Series 16 Part 2 Valuation of Securities

Correct: Under Section 326 of the USA PATRIOT Act, for non-U.S. persons, the Customer Identification Program (CIP) requires firms to obtain one or more of the following: a taxpayer identification number, a passport number and country of issuance, an alien identification card number, or the number and country of issuance of any other government-issued document evidencing nationality or residence and bearing a photograph. The regulation allows for the verification to be completed within a reasonable time after the account is opened, as defined by the firm’s written procedures. Incorrect: Requiring a U.S. Taxpayer Identification Number as the only acceptable form of ID is incorrect, as foreign passports are explicitly permitted for non-U.S. persons. Relying solely on a signed affidavit is insufficient because the firm must still perform verification through documentary or non-documentary means. While firms may choose to restrict account activity until verification is complete, the regulation itself does not mandate two non-documentary methods or prohibit initial deposits prior to verification, provided the verification occurs within a reasonable timeframe. Takeaway: For non-U.S. customers, firms must collect a government-issued identification number, such as a passport number, and verify the customer’s identity within a reasonable timeframe according to their CIP procedures.

Correct: According to FINRA and Options Clearing Corporation (OCC) rules, member firms must allocate exercise notices to their customers using a method that is fair and equitable. Random selection and FIFO are the two most commonly accepted and recognized methods. Additionally, firms are required to disclose their chosen method to customers, typically at the time of account opening, and must notify them of any changes to the methodology to ensure transparency. Incorrect: Prioritizing institutional clients or larger positions is not considered fair and equitable to all customers and would violate the principle of unbiased distribution. Manual selection by a supervisor based on performance or risk profile is subjective and lacks the systematic consistency required by regulators. LIFO is not a standard or approved method for options assignment and could lead to unfair treatment of certain market participants compared to the industry-standard FIFO or random selection methods. Takeaway: Firms must use and disclose a fair and equitable method, such as FIFO or random selection, for allocating options exercise notices to customers.

Correct: Under SEC Rule 17a-4(e)(1), records relating to an associated person, including the Form U4, fingerprint cards, and employment applications, must be preserved for at least three years after the person’s employment or association with the member has terminated. This ensures that regulators can review the qualifications and background of former employees during subsequent audits or investigations. Incorrect: Six years is the retention period for other types of records such as blotters, general ledgers, and customer account records, but it does not apply to personnel records. Retention periods based on the date of creation or submission are incorrect for personnel files because the SEC specifically mandates that the retention clock begins only after the individual’s association with the firm has ended. Permanent retention for the lifetime of the firm is not required for these specific documents under Rule 17a-4. Takeaway: Records for associated persons, such as Form U4 and fingerprinting results, must be kept for three years following the termination of the individual’s association with the firm.

Correct: Under MSRB Rule G-32, dealers selling municipal securities in a primary offering must provide the official statement to the customer by the settlement date. This requirement is generally satisfied by providing a notice to the customer stating that the official statement is available on the Electronic Municipal Market Access (EMMA) system. The notice must include the web address for EMMA and inform the customer that a paper copy is available upon request. Incorrect: Providing a link 30 days after settlement is incorrect because the disclosure or notice must be provided by the settlement date. Requiring a written waiver is incorrect because the delivery requirement is a regulatory obligation that cannot be waived by the customer. While the lead underwriter is responsible for filing the official statement with the MSRB, this does not exempt other syndicate members from the requirement to provide notice to their own customers. Takeaway: MSRB Rule G-32 requires dealers to provide customers with notice of the official statement’s availability on EMMA by the settlement date for all primary offerings.

