Series 23 General Securities Principal Exam Sales Supervisor

Correct: According to NFA Interpretive Notice 9029, CTAs must allocate bunched orders as soon as practicable after the order is filled. The absolute deadline for this allocation is the end of the trading day on which the order was executed. This requirement is designed to prevent ‘cherry-picking,’ where a manager might wait to see market performance before deciding which accounts receive the most favorable prices. Incorrect: The suggestion that allocations can wait 24 hours or until the next business day is incorrect because it violates the ‘end of the trading day’ rule and increases the risk of preferential treatment based on subsequent market movement. Delaying documentation until monthly statements is a failure of both allocation and recordkeeping requirements, as individual account records must reflect trades promptly. Takeaway: Bunched orders must be allocated to individual accounts as soon as possible and no later than the end of the trading day to ensure fair and equitable treatment for all customers.

Correct: Under CFTC Regulations 4.24(l) and 4.34(l), which are enforced by the NFA, CPOs and CTAs are required to disclose any material administrative, civil, or criminal actions against the firm or its principals within the past five years. Since the individual is a principal of the firm and the SEC action occurred four years ago, it falls within the mandatory five-year disclosure window and is considered material information for prospective participants. Incorrect: Option B is incorrect because the disclosure requirement for principals is not limited to actions occurring at the current firm; it follows the individual. Option C is incorrect because the rule applies to all principals of the CPO/CTA, not just those with trading authority. Option D is incorrect because disclosure in the NFA registration system (Form 8-R) does not satisfy the requirement to provide this information directly to potential investors in the Disclosure Document. Takeaway: All material disciplinary actions against a CPO, CTA, or any of its principals within the preceding five years must be disclosed in the firm’s Disclosure Document.

Correct: According to NFA Arbitration Rules, a claim must be filed within two years of the date the party knew or should have known of the act or transaction that is the subject of the dispute. This ‘discovery rule’ allows for claims to be filed even if the actual transaction occurred more than two years ago, provided the claimant acted promptly upon discovering the issue. Incorrect: The two-year window is not strictly from the date of the transaction but from the date of discovery or when the party should have reasonably known of the issue. There is no requirement for a three-year concealment period or for a civil court to determine the statute of limitations before the NFA takes jurisdiction; the NFA’s own Secretary or arbitration panel determines eligibility based on the two-year discovery rule. Takeaway: NFA arbitration claims are subject to a two-year statute of limitations starting from the time the claimant discovered or should have reasonably discovered the dispute.

Correct: According to NFA Compliance Rule 2-35 and related CFTC regulations, a Commodity Pool Operator (CPO) is required to disclose in its Disclosure Document whether any of its principals have purchased or intend to purchase units in the pool. This requirement is designed to provide transparency to prospective participants regarding the financial interest and alignment of the pool’s management with the investors. Incorrect: The suggestion of a 25% threshold is incorrect because NFA rules require the disclosure of the fact of principal investment regardless of the specific percentage of ownership. The requirement for a 48-hour update is not the standard for Disclosure Document amendments, which are generally required when the document becomes materially inaccurate. Prohibiting the disclosure of principal investments is incorrect as transparency regarding principal participation is a mandatory disclosure item under NFA and CFTC regulations. Takeaway: CPOs must disclose in their Disclosure Documents whether principals have purchased or intend to purchase units in the pool to ensure transparency for prospective investors.

Correct: NFA Compliance Rule 2-13 and related CFTC regulations require CPOs and CTAs to disclose all material conflicts of interest in their Disclosure Documents. This includes a full description of any arrangement where the CPO or its principals may benefit, directly or indirectly, from the pool’s use of a particular service provider, such as an affiliated FCM. The disclosure must be sufficient for a participant to understand the nature of the conflict and how it might affect the pool’s performance. Incorrect: The requirement for disclosure is not based on a specific percentage threshold of net asset value, but rather on the materiality of the conflict itself. Simply naming the affiliate is insufficient; the nature of the conflict and the potential benefits to the CPO must be explained. While comparative data might be helpful, the NFA does not specifically mandate a comparative table of three other FCMs as the standard for conflict disclosure. Takeaway: CPOs must provide a comprehensive and transparent description of all material conflicts of interest, particularly those involving affiliated service providers, within their Disclosure Documents.

