The firm’s reporting obligations are governed by FINRA Rule 4530, which specifies certain events that must be reported to FINRA within 30 calendar days of the firm knowing or reasonably should have known of their existence. In this scenario, two separate events trigger this reporting requirement. First, the written customer complaint received on May 5th is a reportable event. According to FINRA Rule 4530(a)(1)(B), a firm must report if it has received a written customer complaint involving allegations of a sales practice violation and the complaint alleges compensatory damages of $15,000 or more. The complaint alleged damages of $28,000, which is above this threshold. The fact that the complaint was later settled for $12,000 does not negate the initial reporting requirement triggered by the alleged damages in the complaint itself. The settlement amount is below the separate reporting threshold for settlements involving an associated person, but the complaint must still be reported. Second, the felony charge on May 10th is also a reportable event. FINRA Rule 4530(a)(1)(G) requires a firm to report if an associated person has been charged with any felony. The rule does not require a conviction; the charge itself is the triggering event. The civil lawsuit over a property boundary is a personal matter and is not a specified event under Rule 4530, so it does not require a report to FINRA. Therefore, the firm is obligated to file two separate reports with FINRA, one for the customer complaint and one for the felony charge, each within 30 calendar days of the firm becoming aware of the respective event.

The process for expunging customer dispute information from the Central Registration Depository (CRD) system is strictly governed by FINRA Rule 2080. This rule establishes a high standard for what it deems an extraordinary remedy. The initial complaint from the customer alleged damages of \( \$20,000 \), which exceeds the \( \$15,000 \) threshold requiring the firm to report the complaint on the associated person’s Form U4. Even though the subsequent settlement was for \( \$12,000 \), the initial reportable event remains on the record unless successfully expunged. A settlement does not automatically bar an individual from seeking expungement. To successfully remove the information, the associated person must obtain a final, non-appealable order from a court of competent jurisdiction that directs FINRA to expunge the information. This is the only mechanism through which expungement can be achieved. A critical procedural step mandated by Rule 2080 is that the party seeking the court order must name FINRA as a party to the court proceeding. Alternatively, the party may request a written waiver from FINRA of this obligation. Without either naming FINRA as a party or receiving this waiver, a court order will not be honored by FINRA for expungement purposes. The court must also make one of three specific affirmative findings: the claim, allegation, or information is factually impossible or clearly erroneous; the registered person was not involved in the alleged investment-related sales practice violation; or the claim, allegation, or information is false.

A final order from a state securities commission that suspends an individual’s registration is defined as a statutory disqualification under Section 3(a)(39)(F) of the Securities Exchange Act of 1934. This definition is critical for a supervising principal to understand during the hiring process. Unlike certain criminal convictions which have a ten-year look-back period, a regulatory suspension or bar from an SRO or a state securities authority constitutes a statutory disqualification regardless of when the event occurred. Therefore, the eight-year-old suspension subjects the candidate to a statutory disqualification. Consequently, the hiring firm cannot proceed with a standard registration by simply filing a Form U4. According to FINRA By-Laws Article III, Section 3, and the procedures outlined in the FINRA Rule 9520 Series, the member firm must seek permission from FINRA to associate with a statutorily disqualified individual. This is accomplished by filing a Membership Continuance Application (Form MC-400). In this application, the firm details the nature of the disqualifying event and proposes a detailed, heightened supervision plan for the individual. FINRA will then review the application and may approve, deny, or approve with conditions the association. The firm is prohibited from employing the individual in a registered capacity until it receives explicit approval from FINRA.

The scenario describes a Private Securities Transaction (PST) for compensation under FINRA Rule 3280. The activity involves the sale of securities (limited partnership interests) away from the member firm. The representative, Anika, will receive compensation, as the “consulting fee” is contingent upon the successful funding of the project, which links her payment directly to the sale of the securities. This distinguishes the activity from a simple Outside Business Activity (OBA) under FINRA Rule 3270, which typically involves employment or compensation for activities that do not involve the sale of securities. Under FINRA Rule 3280, when an associated person proposes to engage in a PST for compensation, the member firm has specific obligations. The representative must provide prior written notice to the member describing the proposed transaction in detail and her proposed role. Upon receiving the notice, the member firm must evaluate the activity and issue a written approval or disapproval. If the firm approves the representative’s participation, it must record the transactions on its own books and records. Furthermore, the firm is required to supervise the representative’s participation in the transaction as if the transaction were being executed on behalf of the member firm itself. This heightened supervisory responsibility is a key distinction for compensated PSTs and is designed to ensure investor protection and firm oversight for activities that are functionally equivalent to the firm’s own business. Simply acknowledging the activity or treating it as a non-compensated PST would be an insufficient supervisory response.

