose conditions on the associated person’s participation in the transaction. Step 5: Conclude the primary supervisory action. The firm’s main duty is not to approve the transaction as if it were its own (which is required for compensated PSTs), but rather to acknowledge the notice and evaluate whether any specific conditions or further supervision are warranted based on the details provided. FINRA Rule 3280, Private Securities Transactions of an Associated Person, establishes the supervisory framework for when a registered representative engages in securities transactions outside the regular course or scope of their employment with a member firm. A critical distinction within this rule is whether the associated person receives or will receive selling compensation. If compensation is involved, the firm must approve the transaction in writing and record it on its books, supervising it as if it were the firm’s own transaction. However, if no compensation is involved, the requirements are different. The associated person must still provide prior written notice to the firm detailing the transaction and their role. The firm’s obligation is then to acknowledge this notice in writing and to assess the activity. The firm retains the authority to impose conditions on the representative’s participation to mitigate any potential risks, such as conflicts of interest or customer confusion. This is distinct from an outside business activity under Rule 3270, which applies to non-securities activities. A supervisor must correctly identify the activity as a PST and apply the appropriate section of the rule based on the presence or absence of compensation.

First, the client’s account status is determined. The equity in the account is the Long Market Value (LMV) minus the debit balance. \[ \$40,000 \text{ (LMV)} – \$22,000 \text{ (Debit)} = \$18,000 \text{ (Equity)} \] As a designated pattern day trader, the client is required to maintain minimum equity of \( \$25,000 \). The account is already below this minimum. Next, the client’s day trading buying power (DTBP) is calculated. DTBP is four times the maintenance margin excess. The FINRA minimum maintenance requirement is 25% of the LMV. \[ \text{Maintenance Requirement} = 0.25 \times \$40,000 = \$10,000 \] \[ \text{Maintenance Margin Excess} = \text{Equity} – \text{Maintenance Requirement} = \$18,000 – \$10,000 = \$8,000 \] \[ \text{Day Trading Buying Power} = 4 \times \text{Maintenance Margin Excess} = 4 \times \$8,000 = \$32,000 \] The client’s day trade of \( \$50,000 \) exceeded the available DTBP of \( \$32,000 \), which correctly generated a day trading margin call. Under FINRA Rule 4210, a day trading margin call must be met within five business days. The scenario states that six business days have passed without the call being met. The rule specifies a precise penalty for this failure. The firm must restrict the account’s day trading buying power for a period of 90 calendar days. The restriction limits the day trading buying power to one times the firm’s maintenance margin excess. This restriction remains in effect for 90 calendar days or until the call is met. The supervisor’s responsibility is to ensure this specific restriction is implemented correctly. Other actions, such as immediate liquidation or a complete account freeze, are not the prescribed initial steps for this specific violation. The rule is designed to curtail the client’s leverage for day trading activities following a failure to meet a margin call in a timely manner.

This scenario falls under FINRA Rule 3280, Private Securities Transactions of an Associated Person, often referred to as “selling away.” The rule makes a critical distinction based on whether the associated person receives, or may receive, selling compensation. Selling compensation is broadly defined to include any compensation paid directly or indirectly from or in connection with the purchase or sale of a security, including finders’ fees, commissions, and, as in this case, securities or rights to acquire securities. Because Anika is set to receive an equity stake in the new company for her role in the capital raise, this is considered selling compensation. When an associated person will receive selling compensation, the member firm’s obligations are more stringent than if no compensation were involved. The associated person must provide prior written notice and receive prior written approval from the member firm before participating. If the member firm chooses to approve the person’s participation, it must record the transaction on its own books and records. Furthermore, the firm must supervise the associated person’s participation in the transaction as if the transaction were being executed on behalf of the member firm itself. This means the firm assumes supervisory responsibility for the transaction, including suitability and other applicable regulations. The supervisor’s primary duty is to ensure this process is followed.

The calculation determines the required house maintenance margin and compares it to the account’s current equity to find the maintenance call amount. First, the firm’s house maintenance requirement is calculated based on the new theoretical loss determined by the portfolio margin model. The firm’s policy requires maintaining 120% of the theoretical loss. The new theoretical loss is $75,000. Therefore, the required house maintenance is \[ \$75,000 \times 1.20 = \$90,000 \]. Next, this required maintenance amount is compared to the client’s current account equity, which is $80,000. A maintenance call is triggered because the account equity is below the required house maintenance level. The amount of the maintenance call is the difference between the required maintenance and the current equity. The calculation is \[ \$90,000 \text{ (Required House Maintenance)} – \$80,000 \text{ (Current Equity)} = \$10,000 \]. Under FINRA Rule 4210, firms are permitted to use a portfolio margin methodology for certain accounts, which calculates margin requirements based on the net risk of a portfolio of securities and options rather than on individual positions. This risk-based approach often results in lower margin requirements for well-hedged positions. However, firms typically establish their own “house” maintenance requirements that are stricter than the minimums calculated by the risk model to provide an additional buffer against market volatility. A general securities sales supervisor is responsible for ensuring that all margin accounts, including complex portfolio margin accounts, adhere to both regulatory rules and the firm’s more stringent internal policies. When an account’s equity falls below the house maintenance threshold, the supervisor must ensure a maintenance call is issued promptly. Failure by the client to meet this call in a timely manner will necessitate the liquidation of positions to bring the account back into compliance.