Correct: The correct approach involves a multi-dimensional analysis that reconciles operational shifts with financial stability. Under Series 16 standards, a Supervisory Analyst must ensure a reasonable basis exists for an analyst’s recommendation. When a company intentionally sacrifices sales volume to pursue a premium pricing strategy, the valuation must demonstrate that the increase in average selling prices (ASPs) and margins compensates for the volume loss. Furthermore, the balance sheet must be scrutinized to ensure the firm has the liquidity and solvency (low leverage) to sustain high R&D costs during a period of transition and intense intra-industry competition. This holistic view ensures that the ‘Strong Buy’ rating is supported by both the strategic narrative and the underlying financial health of the company. Incorrect: Focusing primarily on sales volume as the main driver of health fails to account for strategic shifts in product positioning and margin expansion, which can lead to an inaccurate valuation in a premium-segment transition. Prioritizing aggressive price-cutting to maintain market share often erodes brand equity and long-term profitability, making it a poor justification for a ‘Strong Buy’ rating in this specific scenario. Relying solely on historical balance sheet ratios or dividend yields is insufficient because it ignores the forward-looking impact of R&D and the changing competitive dynamics that define the company’s future earning potential. Assuming that R&D spending will lead to immediate market share gains is a common analytical error, as product research typically has a long lead time and does not impact revenue within a single fiscal quarter. Takeaway: A reasonable basis for a valuation requires reconciling strategic shifts in pricing and volume with the balance sheet’s capacity to fund the research and development necessary to survive intra-industry competition.

Correct: According to MSRB Rule G-3(i), if an associated person fails to complete the Regulatory Element of the Continuing Education requirement within the prescribed 120-day period, that person’s registration is deemed inactive. While in an inactive status, the individual is prohibited from performing any activity that requires registration and is prohibited from receiving any compensation for such activities. The supervisor’s immediate priority must be to halt all registered activities to remain in compliance with regulatory standards. Incorrect: Granting an internal grace period is not permitted as the ‘CE Inactive’ status is an automatic regulatory consequence that the firm cannot override. While waivers exist in extremely rare circumstances, they are not a ‘first step’ and are typically only granted for significant physical disability or other extreme circumstances, not for business convenience. Allowing the receipt of commissions or compensation for registered activities while inactive is a direct violation of MSRB and FINRA rules regarding registration status. Takeaway: Failure to complete the Regulatory Element of Continuing Education results in an immediate ‘CE Inactive’ status, requiring the cessation of all registered duties and related compensation until the requirement is met.

Correct: FINRA Rule 3240 (Borrowing From or Lending to Customers) requires that a member firm have written procedures permitting such arrangements. While the rule identifies five specific circumstances where borrowing/lending may be permitted—including when the customer is a member of the representative’s immediate family—the firm has the right to be more restrictive than the rule. For familial loans, the rule does not strictly mandate prior written approval, but the firm’s own WSPs dictate whether the representative must provide notification or obtain approval. Incorrect: The claim that the firm is prohibited from interfering is incorrect because firms must maintain oversight and can implement stricter internal controls than the baseline FINRA rules. Reporting the loan as a statutory disqualification is incorrect as this situation does not meet the criteria for disqualification defined in the FINRA By-Laws. The assertion that cousins are excluded from the definition of immediate family is factually incorrect; FINRA Rule 3240 explicitly includes cousins, aunts, uncles, and in-laws in its definition of immediate family. Takeaway: While FINRA Rule 3240 allows for borrowing from immediate family, the member firm’s written supervisory procedures ultimately determine the specific notification and approval requirements for the representative.

Correct: MSRB Rule G-47 (Time of Trade Disclosure) requires brokers, dealers, and municipal securities dealers to disclose to a customer, at or prior to the time of trade, all material information known about the transaction and the security. This obligation applies whether the transaction is solicited or unsolicited, and whether the dealer is acting as agent or principal. Material information is defined as facts that a reasonable investor would consider important in making an investment decision, such as the tax status of the bond or specific redemption features. Incorrect: Option B is incorrect because Rule G-47 does not provide an exemption for unsolicited trades or allow for a general waiver of disclosure obligations. Option C is incorrect because the disclosure must occur ‘at or prior to’ the time of trade; providing documents after the trade (T+2) does not satisfy the rule. Option D is incorrect because the MSRB has specifically stated that ‘constructive notice’—the idea that a customer could find the information on EMMA or other public sites—does not relieve the dealer of its duty to disclose material facts directly to the customer. Takeaway: Dealers must disclose all material facts about a municipal security to customers at or before the time of trade, regardless of whether the trade was solicited or if the information is publicly available elsewhere.