The core issue involves the discovery of a previously undisclosed felony conviction for a currently associated person. According to Section 3(a)(39) of the Securities Exchange Act of 1934, any person convicted of any felony within the past ten years is subject to a statutory disqualification. The nature of the felony, whether investment-related or not, is irrelevant for the determination of the disqualification itself. Upon learning of information that would cause an associated person’s Form U4 to become inaccurate or incomplete, the member firm has a strict obligation. FINRA Rule 4530 requires firms to report specified events, including the discovery that an associated person is subject to a statutory disqualification. The reporting must be done promptly, but no later than 30 calendar days after the member knows or should have known of the event. The primary mechanism for this reporting is filing an amended Form U4. Therefore, the principal’s first supervisory duty under FINRA Rule 3110 is to conduct a reasonable investigation to confirm the facts of the conviction. Once confirmed, the firm must promptly file an amended Form U4 to disclose the felony conviction. Simply terminating the representative without proper reporting is insufficient, and ignoring the conviction because it is not investment-related is a direct violation of the rules. The firm cannot unilaterally decide the consequence; it must report the event to the regulator, which then opens up further processes, such as a potential Membership Continuance Application (MC-400) if the firm wishes to retain the individual.

The firm’s primary and immediate obligation is to report the settlement via an amendment to the representative’s Form U4. According to FINRA Rule 4530, a member firm must report specified events to FINRA within 30 calendar days of the firm knowing or having reason to know of their existence. One of these specified events is a customer complaint involving allegations of a sales practice violation that is settled for an amount of $15,000 or more. In this scenario, the firm settled the complaint for $18,000, which is above the mandatory reporting threshold. Therefore, the firm must file an amended Form U4 for the representative to disclose the details of this settlement. This reporting requirement is absolute and not contingent on the representative’s opinion of the complaint’s merits or any future desire to seek expungement. While the representative may wish to pursue expungement under FINRA Rule 2080, this is a separate and complex legal process that requires obtaining a court order confirming that the claim was factually impossible, clearly erroneous, or that the representative was not involved. Given that the firm’s own investigation found the claim had merit, pursuing expungement would be difficult and does not negate the immediate duty to report the settlement as required. The principal’s supervisory responsibility is to ensure timely and accurate regulatory filings.

The correct course of action and understanding is dictated by FINRA Rule 2080, which governs the expungement of customer dispute information from the Central Registration Depository (CRD). When a registered representative seeks to expunge such information, they must obtain an award from a FINRA arbitration panel that contains a specific affirmative finding. The firm, in this case, Apex Securities, must be named as a party to this new arbitration proceeding initiated by the representative. The firm cannot simply agree to the expungement or take a neutral stance to avoid costs. The arbitration panel must make one of three specific findings to grant expungement: that the claim is factually impossible or clearly erroneous; that the registered person was not involved in the alleged investment-related misconduct; or that the claim is false. The settlement of the original complaint for $20,000 is a reportable event on Form U5, as it exceeds the $15,000 threshold. The firm’s prior settlement with the customer does not negate the need for this formal process. Furthermore, even if the arbitration panel grants the expungement, the representative must then obtain a court order confirming the arbitration award before FINRA will actually remove the information from the CRD system. The principal’s responsibility is to ensure the firm participates in the arbitration as required and understands that only a specific finding by the panel, subsequently confirmed by a court, can lead to expungement.

The correct procedure for seeking expungement of customer dispute information from the Central Registration Depository (CRD) system is governed by FINRA Rule 2080. The settlement amount in this scenario is \($10,000\), which is below the \($15,000\) threshold for mandatory reporting of settlements under FINRA Rule 4530. However, the initial written customer complaint itself was reportable because it alleged sales practice violations and claimed compensatory damages of \($5,000\) or more. Once a complaint is reported to CRD, its removal is not a simple matter. To obtain expungement, the associated person must first seek a recommendation for expungement from an arbitration panel. The panel can only recommend expungement based on one of three narrow findings: the claim, allegation, or information is factually impossible or clearly erroneous; the registered person was not involved in the alleged investment-related sales practice violation; or the claim, allegation, or information is false. If the arbitration panel issues an award containing a recommendation for expungement, this is not the final step. Under Rule 2080, the registered person or the firm must then initiate a separate legal proceeding in a court of competent jurisdiction to obtain a court order confirming the arbitration award and directing the expungement. Critically, FINRA must be named as a party in this court proceeding, or the party seeking expungement must obtain a waiver from FINRA of this requirement. The court then reviews the arbitration panel’s findings and decides whether to issue the final expungement order. A firm cannot unilaterally remove the disclosure, nor can an arbitration panel’s decision alone finalize the expungement.