The trading activity described is a classic red flag for the manipulative practice known as marking the close. This practice involves entering orders at or near the end of the trading day to influence the security’s closing price. The goal is often to artificially inflate the value of a security in a portfolio, which can affect performance metrics, avoid margin calls, or impact the valuation of related derivative instruments. Under the Securities Exchange Act of 1934, particularly Section 9(a), and FINRA Rule 2020, any manipulative or deceptive device is prohibited. Marking the close falls squarely into this category. A supervisor’s responsibility under FINRA Rule 3110 (Supervision) is to establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations. When presented with a pattern of potentially manipulative trading, the supervisor’s initial and most critical step is to conduct a thorough investigation. This involves escalating the matter internally, discussing the specific trades with the representative to understand their rationale, reviewing the client’s objectives, and documenting all findings. Simply commending the performance or ignoring the pattern would be a dereliction of supervisory duty. Conversely, taking immediate disciplinary action or reporting to regulators without a preliminary internal investigation would be premature. The primary duty is to first investigate the facts to determine if a violation has actually occurred.

The primary regulatory concern in this scenario is the potential for excessive trading, also known as churning, in a discretionary account, which is a violation of FINRA Rule 3260(a) and general suitability rules under FINRA Rule 2111 and MSRB Rule G-19. A supervisor must evaluate trading activity not just on the profitability of individual trades, but on its consistency with the customer’s stated financial situation, investment objectives, and needs. In this case, the client’s objective is capital preservation and income. A high volume of trades involving similar-quality municipal bonds, which does not materially alter the portfolio’s composition or risk profile but consistently generates commissions, is a significant red flag for churning. The three elements to consider for churning are the representative’s control over the account (which is established by the discretionary authority), the excessive nature of the trading in light of the customer’s objectives, and the representative’s intent to generate commissions. The supervisor’s duty under FINRA Rule 3110 is to detect and prevent such violations. The appropriate initial supervisory action is to investigate the rationale behind the high turnover rate by discussing the trading strategy with the representative and determining if the activity is truly in the client’s best interest or if it is primarily to generate revenue for the representative and the firm.

The calculation for the maintenance call is as follows. First, determine the customer’s equity in the account. Equity is the Long Market Value (LMV) minus the Debit Balance (DR). In this case, Equity = \(\$60,000 – \$48,000 = \$12,000\). Next, calculate the minimum maintenance requirement under FINRA rules, which is 25% of the long market value. The required equity is \(0.25 \times \$60,000 = \$15,000\). The maintenance call is the difference between the required equity and the actual equity, which is \(\$15,000 – \$12,000 = \$3,000\). A maintenance margin call must be met promptly by depositing cash or fully paid marginable securities. Non-marginable securities, such as certain OTC stocks, have no loan value and therefore cannot be used as collateral to satisfy a maintenance call. Depositing these securities into the account does not increase the account’s equity for margin calculation purposes. The only way these securities could help is if they are liquidated, and the resulting cash proceeds are used to meet the call. The representative’s acceptance of the stock deposit itself is a violation of margin rules. The supervisor’s primary duty is to identify this error and ensure the call is met properly. Furthermore, the customer is a designated pattern day trader, and their equity of \(\$12,000\) has fallen below the \(\$25,000\) minimum requirement established by FINRA Rule 4210. As a result, the account’s day trading buying power must be restricted until the maintenance call is met and the equity is brought back up to at least \(\$25,000\). The supervisor must enforce these restrictions immediately.

The core issue is that the trade was executed by a representative, Maria, who did not have written discretionary authority over Mr. Chen’s account as required by FINRA Rule 3260. While Mr. Chen provided verbal instructions, this does not satisfy the requirement for pre-approved written authorization for a third party (Maria) to place trades. Therefore, the trade, even if it had been placed in the correct account, would have been unauthorized. A supervisor cannot rectify a clerical error (placing a trade in the wrong account) by moving the trade to the correct client’s account if doing so would result in the acceptance of an unauthorized trade. The initial execution by Maria was a violation. The proper procedure under FINRA rules, including the principles of commercial honor in Rule 2010, is to move the erroneously executed trade into the firm’s designated error account. The firm is responsible for any loss incurred on the position, and any profit must also remain in the firm’s account. Simply canceling and rebilling the trade to Mr. Chen’s account would mean the firm is knowingly placing an unauthorized trade in his account, which is a serious violation. The supervisor’s primary duty is to uphold regulatory requirements, which means isolating the error and preventing a second violation from occurring. The firm must then address the procedural failure that allowed an unauthorized person to execute a trade.