Correct: According to FINRA Article V, Section 2, and related supervisory rules, a member firm is required to keep its associated persons’ registration applications current. When a registered person’s information changes, such as a legal name change, an amendment to Form U4 must be filed within 30 days of the firm learning of the change. This ensures that the Central Registration Depository (CRD) remains accurate, which is critical for regulatory oversight, public disclosure, and automated screening processes like those used for AML and sanctions compliance. Incorrect: Waiting for an annual compliance certification is incorrect because the 30-day filing requirement for Form U4 amendments is a continuous obligation. Placing a representative on heightened supervision is a disciplinary or risk-management action but does not satisfy the underlying regulatory requirement to update the U4. Maintaining a registration under a previous name is not permitted; the CRD must reflect the individual’s current legal name to ensure the integrity of the regulatory database and the effectiveness of industry-wide screening tools. Takeaway: Firms are strictly required to amend Form U4 within 30 days of a name change to ensure the accuracy of the CRD and the effectiveness of supervisory screening systems.

Correct: Under FINRA Rule 3110(e), firms are required to investigate the good character, business reputation, and qualifications of an applicant. This specifically includes a requirement to search reasonably available public records to verify the accuracy of the Form U4. This process ensures that the firm identifies any undisclosed criminal history or civil litigation that might lead to a statutory disqualification under Article III of the FINRA By-Laws. Incorrect: Relying only on the Form U5 is insufficient as the firm has an independent duty to verify the U4 information. Fingerprinting is a prerequisite for registration, not a step to be taken after state effectiveness. Allowing a candidate to perform registered duties, such as discussing suitability, before their registration is officially effective and the background check is completed constitutes a violation of registration requirements. Takeaway: Member firms must proactively verify Form U4 disclosures by searching public records to ensure the applicant is qualified and not subject to statutory disqualification.

Correct: When a supervisor identifies a pattern of trades marked as unsolicited that coincide with firm recommendations or appear inconsistent with client profiles, they must investigate to ensure the ‘unsolicited’ designation is not being used to bypass suitability requirements. Reviewing communications (emails, texts) and speaking directly with clients are standard investigative steps to verify the origin of the trade instructions and ensure compliance with FINRA Rule 3110 regarding supervision. Incorrect: Re-designating trades without an investigation assumes guilt and may result in inaccurate records if some trades were actually unsolicited. Filing a Form U4 amendment is premature as it is used for reporting specific events or changes in registration status, not for initial internal investigations of trade marking. Issuing a letter of education is a disciplinary or remedial step that should only occur after the investigation has confirmed that a violation or misunderstanding actually took place. Takeaway: Supervisors must investigate suspicious patterns of unsolicited orders to prevent representatives from using the designation as a tool to circumvent suitability obligations and record-keeping rules.

Correct: Under FINRA By-Laws Article III, Section 4, a person is subject to statutory disqualification if they are enjoined by any court of competent jurisdiction from engaging in or continuing any conduct or practice in connection with the purchase or sale of any security. This includes state court injunctions. To continue the association, the firm must follow the eligibility proceedings, which involve filing an MC-400 application to request permission from FINRA. Incorrect: Statutory disqualification is not limited to felony convictions; it explicitly includes certain injunctions and administrative orders regardless of whether they are federal or state-level. While termination is a common firm response to such findings, it is not the only regulatory path, as firms can apply for an eligibility proceeding to maintain the association under specific conditions and heightened supervision. Takeaway: A permanent injunction from a court regarding securities-related conduct triggers a statutory disqualification, requiring the firm to seek an eligibility proceeding to maintain the association.