The situation described involves a registered representative proposing to engage in a securities transaction for compensation outside the regular course or scope of her association with the member firm. This activity is defined as a private securities transaction under FINRA Rule 3280, not merely an outside business activity under Rule 3270. The key determinant is the presence of transaction-based compensation, in this case, the two percent commission. Under FINRA Rule 3280, when an associated person proposes to engage in a private securities transaction for compensation, they must provide prior written notice to the member firm. The notice must describe the proposed transaction in detail and the person’s proposed role. Upon receiving this notice, the member firm has a specific obligation to issue a written response either approving or disapproving the person’s participation. If the firm approves the participation, it must record the transaction on its own books and records and supervise the person’s participation as if the transaction were executed on behalf of the member firm itself. Given that the firm’s Written Supervisory Procedures explicitly prohibit all private securities transactions, the firm is not in a position to approve the activity and assume the required supervisory and record-keeping responsibilities. Therefore, the supervisor’s most critical and appropriate obligation under FINRA rules is to formally disapprove the representative’s participation in the transaction in writing. Simply treating it as an outside business activity or allowing it to proceed without firm involvement would be a direct violation of supervisory duties.

The core of this issue lies in the intersection of FINRA Rules 3110 (Supervision), 3270 (Outside Business Activities), 3280 (Private Securities Transactions), and 4530 (Reporting Requirements). When the firm received the written customer complaint from Mr. Chen, it triggered specific supervisory and reporting obligations. The complaint alleged a sales practice violation involving a security (the real estate limited partnership) that was not offered through the firm. Even though the representative, Anika, had her consulting firm approved as an outside business activity under Rule 3270, the moment a securities transaction for compensation is involved, the activity falls under the purview of Rule 3280 for private securities transactions. The firm’s approval of the OBA was contingent on no securities transactions occurring, a condition that the complaint alleges was violated. Under FINRA Rule 3110, the principal has a duty to investigate the allegations in the complaint. Concurrently, FINRA Rule 4530(a)(1)(B) mandates that a firm must report to FINRA within 30 calendar days of learning that it or an associated person is the subject of a written customer complaint involving allegations of theft, misappropriation of funds or securities, or forgery. The allegation of being sold an unsuitable investment away from the firm falls under this reporting requirement. The obligation to report is triggered by the receipt of the written complaint itself, not by the conclusion of the firm’s internal investigation. Therefore, the principal’s most critical and immediate responsibilities are to commence a thorough internal investigation to ascertain the facts and to ensure the firm files the required report with FINRA within the 30-day timeframe stipulated by Rule 4530.

The correct procedure for seeking expungement of customer dispute information from the Central Registration Depository (CRD) system, in this specific scenario, is governed by FINRA Rule 2080. While the arbitration panel’s finding that the claim was “factually impossible or clearly erroneous” is one of the three specific grounds upon which expungement can be granted, the arbitration award itself is not sufficient to trigger the removal of the information by FINRA. The rule requires an additional, critical step. The party seeking expungement, in this case the registered representative, must initiate a separate proceeding in a court of competent jurisdiction. The purpose of this court proceeding is to obtain a judicial order that confirms the arbitration award. Only after a court has issued a final, non-appealable order confirming the award and directing expungement can the representative or the firm provide this court order to FINRA. Upon receipt of the court order, FINRA will then proceed to expunge the customer dispute information from the CRD record. Simply filing the arbitration award with FINRA, even with the favorable language, is procedurally incorrect and will be rejected. Initiating a new arbitration is duplicative and not the prescribed path. The process explicitly requires judicial confirmation to ensure a higher level of review before a permanent record is altered.

The fundamental requirement for a broker-dealer under FINRA Rule 3110 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, and with applicable FINRA rules. When a firm hires a registered representative with a history of disciplinary actions or customer complaints, standard supervisory procedures are often insufficient. The firm and the designated supervisor must implement a heightened supervisory plan. This plan must be specific, in writing, and tailored to address the particular risks associated with that representative. In this scenario, the representative’s history involves suitability complaints, so the plan must directly address this risk. Elements of such a plan could include, but are not limited to, pre-approval of all transactions by a principal, a higher frequency of review for all communications with the public, restrictions on the types of products the representative can sell, and more frequent monitoring of their activities. While the firm does not meet the numerical thresholds that would mandate compliance with FINRA Rule 3170, which requires tape-recording conversations, the principles of heightened monitoring are still applicable. The creation and documentation of this specific plan is the critical first step, as it forms the basis for all subsequent supervisory actions and provides evidence to regulators that the firm is taking its supervisory obligations seriously. Simply adding the person to a watch list or requiring continuing education, while potentially part of the plan, does not constitute the complete and required supervisory response.