Correct: Under NFA Compliance Rule 2-13 and related CFTC regulations, a Disclosure Document must include the business background of each principal for the preceding five years. This disclosure is not limited to industry-specific experience and must include the name and main business of any corporation or organization in which the principal’s occupations were carried on. This ensures that potential investors have a clear and transparent view of the individuals’ professional history and any potential red flags associated with their previous affiliations. Incorrect: Limiting the disclosure to three years is insufficient because the regulatory requirement is five years. Omitting the names of dissolved firms or focusing only on commodity-related experience fails to meet the requirement for a complete business history, which must include the names and primary business activities of all employers during the five-year window, regardless of the industry or the current status of the employer. Takeaway: NFA and CFTC regulations require the disclosure of the full five-year business background for all principals, including the names and primary business activities of all previous employers.

Correct: NFA Compliance Rule 2-10 and CFTC Regulation 1.35 require that order tickets include specific timestamps, including the time of receipt, entry, and execution. When a recordkeeping deficiency is identified, the branch manager must document the error and take proactive steps to remediate the underlying cause. This demonstrates proper supervision under NFA Rule 2-9 and ensures future compliance with record-retention standards. Incorrect: Reconstructing or estimating timestamps is a violation of recordkeeping integrity and could be interpreted as falsifying records. Obtaining a client waiver is insufficient because regulatory recordkeeping requirements are mandatory and cannot be waived by a private party. Waiting for an audit to disclose the issue is a failure of the manager’s supervisory obligations to maintain and correct the firm’s internal control systems promptly. Takeaway: Branch managers must proactively document and remediate any failures in the recordkeeping process to ensure all required data points, such as execution timestamps, are captured in accordance with NFA and CFTC regulations.

Correct: NFA Compliance Rule 2-9 and its related Interpretive Notices require Member firms to diligently supervise their branch offices. While firms have some flexibility in designing a risk-based audit program, the NFA explicitly identifies high personnel turnover and a significant number of customer complaints as ‘red flags’ or risk factors. These factors require the firm to perform more frequent or even immediate on-site reviews to ensure that the branch is operating in compliance with NFA rules and that the supervision is effective. Incorrect: Deferring an audit when clear risk indicators are present fails the ‘diligent supervision’ standard required by Rule 2-9. Relying solely on a manager’s attestation is insufficient when external indicators suggest potential issues. The requirement for on-site audits is not limited to offices that handle funds; solicitation and sales practices also require robust oversight. Finally, firms are expected to manage their own internal supervisory programs and do not need to wait for NFA participation to address internal compliance concerns. Takeaway: NFA Member firms must implement a risk-based branch audit program where significant red flags, such as increased complaints or high turnover, trigger prompt on-site inspections.

Correct: NFA Compliance Rule 2-29 requires that promotional material must not be misleading and must provide a balanced presentation of risk and profit. Specifically, risk disclosures must be at least as prominent as any discussion of potential profits. Furthermore, any mention of hypothetical or simulated performance, such as back-tested results, must be accompanied by the specific cautionary statement prescribed by the NFA to prevent the public from overestimating the reliability of non-real-time data. Incorrect: While the NFA may require certain firms under disciplinary review to file promotional material for pre-approval, it is not a universal requirement for all CPOs. Rule 2-29 applies to all communications with the public, and there is no exemption for sophisticated investors or qualified eligible participants regarding the balanced presentation of risk. Simply retaining records or transcribing verbal disclosures for three years addresses recordkeeping requirements but does not rectify the underlying compliance failure regarding the content and prominence of risk disclosures. Takeaway: Promotional materials must balance profit claims with equally prominent risk disclosures and include specific NFA-mandated disclaimers when presenting hypothetical performance.

Correct: Under NFA Compliance Rule 2-29 and CFTC Part 4 regulations, all performance information must be accurate and not misleading. If a firm discovers that its performance records or disclosure documents contain material errors, the immediate priority is to stop the dissemination of the false information and correct the record for those who have already received it to prevent fraudulent inducement or misinformed investment decisions. Incorrect: Waiting for a scheduled update is a violation of the requirement to provide accurate and current disclosures. Filing a disciplinary report is an administrative step that does not address the immediate risk to the public. Adjusting future figures to ‘offset’ a past error is a form of record manipulation that violates just and equitable principles of trade and further compromises the integrity of the performance history. Takeaway: The immediate cessation of use and notification of affected parties is the mandatory first step when a material deficiency in performance records is identified.