Correct: Under MSRB Rule G-3 and FINRA Rule 3110, firms are required to perform a due diligence investigation on all new associated persons. This includes verifying the information on the Form U4 and conducting a background check that covers at least the most recent three years of employment history. Additionally, the supervisor must ensure the candidate is not subject to statutory disqualification under MSRB Rule G-4, which would prevent them from associating with the firm unless a specific eligibility proceeding is successful. Incorrect: The suggestion that a candidate can solicit business before registration is fully processed is incorrect, as there is no grace period for performing regulated activities. The requirement for employment verification is generally focused on the most recent three years for the pre-hire investigation, not ten years for the supervisor’s verification duty (though ten years of history is disclosed on the U4). Finally, a waiver from the MSRB is only sought in cases of actual statutory disqualification, not for every minor regulatory fine that does not meet the disqualification threshold. Takeaway: Supervisors must verify the accuracy of Form U4 and the most recent three years of employment history while ensuring the candidate is not subject to statutory disqualification before they engage in municipal securities business.

Correct: Under FINRA Rule 3110 and the FINRA By-Laws, member firms are responsible for ensuring that their associated persons are properly qualified and registered in the appropriate categories and jurisdictions before engaging in securities business. This includes ‘Blue Sky’ laws which require registration in the state where solicitation occurs (Florida), as well as specific registrations for advisory services (Series 65/66) or options (Series 4 for supervision). The supervisor’s failure to verify and restrict the manager’s activities to their registered scope constitutes a failure to supervise. Incorrect: The $100 gift limit generally does not apply to legitimate business entertainment where the host is present, so reporting it as a gift violation is a secondary or non-issue compared to registration. There is no broad 180-day grace period that allows an individual to solicit business in a new state or perform advisory functions without the proper licenses. Finally, FINRA Rule 3110 explicitly places the burden of supervision on the firm and its supervisors to ensure ongoing compliance with registration requirements; it is not solely the responsibility of the individual representative. Takeaway: Supervisors must ensure associated persons are properly registered both by license type and by state jurisdiction before any solicitation or specialized business activity occurs.

Correct: According to industry standards and FINRA rules, the price at which a trade is actually executed on the exchange is the binding price for the transaction. An erroneous report (often referred to as a ‘bad report’) does not change the terms of the actual execution. The firm is obligated to correct the report to match the execution price, as the contract is based on the market fill, not the notification sent to the client. Incorrect: Honoring the reported price for the sake of goodwill is incorrect because it ignores the regulatory standard that the execution price is the legal basis of the trade. Canceling trades is not the standard procedure for reporting errors if the execution itself was valid and conducted according to the client’s instructions. Allowing a client to choose the price is not a recognized regulatory practice and would lead to inconsistent record-keeping and potential violations regarding the accurate reporting of trade data. Takeaway: The actual execution price on the exchange is legally binding on the customer, regardless of any errors made in the subsequent reporting of that trade.

Correct: Under FINRA By-Laws and the Securities Exchange Act of 1934, a person is subject to statutory disqualification if they have been convicted of any felony within the preceding ten years. This rule is broad and covers all felonies, regardless of whether they are investment-related or involve financial dishonesty. An individual subject to statutory disqualification is ineligible to be associated with a member firm unless the firm applies for and receives approval through a specific eligibility proceeding (MC-400). Incorrect: Option B is incorrect because the ten-year felony rule for statutory disqualification applies to all felony convictions, not just those involving financial crimes. Option C is incorrect because a felony conviction within the ten-year window triggers a disqualification status that requires more than just a Rule 4530 report or a U4 amendment. Option D is incorrect because while the firm may terminate the employee, the disqualification is not an ‘automatic permanent bar’ as there is a process to seek eligibility, and the standard timeframe for a Form U5 filing is 30 days, not 10. Takeaway: Any felony conviction within a ten-year period triggers statutory disqualification for an associated person, regardless of the nature of the crime.

Correct: The primary responsibility of a Supervisory Analyst when encountering an internal contradiction is to ensure the report provides a reasonable basis for its conclusions as required by FINRA Rule 2241. When the narrative analysis (e.g., declining margins) conflicts with the investment conclusion (e.g., a Buy rating), the analyst must reconcile these elements so the report is not misleading. This involves a systematic review of the valuation thesis and the supporting text to identify where the logic diverges, followed by a mandatory correction or the inclusion of a clear, documented justification for the rating that aligns with the facts presented. Incorrect: Automatically adjusting a rating to match the narrative sentiment is inappropriate because the Supervisory Analyst’s role is to review and approve, not to unilaterally determine investment opinions without the analyst’s input. Focusing solely on mathematical accuracy or citation verification addresses data integrity but fails to resolve the logical disconnect between the analysis and the recommendation. Relying on general disclosures about rating systems does not fix a specific instance of internal inconsistency within a single research report and fails to meet the standard of providing a clear and consistent message to the client. Takeaway: Internal consistency requires that the qualitative narrative, financial projections, and final investment recommendation form a logical and non-contradictory argument to ensure a reasonable basis for the report’s conclusions.