The primary issue involves the mandatory reporting requirements triggered by a customer-initiated arbitration. According to FINRA Rule 4530, a member firm must report certain specified events to FINRA no later than 30 calendar days after the firm knows or should have known of the event’s existence. The filing of a securities-related, customer-initiated arbitration claim against the firm or an associated person is a specified event under Rule 4530(a)(1)(G). The amount of the claim, in this case $25,000, is irrelevant to the reporting requirement itself, although settlement amounts above certain thresholds are also reportable. Simultaneously, the filing of this arbitration requires an amendment to the associated person’s Form U4. Question 14I on Form U4 specifically asks if the registered person is the subject of a customer-initiated, investment-related arbitration. This must be answered affirmatively, and the details of the arbitration must be disclosed. This amendment must also be filed within 30 calendar days of the firm being notified of the arbitration. The firm’s internal conclusion that the complaint lacks merit does not negate these reporting obligations. The trigger for reporting is the event itself, not the firm’s opinion of its validity. Similarly, pursuing expungement under FINRA Rule 2080 is a separate process that can only be initiated after the arbitration is concluded and only if the arbitration panel makes one of the specific findings required by the rule, such as the claim being factually impossible or the registered person not being involved. Therefore, the most critical and immediate supervisory action is to ensure timely and accurate reporting to FINRA and the amendment of the representative’s registration form.

The scenario describes a private securities transaction (PST) where the associated person will receive compensation. According to FINRA Rule 3280, when an associated person proposes to engage in a PST for compensation, the member firm has a specific set of obligations. The associated person, Anika, must provide prior written notice to the member firm, Keystone Securities, describing the proposed transaction and her role in detail, including the anticipated compensation. Upon receiving this notice, the supervisor, Leo, acting on behalf of the firm, must evaluate the proposal. The firm must then issue a written response stating whether it approves or disapproves of the person’s participation. If the firm approves the participation, it is required to 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 is the most stringent requirement under the rule and is triggered by the presence of compensation. Simply acknowledging the activity as an outside business activity under Rule 3270 would be insufficient because the activity involves the sale of securities. Likewise, treating it as a PST without compensation, which only requires acknowledgement and potential conditions, is incorrect because a finder’s fee constitutes compensation. The core determination is the firm’s decision to approve and subsequently record and supervise, or to disapprove the activity entirely.

The core of this issue rests on interpreting the requirements of FINRA Rule 4530 concerning reporting requirements. The determinative factor is not the format of the customer complaints, which were verbal, but the outcome of the firm’s internal review. The firm conducted a review and concluded that the allegations of aggressive sales tactics against the representative, Alex, have merit. This internal conclusion is a triggering event under FINRA Rule 4530(a)(1)(B). This rule requires a member firm to report to FINRA within 30 calendar days of the date the member has concluded or reasonably should have concluded that an associated person has violated any investment-related statutes, rules, regulations, or standards of conduct of any domestic or foreign regulatory body or self-regulatory organization. Therefore, the firm’s finding that the allegations have merit constitutes a conclusion that a violation of standards of conduct has occurred. This necessitates a report to FINRA. The most common method for this reporting is by filing an amended Form U4 for the associated person. While placing the representative on heightened supervision is a prudent supervisory step under FINRA Rule 3110, it does not satisfy the separate and distinct regulatory reporting obligation under Rule 4530. Waiting for a written complaint would be incorrect because the reporting trigger is the firm’s own conclusion, not the customer’s action. Similarly, focusing on the past expunged dispute or immediately terminating the representative are not the primary, mandated initial actions required by the specific reporting rule triggered by the internal review’s findings.

The proposed activity must be identified as a Private Securities Transaction (PST) under FINRA Rule 3280, not merely an Outside Business Activity (OBA) under FINRA Rule 3270. The critical distinction is that the representative will be participating in a transaction involving securities (equity interests in the LLC) that are not offered through their employing broker-dealer. Because the representative will receive compensation (a consulting fee and an equity stake), the supervisory requirements are significantly heightened. Under Rule 3280, when an associated person is to receive compensation for a PST, the member firm must first approve the transaction in writing. If approved, the firm must then record the transaction on its own books and records and supervise the associated person’s participation as if the transaction were executed on behalf of the member itself. Simply treating this as an OBA under Rule 3270, which would primarily involve assessing conflicts of interest and the representative’s ability to perform their duties, would be a serious supervisory failure. The principal’s primary duty is to correctly categorize the activity based on its substance—the sale of securities for compensation—and apply the more stringent requirements of Rule 3280. This ensures the firm maintains proper oversight over all securities-related activities of its representatives, protecting both the firm and the investing public.