Correct: According to NFA Compliance Rule 2-13, which incorporates CFTC Regulation 4.26, if a CPO or CTA knows or should know that a disclosure document is materially inaccurate or incomplete, they must correct the defect and file the amendment with the NFA within 21 calendar days of the discovery. Incorrect: The suggestion of a 48-hour notification and 60-day distribution period does not align with the specific 21-day filing requirement for material inaccuracies. While disclosure documents generally have a 9-month lifespan before they must be updated, this does not apply to the correction of known material inaccuracies, which must be addressed much sooner. Suspending all solicitations until a full NFA audit is completed is an extreme measure not mandated by the standard amendment rules for fee changes. Takeaway: Material inaccuracies or omissions in NFA disclosure documents must be corrected and filed within 21 days of the date the firm becomes aware of the issue.

Correct: NFA and CFTC regulations, specifically CFTC Regulation 1.35, require that every order received from a customer must be recorded on an order ticket that includes the date and time, to the nearest minute, that the order was received. This requirement is absolute and does not provide exceptions for fast market conditions or high volatility, as the timestamp is critical for preventing front-running and ensuring fair trade allocation. Incorrect: Relying on phone logs is insufficient because the order ticket itself is the primary record of the transaction and must be complete. There is no regulatory provision allowing a 30-minute delay in timestamping based on market conditions, as this would undermine the audit trail. Waivers for institutional clients do not exempt a firm from basic recordkeeping requirements regarding order receipt times, as these rules are designed to protect market integrity. Takeaway: Order tickets must reflect the exact time of receipt to the nearest minute to maintain a complete audit trail and ensure compliance with NFA recordkeeping standards.

Correct: NFA Compliance Rule 2-4 is a broad, ethical ‘catch-all’ provision that requires Members and Associates to observe high standards of commercial honor and just and equitable principles of trade. It is designed to cover unethical conduct that may not be specifically prohibited by other technical rules. Prioritizing personal trades over client trades to the clients’ detriment is a clear violation of the spirit of fair dealing and commercial honor, necessitating disciplinary action even if a specific technical loophole was exploited. Incorrect: The other options are incorrect because Rule 2-4 does not require a specific technical rule to be broken for a violation to occur; therefore, waiting for a manual update or a client complaint is insufficient. Rule 2-4 is a proactive ethical standard, not a reactive dispute resolution tool. Furthermore, referring the matter to a Business Continuity committee is inappropriate as this is a conduct and ethics issue, not a disaster recovery or operational resilience matter. Takeaway: NFA Compliance Rule 2-4 serves as a broad ethical standard that allows for disciplinary action against unfair or dishonorable conduct even in the absence of a specific technical rule violation.

Correct: NFA Bylaw 1101 prohibits NFA members from conducting futures-related business with any person or entity that is required to be registered with the CFTC but is not a member of the NFA. The Branch Manager is responsible for ensuring the firm has a robust due diligence process to verify the registration or exemption status of all counterparties. Blindly accepting a claim of exemption without verification is a violation of the firm’s supervisory duties and Bylaw 1101. Incorrect: Relying solely on a written representation of exemption is insufficient if the firm has not taken reasonable steps to verify the claim. A temporary license is a mechanism for individuals applying to be Associated Persons (APs) under a firm’s sponsorship, not for third-party entities. Form 8-T is specifically used to notify the NFA of the termination of an AP’s association with a firm and cannot be used to register or exempt an independent solicitor. Takeaway: NFA members have an affirmative obligation under Bylaw 1101 to verify that any entity they conduct business with is either an NFA member or holds a valid registration exemption.

Correct: NFA Compliance Rule 2-10, which incorporates CFTC Regulation 1.31 by reference, requires that all books and records required to be kept by the Commodity Exchange Act and NFA rules must be maintained for a period of five years from the date thereof. Furthermore, these records must be readily accessible during the first two years of the five-year period. In the scenario, records from four years ago being in deep archive is acceptable, as they are past the two-year ‘readily accessible’ threshold. Incorrect: The suggestion of a three-year retention period is incorrect because the standard requirement is five years. Requiring records to remain on-site for the full five years is not a regulatory requirement, as off-site storage is permitted after the initial two-year period of ready accessibility. A seven-year retention period is a common internal bank policy or tax requirement but exceeds the specific NFA/CFTC requirement for general commodity interest records. Takeaway: NFA and CFTC regulations require books and records to be maintained for five years, with the first two years requiring immediate or ready accessibility.