Correct: Under FINRA Rule 3110(e), member firms are required to conduct a pre-hire investigation into the good character, business reputation, and qualifications of an applicant. This mandate specifically includes searching reasonably available public records to verify the accuracy of the information contained in the Form U4 and reviewing the Form U5 from previous employers. This independent verification is the primary safeguard against the inclusion of inaccurate content in registration filings and the association of disqualified persons with the firm. Incorrect: Relying on a candidate’s own attestation is insufficient because it lacks the independent verification required by FINRA rules. A letter of good standing from a previous firm’s legal department does not fulfill the regulatory requirement to perform a public record search and review the CRD. Allowing a candidate to work in a non-registered capacity does not address the supervisor’s obligation to verify the integrity of the registration application content before the individual is permitted to function in a registered role. Takeaway: FINRA Rule 3110(e) requires firms to independently verify the accuracy of Form U4 content through public record searches and CRD reviews to ensure the candidate is qualified and not subject to statutory disqualification.

Correct: Under FINRA Rule 3110 and the FINRA By-Laws, firms are required to conduct a pre-hire investigation and verify the accuracy of the Form U4. When a discrepancy is found between a candidate’s self-disclosure and the CRD record, the supervisor must ensure the Form U4 is accurate and complete before submission. This prevents the filing of a false or misleading regulatory document, which is a significant compliance failure. Incorrect: Submitting a known inaccurate Form U4 with the intent to amend it later is a violation of registration rules. Relying on a candidate’s affidavit or verbal explanations when objective evidence in the CRD contradicts them is a failure of the firm’s duty to investigate. Firms cannot obtain ‘waivers’ from other member firms regarding mandatory regulatory disclosure requirements defined by FINRA and the SEC. Takeaway: Supervisors must independently verify Form U4 accuracy against CRD records and ensure all required disclosures are present before filing to maintain regulatory integrity.

Correct: MSRB Rule G-24 dictates that a broker, dealer, or municipal securities dealer that acquires information in a fiduciary or agency capacity (such as a paying agent, transfer agent, or registrar) is prohibited from using that information for the purpose of soliciting purchases, sales, or exchanges of securities, or for any other financial gain, unless the firm receives the express consent of the party for whom the information was obtained (the issuer). Incorrect: The suggestion that internal marketing is permitted without consent fails to recognize that the fiduciary source of the data creates a strict prohibition on its use for solicitation. Relying on the National Do Not Call Registry is incorrect because Rule G-24 addresses the source of the information rather than telemarketing regulations. Suitability determinations do not override the prohibition on using non-public ownership information obtained through a fiduciary role for business development. Takeaway: Information obtained while acting in a fiduciary or agency capacity for an issuer cannot be used for solicitation or financial gain without the issuer’s explicit consent.

Correct: The supervisory analyst is responsible for ensuring that all calculations presented in a research report are relevant, reasonable, and consistent throughout the document. In this scenario, the discrepancy between the terminal growth rate in the valuation model and the long-term outlook in the narrative violates the requirement for internal consistency. Furthermore, when third-party data contradicts primary financial statements (such as a 10-K filing), the analyst must verify the accuracy and credibility of those sources and ensure the calculations reconcile with the subject company’s actual financial position. This rigorous review process is essential to provide a reasonable basis for the report’s conclusions and to maintain the integrity of the valuation thesis. Incorrect: Allowing the report to proceed with a disclaimer regarding data variance fails to address the fundamental requirement that calculations must be accurate and reconcile with financial statements. Removing the conflicting model entirely is an insufficient solution that may deprive the reader of necessary valuation context and fails to correct the underlying analytical inconsistency. Adjusting the narrative to match the model without investigating the validity of the 3% growth rate or the conflicting EBITDA data prioritizes superficial consistency over factual accuracy and professional skepticism, potentially leading to an unsupported or misleading recommendation. Takeaway: Supervisory analysts must ensure that all valuation models, narrative outlooks, and primary financial data are internally consistent and reconciled to provide a credible and reasonable basis for investment recommendations.