The core issue revolves around a General Securities Principal’s supervisory responsibilities under FINRA Rule 3110 when hiring a representative with a significant disciplinary disclosure on their Form U4. The disclosure in question is a customer arbitration award of twenty thousand dollars for unsuitable recommendations. While this amount exceeds the fifteen thousand dollar threshold for mandatory reporting on Form U4, it does not, in itself, trigger a statutory disqualification as defined under Section 3(a)(39) of the Securities Exchange Act of 1934. Events that cause statutory disqualification are more severe, such as certain misdemeanor and all felony criminal convictions, or being barred or suspended by the SEC or an SRO. Therefore, initiating a statutory disqualification eligibility proceeding is not the required immediate step. Similarly, there is no rule that automatically makes an individual ineligible for association due to such an award. However, simply acknowledging the disclosure and taking no further action would be a failure of the firm’s supervisory obligations. FINRA Rule 3110 requires firms to establish, maintain, and enforce a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations. When a firm hires an individual with a history of customer complaints or disciplinary actions, it is expected to implement a heightened supervisory plan tailored to the specific risks presented by that individual’s past conduct. This plan must be in writing and should detail the specific additional supervisory steps the firm will take, which could include more frequent reviews of the representative’s transactions, correspondence, and client interactions.

The correct supervisory response requires addressing two distinct but related regulatory issues simultaneously: the written customer complaint and the undisclosed outside business activity (OBA). Under FINRA Rule 3110, the principal has a duty to supervise the activities of associated persons and investigate potential violations. The receipt of a written customer complaint alleging a sales practice violation triggers specific obligations. First, the firm must log the complaint and begin an internal investigation as required by Rule 4513. Second, and critically, this type of complaint is a specified event under FINRA Rule 4530, which mandates that the firm report the event to FINRA within 30 calendar days of discovery. Concurrently, the discovery of the financial planning blog, which generates revenue, constitutes an undisclosed OBA, a violation of FINRA Rule 3270. This rule requires registered persons to provide prior written notice to their firm before engaging in any OBA. The principal must immediately launch an investigation into the nature and scope of this undisclosed activity. A comprehensive supervisory action plan involves investigating both the complaint’s merits and the OBA violation. This dual investigation is necessary to determine the full extent of any misconduct, assess potential customer harm, and decide on appropriate disciplinary action, which could range from a warning to termination and an amended Form U5 filing. Failing to address both issues promptly and thoroughly would represent a significant supervisory lapse.

The correct course of action requires understanding the distinct processes for customer complaint record-keeping, reporting, and expungement. First, under FINRA Rule 4513, the firm must maintain a record of the written customer complaint and the results of its investigation at the Office of Supervisory Jurisdiction. This record-keeping duty is separate from any potential expungement. Second, the process for removing customer dispute information from the Central Registration Depository (CRD) system is governed by FINRA Rule 2080. This rule establishes that expungement is an extraordinary remedy and is not granted lightly. A settlement, particularly one made to avoid litigation costs, is not in itself a basis for expungement. The associated person must obtain an order from a court of competent jurisdiction to have the information expunged. In the court proceeding, the associated person must name FINRA as a party or obtain a waiver from FINRA. The court must make an affirmative finding of fact that the claim, allegation, or information is factually impossible or clearly erroneous; the registered person was not involved in the alleged investment-related sales practice violation; or the claim, allegation, or information is false. Finally, and critically, even if a court grants an order of expungement from the CRD system, this does not negate the firm’s separate obligation under SEC Rule 17a-4. This SEC rule requires broker-dealers to preserve original records of all written customer complaints and related correspondence and memoranda for a period of not less than six years, the first two years in an easily accessible place. Therefore, the firm must retain its internal file on the complaint regardless of whether the information is ultimately removed from the CRD.

The core issue involves the distinct and separate obligations of a broker-dealer regarding record retention and the specific process for expunging customer dispute information from the Central Registration Depository (CRD) system. Under SEA Rule 17a-4, a broker-dealer is required to preserve records of all written customer complaints, along with any corresponding documentation showing the firm’s investigation and resolution, for a period of not less than six years. This retention requirement is absolute and is not affected by the outcome of the complaint or any subsequent actions. Separately, FINRA Rule 2080 establishes a very strict and narrow path for obtaining expungement of customer dispute information from a registered representative’s CRD record. A firm or an associated person cannot unilaterally decide to remove this information. To achieve expungement, the representative must obtain an order from a court of competent jurisdiction directing FINRA to expunge the information. This court order is typically sought after a FINRA arbitration panel has heard the case and issued an award containing a recommendation for expungement. The firm’s internal finding that a complaint is without merit is insufficient to trigger expungement. Therefore, the supervisor must understand that the firm’s duty to retain the complaint file for six years is independent of the representative’s process to seek a court-ordered expungement for their CRD record.