Correct: NFA rules require that when an Associated Person (AP) leaves a firm, the sponsoring Member must file a Form 8-T (Notice of Termination) within 30 days of the termination date. When a new firm wishes to sponsor that individual, the new sponsor is responsible for conducting due diligence, including verifying the applicant’s background and ensuring they meet proficiency requirements. This ensures compliance with NFA Bylaw 1101, which prohibits Members from doing business with non-Members who are required to be registered. Incorrect: The responsibility for filing termination notices rests with the sponsoring firm, not the individual AP. NFA Bylaw 1101 is a strict liability rule that does not provide a 60-day grace period for conducting business with unregistered persons who are required to be registered. Furthermore, while some proficiency requirements may be waived if the AP was recently registered, the new sponsor cannot simply bypass the fitness and background screening process by relying on the previous firm’s records. Takeaway: Sponsors must file Form 8-T within 30 days of an AP’s departure, and new sponsors must independently verify registration and fitness to comply with NFA Bylaw 1101.

Correct: NFA Compliance Rule 2-38 requires each Member to establish and maintain a written business continuity plan. Crucially, the rule mandates that Members must provide the NFA with current emergency contact information for two individuals who are authorized to make key decisions. Furthermore, the plan must be reviewed at least annually and updated as necessary to reflect changes in the firm’s operations, personnel, or technology architecture. The departure of a primary contact and a major infrastructure change (moving to the cloud) both necessitate immediate updates and a formal review of the plan’s effectiveness. Incorrect: The NFA does not require firms to submit their business continuity plans for formal approval every time a change is made; rather, the firm must maintain the plan and make it available for inspection. While firms must disclose to customers how they will respond to significant disruptions, they are not required to provide customers with full internal technical specifications. Additionally, while testing the plan is a best practice and part of maintaining an effective plan, NFA rules do not prescribe a specific ‘live-site failover simulation’ every six months. Takeaway: NFA Members must update emergency contact information promptly and conduct at least an annual review of their Business Continuity Plan to ensure it reflects current operations and personnel.

Correct: FCMs are required to report large trader positions to the CFTC when they exceed specific levels defined by the commission. Form 102 is used to identify the owners of these positions. An automated system that monitors these levels daily and provides early warnings before the threshold is hit is the most effective way to ensure the firm meets its filing deadlines and maintains accurate records as required by NFA and CFTC regulations. Incorrect: Relying solely on the clearinghouse is insufficient because the FCM has independent regulatory obligations to identify and report the beneficial owners of large positions. Monthly self-certification by clients is too infrequent and shifts the firm’s compliance responsibility to the customer, which is not acceptable under NFA rules. Restricting client trading to a fixed percentage of limits is a commercial decision that does not address the legal requirement to report positions that reach the actual CFTC reporting levels, which are often distinct from speculative limits. Takeaway: Firms must proactively monitor account sizes against CFTC reporting thresholds to ensure the timely and accurate submission of large trader reports and identification forms.

Correct: Under NFA Compliance Rule 2-13 and CFTC Regulations 4.21 and 4.31, a Commodity Pool Operator (CPO) or Commodity Trading Advisor (CTA) is prohibited from using a disclosure document if the information contained within it is as of a date more than nine months prior to the date of its use. This ensures that prospective investors receive reasonably current information regarding the risks, performance, and management of the pool or trading program. Incorrect: The twelve-month period is a common standard for annual financial reports but does not apply to the validity of the primary disclosure document. A six-month update for performance data is not the regulatory threshold for the entire document’s expiration. A twenty-four-month period is significantly longer than the nine-month limit allowed by the NFA and CFTC for active solicitation materials. Takeaway: CPO and CTA disclosure documents must be updated at least every nine months to remain valid for use in soliciting prospective participants.

Correct: According to NFA Rule 3-4 (Answer to Complaint), a respondent has 30 days from the date of the complaint to file a written answer. This answer must admit, deny, or state that the respondent lacks sufficient knowledge to admit or deny each allegation. If the respondent fails to file a timely answer, the NFA Business Conduct Committee may treat the failure as an admission of the charges and a waiver of the respondent’s right to a hearing, which typically leads to a default judgment. Incorrect: The 15-business-day timeframe is incorrect for a formal complaint response, and daily fines are not the standard automatic consequence for a missed filing. The 45-day period is an incorrect extension of the actual 30-day rule, and registration revocation is a potential final sanction rather than an immediate procedural result. The 60-day timeframe is too long, and mandatory probation is a specific penalty that would be determined after a hearing or default judgment, not an automatic procedural consequence of a late filing. Takeaway: In NFA disciplinary proceedings, a respondent has exactly 30 days to file a written answer, or they risk a default judgment where all allegations are deemed admitted and the right to a hearing is waived.