Correct: Under Function 2 of the Series 16 standards, specifically tasks related to ensuring consistency and a reasonable basis for conclusions, the Supervisory Analyst (SA) is responsible for verifying that the valuation thesis aligns with the recommendation and that the report’s narrative is consistent with its quantitative models. If an analyst adjusts a discount rate to reflect higher risk but fails to update the qualitative discussion regarding timelines, the report lacks internal consistency. The SA must ensure that the rationale for the price target and rating is logically supported by both the financial model’s inputs and the descriptive content of the report to satisfy the reasonable basis requirement. Incorrect: The approach focusing on historical data verification and formula functionality is incorrect because it describes Function 1 tasks, which deal with data accuracy and mechanical consistency rather than the substantive ‘reasonable basis’ for an analyst’s opinions. The approach that relies solely on a mathematical spread between the market price and the target price is insufficient; a Buy rating requires a holistic reasonable basis where the valuation parameters and the thesis are aligned, not just a numerical gap. The approach emphasizing the citation of external sources and permissions is a compliance and data integrity task under Function 1, which does not address the validity or reasonableness of the analyst’s projections or valuation methodology. Takeaway: A Supervisory Analyst must ensure that the qualitative narrative and quantitative valuation parameters are internally consistent to provide a reasonable basis for the report’s conclusions.

Correct: Under professional standards for research oversight, a Supervisory Analyst must ensure that a reasonable basis exists for all conclusions, including price targets and ratings. This requires verifying that the valuation thesis is supported by the data and that the report content is internally consistent. When a report identifies significant qualitative risks, such as increased competition, but fails to reflect those risks in the quantitative financial projections or valuation parameters, the analyst has not established a reasonable basis. The Supervisory Analyst must require the analyst to reconcile these discrepancies and provide a documented rationale for aggressive valuation assumptions, such as a terminal growth rate that deviates from standard economic forecasts, to ensure the report meets regulatory requirements for accuracy and consistency. Incorrect: Relying on market consensus as a proxy for a reasonable basis is insufficient because the firm must have its own independent justification for its specific conclusions regardless of what other firms are publishing. Focusing exclusively on mathematical accuracy and data sourcing neglects the core responsibility of evaluating the logic and reasonableness of the underlying assumptions and valuation parameters. Mandating a specific rating change to be conservative is an inappropriate intervention; the role of the reviewer is to ensure the analyst’s own conclusion is supported by the evidence provided, not to substitute their own market judgment for the analyst’s independent view. Takeaway: A Supervisory Analyst must ensure that all qualitative risks discussed in a report are logically reconciled with the quantitative valuation parameters to establish a reasonable basis for the final recommendation.

Correct: Under FINRA Rule 2210, social media content is categorized as retail communication. Static content, which remains posted until changed (like a profile or a pre-planned update), requires prior principal approval. Interactive content (like real-time comments or chat) does not require prior principal approval but must be supervised in a manner similar to correspondence and must be archived according to SEA Rule 17a-4 to ensure all business-related communications are preserved. Incorrect: Requiring prior approval for interactive content is not a regulatory requirement and is often impractical for real-time engagement. While firms may choose to prohibit the use of personal accounts for business as a matter of internal policy, it is not a regulatory mandate as long as the firm can effectively supervise and archive the communications. Simply using a disclaimer or limiting the audience to existing clients does not satisfy the core requirements for principal approval of static content and the archiving of all business-related interactions. Takeaway: Supervisors must distinguish between static and interactive social media content to apply the correct prior approval standards while ensuring all business-related communications are archived and monitored.