The analysis concludes that for a court to order the expungement of the customer dispute information from Kenji’s CRD record, the court must confirm an arbitration award that contains one of the specific affirmative findings required under FINRA Rule 2080. The most relevant of these findings is that the customer’s claim, allegation, or information is factually impossible or clearly erroneous. FINRA Rule 2080 establishes a strict and uniform process for seeking the expungement of customer dispute information from the Central Registration Depository (CRD) system. This rule is designed to protect the integrity of the CRD system as a public source of information while providing a mechanism for registered persons to clear their records of false, erroneous, or inapplicable claims. A firm settling a complaint for a nuisance value, such as the \(\$10,000\) in this scenario, does not in itself provide grounds for expungement. The representative must initiate a separate arbitration proceeding or seek the finding within the original customer arbitration. The arbitration panel must then make one of three specific findings: (1) the claim, allegation, or information is factually impossible or clearly erroneous; (2) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds; or (3) the claim, allegation, or information is false. Without one of these explicit findings from an arbitration panel, a court cannot order FINRA to expunge the information. The fact that a firm’s internal review cleared the representative or that the settlement was for a small amount to avoid litigation costs are not sufficient grounds under the rule.

The correct action is to submit the court-confirmed arbitration award to FINRA to process the expungement. FINRA Rule 2080 establishes a strict and specific process for removing customer dispute information from the Central Registration Depository (CRD) system. This process treats expungement as an extraordinary remedy. First, a registered representative must obtain an arbitration award that explicitly directs expungement. This award must be based on one of three narrow grounds: the claim is factually impossible or clearly erroneous, the registered person was not involved in the alleged misconduct, or the claim is false. Following the arbitration award, the representative or the firm must obtain an order from a court of competent jurisdiction confirming the arbitration award. The firm itself does not have the authority or technical ability to directly delete or alter historical disclosures in the CRD system. Once the final, confirmed court order is obtained, the firm’s supervisory responsibility is to submit this legal document to FINRA, typically through the Registration and Disclosure (RAD) department. This is usually accomplished by filing an amended Form U4, attaching the court order, and formally requesting that FINRA execute the expungement. FINRA staff will then review the submission to ensure it complies with the rule’s requirements before removing the disclosure from the CRD record. Simply receiving a court order does not automatically clear the record; the firm must take the affirmative step of providing it to the regulator to finalize the process.

The scenario describes a private securities transaction (PST) for which the associated person, Kenji, will receive compensation. According to FINRA Rule 3280, an associated person must provide prior written notice to their member firm before participating in any private securities transaction. The critical distinction in this case is the presence of compensation. The 2% equity stake, contingent on the capital raise, is considered non-cash compensation. Because compensation is involved, the firm’s supervisory obligations are heightened. The firm must not only receive written notice but must also issue a written approval or disapproval of the representative’s participation. If the firm approves the activity, it must record the transaction on its books and records and supervise the associated person’s participation as if the transaction were being effected on behalf of the member firm itself. Simply treating this as an Outside Business Activity under FINRA Rule 3270 is insufficient because that rule does not encompass the specific requirements for supervising a compensated securities transaction. The firm’s responsibility extends beyond merely assessing conflicts or acknowledging the notice; it must actively supervise the transaction as its own. This includes ensuring compliance with all applicable securities laws and regulations, including suitability and disclosure requirements, for the transactions Kenji facilitates.

The primary issue is determining the correct regulatory reporting action under FINRA Rule 4530. The rule specifies several events that require a firm to report information to FINRA. One key trigger, under Rule 4530(a)(1)(B), is when a registered person is the subject of a written customer complaint involving allegations of theft, misappropriation of funds or securities, or forgery. Unauthorized trading is considered a form of misappropriation, as it involves the misuse of the customer’s assets or authority. Therefore, the allegation itself triggers a mandatory reporting requirement. This report must be filed within 30 calendar days of the firm discovering the event. The reporting is typically done by filing an amended Form U4 for the associated person. Another trigger, under Rule 4530(a)(1)(G), relates to settlements of customer complaints, arbitrations, or litigations for an amount exceeding $15,000. In this scenario, the settlement is for $10,000, which is below this specific threshold. However, the existence of a lower settlement amount does not negate the separate reporting requirement triggered by the nature of the allegation itself. The firm cannot choose which trigger to follow; if any trigger is met, reporting is required. The firm’s internal conclusion that the claim was factually impossible and the subsequent settlement to avoid litigation costs are irrelevant to the initial reporting obligation. The obligation is based on the customer’s written allegation. The process for expungement under FINRA Rule 2080 is a separate and subsequent matter that requires obtaining an order from a court of competent jurisdiction. The principal’s immediate and most critical supervisory duty is to ensure compliance with the mandatory reporting rules.