Correct: The primary objective of Management’s Discussion and Analysis (MD&A) is to provide a narrative explanation of the financial statements that enables investors to see the company through the eyes of management. According to SEC Regulation S-K Item 303, management is required to disclose known trends, demands, commitments, events, or uncertainties that are reasonably likely to have a material effect on the registrant’s financial condition or results of operations. For a supervisory analyst, the most critical factor is ensuring that the research report identifies and evaluates these material trends—such as a decline in comparable store sales or increasing cost pressures—and reconciles management’s qualitative narrative with the quantitative data in the financial statements to provide a reasonable basis for the analyst’s conclusions. Incorrect: Focusing primarily on the reconciliation of non-GAAP financial measures is a common misconception; while important for transparency, it represents only a narrow subset of the MD&A requirements and fails to capture the broader discussion of liquidity and capital resources. Emphasizing historical performance data from summary tables without adjusting for the qualitative context provided in the narrative ignores the ‘discussion’ component of MD&A, which often contains critical information about the non-recurring nature of certain gains or losses. Relying solely on management’s optimistic forward-looking statements regarding market share expansion, even with a safe harbor disclaimer, is insufficient for a research report as it fails the requirement to have an independent, reasonable basis for a recommendation and ignores the analyst’s duty to weigh those statements against disclosed risks. Takeaway: Effective MD&A analysis requires reconciling management’s narrative disclosures of material trends and uncertainties with the quantitative financial data to ensure a reasonable basis for future projections.

Correct: Under the Customer Identification Program (CIP) requirements and FINRA recordkeeping rules, a firm must obtain and maintain a physical residential or business address for each individual customer. While a P.O. Box may be used for mailing purposes, it does not satisfy the requirement for a physical location. Additionally, address changes to foreign jurisdictions represent a potential red flag for money laundering or sanctions evasion, requiring the supervisor to ensure the new location is screened against OFAC lists and evaluated for jurisdictional risk. Incorrect: Allowing a P.O. Box as a primary legal address is a violation of CIP rules which require a physical location. Requiring a domestic Power of Attorney for all foreign residents is not a regulatory requirement and could be seen as an unnecessary barrier to service. Automatically freezing accounts or placing holds on wires solely based on an address change to a non-FATF jurisdiction is an overly broad response that does not align with a risk-based approach and could lead to regulatory scrutiny regarding account access. Takeaway: Supervisors must ensure that a physical address is always on file for CIP purposes and that foreign address changes are subjected to enhanced AML screening and jurisdictional risk assessment.

Correct: Under FINRA By-Laws Article III, Section 3, a person subject to statutory disqualification (such as a bar by an SRO) cannot be associated with a member firm unless the firm applies for and receives special permission through an eligibility proceeding (MC-400). The firm must also ensure the Form U4 is accurate and updated promptly when such information is discovered to maintain the integrity of the CRD system. Incorrect: Implementing heightened supervision is a common requirement for individuals with a disciplinary history, but it does not bypass the requirement to update the CRD or address the statutory disqualification status. Filing a Form U5 is required upon termination, but the deadline is 30 days, not 60, and the firm must first address the current inaccurate Form U4. Requesting a private letter ruling from the SEC is not the standard procedure for resolving FINRA registration and disqualification issues. Takeaway: Firms must promptly update Form U4 and initiate eligibility proceedings when a statutory disqualification is discovered to comply with FINRA qualification and supervision standards.

Correct: Under FINRA Rule 2150(c), an associated person is prohibited from sharing in the profits or losses of a customer’s account unless three conditions are met: the associated person obtains prior written authorization from the member firm, the customer provides written authorization, and the sharing is in direct proportion to the financial contributions made by each party. The proportionality requirement is only waived if the customer is an immediate family member of the associated person. Incorrect: Providing a guarantee against loss is a violation of Rule 2150(b), which explicitly prohibits associated persons from guaranteeing a customer against loss in any securities account. Sharing in profits without a proportional financial contribution is only permitted for accounts with immediate family members; for all other clients, proportionality is mandatory. Verbal agreements are insufficient as the rule requires specific written authorizations from both the firm and the customer. Takeaway: For non-family members, any profit or loss sharing arrangement must be proportional to the capital invested and requires prior written approval from the member firm.