This scenario involves multiple, distinct reporting obligations under FINRA rules, each with its own timeline and procedure. The primary rules at play are FINRA Rule 4530 (Reporting Requirements) and the requirements for amending Form U4. First, the written customer complaint alleging unsuitability and significant losses triggers a reporting requirement under FINRA Rule 4530(a)(1)(B). The firm must report this complaint to FINRA via the Firm Gateway within 30 calendar days of the end of the calendar quarter in which the complaint was received. However, the more critical and time-sensitive issue is the allegation of an undisclosed felony conviction for embezzlement. Under Section 3(a)(39) of the Securities Exchange Act of 1934, a felony conviction within the last ten years is a statutory disqualification. Embezzlement is a crime involving the misappropriation of funds, which falls squarely within the definition. Upon learning of a potential statutory disqualification, the supervisor has an immediate duty to investigate. If the allegation is verified, two reporting requirements are triggered. First, under FINRA Rule 4530(b), the firm must report the statutory disqualification to FINRA within 10 calendar days of discovering it. Second, under FINRA By-Laws Article V, Section 2(c), the firm must file an amended Form U4 for the associated person to disclose the disqualifying event, also within 10 calendar days. Therefore, the supervisor’s most appropriate initial action is to prioritize the investigation of the felony conviction. If verified, the firm must file the amended Form U4 and the Rule 4530(b) notice within 10 days, while also ensuring the separate customer complaint is reported within its own required timeframe. This demonstrates a comprehensive understanding of prioritizing regulatory obligations based on severity and timeliness.

The correct course of action is determined by applying the distinct requirements of FINRA and SEC rules regarding customer complaints, reporting, record retention, and expungement. 1. A written customer complaint is received, alleging a sales practice violation. 2. Under SEC Rule 17a-4, the firm must preserve the original written customer complaint for a specified period (typically six years, with the first two in an easily accessible place). 3. Under FINRA Rule 4513, the firm must maintain a separate file of all written customer complaints and any action taken by the member. 4. Under FINRA Rule 4530, the firm is required to report specified events, including customer complaints that allege theft, misappropriation, or sales practice violations. This reporting is typically done via an amendment to the associated person’s Form U4 within 30 calendar days. 5. A subsequent settlement and the customer’s request to withdraw the complaint do not negate the firm’s initial obligation to report the event or retain the original complaint record. The event occurred and must be documented and reported as per the rules. 6. Expungement of customer dispute information from the CRD system is governed by FINRA Rule 2080. This is a separate and distinct process that requires an order from a court of competent jurisdiction. It cannot be achieved simply through a settlement or an agreement with the customer. Therefore, the principal’s primary duty is to ensure the complaint is reported and the records are maintained, irrespective of the settlement. A registered representative’s receipt of a written customer complaint triggers several non-negotiable regulatory obligations for the member firm, which a supervising principal must oversee. The core principle is that the existence of a complaint is a reportable and recordable event in itself, separate from its eventual resolution. SEC Rule 17a-4 mandates the preservation of original books and records, which explicitly includes written customer complaints. This means the original complaint letter cannot be destroyed or replaced, even if a settlement is reached. Concurrently, FINRA Rule 4513 requires the firm to keep a dedicated file of these complaints and the actions taken. Furthermore, FINRA Rule 4530 imposes a duty on the firm to report certain events to FINRA, including customer complaints that allege sales practice violations like unsuitability. This reporting must occur within 30 days. A settlement or a customer’s later desire to withdraw the complaint does not erase these initial obligations. While the settlement details should be added to the complaint file, the original event remains a reportable occurrence. The process for removing a complaint from a representative’s CRD record, known as expungement, is governed by the strict standards of FINRA Rule 2080 and requires a court order, not merely a customer’s consent.

The core issue involves understanding the specific reporting and record-keeping obligations triggered by a written customer complaint that results in a settlement. First, under FINRA Rule 4530(a)(1)(B), a member firm is required to report to FINRA within 30 calendar days of the event if the firm has settled a written customer complaint involving securities or funds for an amount exceeding $15,000. In this scenario, the settlement for $18,000 occurred on July 10th. Therefore, the 30-day clock for reporting starts on July 10th, not when the complaint was received or when the internal investigation concluded. Second, under FINRA Rule 4513, the firm must maintain a file of all written customer complaints and the action taken in the relevant Office of Supervisory Jurisdiction (OSJ). This is a procedural requirement that begins upon receipt of the complaint. Third, SEC Rule 17a-4(b)(4) mandates that originals of all communications received and sent by the member firm, including customer complaints, must be preserved for a period of not less than three years, with the first two years in an easily accessible place. Therefore, the correct course of action involves filing the required report with FINRA within 30 days of the settlement, maintaining the complaint file at the OSJ, and preserving all related records for the mandated three-year period. A supervising principal must be able to distinguish between the various regulatory timelines and requirements associated with a single event like a customer complaint. The initial receipt of the complaint triggers an immediate obligation to log it and begin an investigation according to the firm’s Written Supervisory Procedures (WSPs). It also triggers the record-keeping requirement under SEC Rule 17a-4. However, the external reporting obligation under FINRA Rule 4530 is contingent upon specific events, such as a settlement exceeding a certain monetary threshold. The rule specifies different thresholds for matters involving the firm versus those involving an associated person. For a settlement by the firm, the threshold is $15,000. For a settlement involving an associated person, the threshold is $25,000. Misunderstanding these triggers, thresholds, and deadlines can lead to significant regulatory violations. The principal’s role is to ensure all these distinct obligations are met correctly and in a timely manner.

A prospective employee’s conviction for a misdemeanor involving securities fraud within the last ten years constitutes a statutory disqualification under Section 3(a)(39) of the Securities Exchange Act of 1934 and FINRA By-Laws. The ten-year look-back period begins from the date of conviction, not the end of any sentence or probation. Therefore, a conviction from eight years ago falls within this period, making the individual statutorily disqualified. A member firm cannot unilaterally decide to hire such an individual, even with a heightened supervision plan in place. The firm’s responsibility under FINRA Rule 3110(e) is to investigate the applicant’s background, which has been done in this scenario. Upon discovering the disqualifying event, if the firm still wishes to employ the individual, it must seek permission from FINRA. This is accomplished by filing an application, specifically a Membership Continuance Application (MC-400), which details the circumstances of the disqualification and the supervisory plan the firm proposes to implement. FINRA will then review the application to determine if allowing the association is in the public interest. If FINRA decides to approve the application, it is required under SEC Rule 19h-1 to file a notice with the SEC, which then has the authority to review FINRA’s decision. Simply rejecting the candidate is an option for the firm, but it is not the only required regulatory step if they wish to proceed. The failure to disclose is a separate serious issue, but it does not negate the need to address the underlying statutory disqualification through the proper regulatory channels.

The core of this issue rests on the firm’s continuing obligations under FINRA rules even after a representative has terminated their association. The logical steps to determine the correct action are as follows: 1. Identify the triggering event: The firm discovers information about a former representative that would constitute a statutory disqualification. 2. Determine the reporting mechanism: FINRA By-Laws Article V, Section 3, and FINRA Rule 4530 mandate that member firms must report the termination of an associated person on a Form U5. This rule also requires the firm to amend the Form U5 if it later learns that any information provided was inaccurate or has become incomplete. 3. Establish the timeline for reporting: The amendment to the Form U5 must be filed within 30 calendar days of the firm discovering the facts that necessitate the amendment. 4. Confirm jurisdictional authority: FINRA By-Laws Article V, Section 4, establishes that FINRA retains jurisdiction over a terminated person for two years following the date the written notice of termination was received by FINRA. Therefore, the fact that the representative is now at another firm does not absolve the former firm of its reporting duty. Conclusion: The principal’s primary and most immediate regulatory duty is to file an amended Form U5 to reflect the newly discovered statutory disqualification. This action is required within a specific timeframe and is not negated by the representative’s new employment. A General Securities Principal must understand that a firm’s regulatory responsibilities regarding its associated persons do not necessarily end when the person’s registration is terminated. The Central Registration Depository (CRD) system relies on accurate and timely reporting from member firms to maintain the integrity of the registration and disciplinary disclosure process. When a firm files a Form U5, it is attesting to the accuracy of the information regarding the representative’s departure. If the firm subsequently discovers information that would have been reportable on the original U5, such as a previously unknown event that constitutes a statutory disqualification under Section 3(a)(39) of the Securities Exchange Act of 1934, it has an affirmative obligation to update the record. This is mandated by FINRA rules, which require an amended Form U5 to be filed within 30 days of the discovery. This requirement exists under FINRA’s two-year retention of jurisdiction policy, ensuring that significant disciplinary events are captured and made available to regulators, future employers, and the public via BrokerCheck, regardless of the representative’s current employment status. Failure to amend the Form U5 is a serious violation.

The described activity constitutes a private securities transaction for compensation under FINRA Rule 3280. The representative, Anika, is participating in the sale of securities that are outside the regular course of her employment with the member firm. The equity stake she stands to receive is considered compensation, as the rule defines compensation broadly to include any economic benefit, not just cash commissions. Because compensation is involved, the supervisory requirements are stringent. The member firm, through its principal, is obligated to explicitly approve or disapprove the representative’s participation. If the firm chooses to approve the activity, it must then record the transaction on its own books and records. Furthermore, the firm must supervise the representative’s participation in the transaction as if the transaction were being executed on behalf of the member firm itself. This includes ensuring compliance with all applicable securities laws and regulations, including suitability. Simply acknowledging the notice or evaluating it as a standard outside business activity is insufficient given the presence of both securities and compensation. The requirements for a compensated private securities transaction supersede the general requirements for an outside business activity under Rule 3270.