Correct: Futures contracts are standardized instruments that trade on organized exchanges. A central clearinghouse acts as the buyer to every seller and the seller to every buyer, which effectively eliminates individual counterparty credit risk. In contrast, forward contracts are over-the-counter (OTC) instruments that are privately negotiated and customized between two parties, meaning each party is directly exposed to the credit risk of the other. Incorrect: One option incorrectly suggests that forwards are subject to daily mark-to-market and futures settle at expiration; in reality, futures are marked-to-market daily while forwards typically settle at the end. Another option claims futures are customizable and forwards are standardized, which reverses the actual definitions. The final option incorrectly states that forwards are exchange-traded and futures are private; futures are the exchange-traded instruments, while forwards are private OTC agreements. Takeaway: The defining differences between futures and forwards are standardization, exchange trading, and the use of a clearinghouse to mitigate counterparty risk in futures markets.

Correct: Basis is defined as the difference between the local cash price and the futures price (Cash – Futures). When a participant enters a hedge, they are essentially trading price risk for basis risk. If the basis changes (strengthens or weakens) between the time the hedge is established and the time it is liquidated, the gain or loss in the futures market will not perfectly offset the loss or gain in the cash market, leading to the discrepancy described by the client. Incorrect: Marking-to-market is a procedural requirement for daily cash settlement and does not explain the divergence between cash and futures prices. Cost of carry is a component that helps determine the theoretical price of a futures contract but is not the risk of price divergence itself. Yield curve risk is a specialized form of interest rate risk that is not applicable to general price hedging scenarios involving the relationship between a physical asset and its corresponding futures contract. Takeaway: Hedging does not eliminate all risk; it substitutes absolute price risk for basis risk, which is the risk that the spread between cash and futures prices will change.

Correct: Marking-to-market is a fundamental requirement in the futures industry where the value of a futures contract is adjusted daily based on the closing settlement price. This process ensures that gains are credited and losses are debited from the account in cash every day, preventing the accumulation of large, uncollateralized losses and maintaining the solvency of the clearing system. Incorrect: Deferring the recognition of losses until a position is offset is incorrect because futures contracts require daily settlement of gains and losses. Marking positions on a weekly basis is insufficient as exchange and NFA standards mandate daily valuation to manage credit risk. Using a three-day average price is not permitted for marking-to-market, as the process must reflect the specific daily settlement price determined by the exchange at the close of trading. Takeaway: Marking-to-market ensures financial transparency and systemic stability by requiring the daily cash settlement of all price fluctuations in futures contracts.

Correct: NFA Compliance Rule 2-4 requires members to observe high standards of commercial honor and just and equitable principles of trade. Prioritizing firm trades over customer trades, even if the financial impact is small, violates the principle of fair dealing. The firm must take proactive steps to rectify the unfair practice immediately to uphold the integrity of the markets and its fiduciary-like duty to customers. Incorrect: Disclosing the flaw in a Disclosure Document does not excuse the ongoing violation of equitable principles. Providing fee credits is an insufficient remedy because it does not fix the underlying unethical trade practice. Waiting for an NFA interpretation is inappropriate when a clear violation of fair trade principles has been identified, as firms are expected to maintain high standards of conduct at all times without external prompting. Takeaway: NFA Compliance Rule 2-4 serves as a broad ethical mandate requiring firms to prioritize fair treatment of customers and commercial honor over proprietary interests.

Correct: Price limits are regulatory or exchange-mandated boundaries that restrict the maximum price fluctuation allowed for a futures contract during a single trading session. When a contract hits its limit (limit up or limit down), trading is not necessarily suspended; rather, it is restricted. Market participants are still permitted to execute trades at the limit price or at any price within the established range, though liquidity often dries up because few participants are willing to trade at the restricted price. Incorrect: Suspending all trading until the next business day is a characteristic of certain circuit breakers or specific exchange ‘halts,’ but hitting a daily price limit typically allows for continued trading at the limit price. Converting limit orders to market orders is not a standard procedure and would likely exacerbate volatility rather than control it. While exchanges may increase margin requirements during periods of high volatility, there is no regulatory requirement for the clearinghouse to liquidate positions within one hour solely because a price limit was reached. Takeaway: Daily price limits restrict the range of trade prices but allow for continued execution at or within the limit price.

Correct: The cost of carry represents the total cost of holding an asset until the futures delivery date, including interest, storage, and insurance. In a normal market (contango), the futures price equals the spot price plus the cost of carry. Therefore, if the cost of carry decreases (for example, due to a drop in interest rates), the premium of the futures price over the spot price must also decrease, leading to a narrowing of the basis. Incorrect: The suggestion that futures prices increase when carrying costs decrease is incorrect because the futures price is mathematically linked to the spot price plus those costs. Spot prices do not adjust to futures prices; rather, futures prices converge toward the spot price as the delivery date approaches and the cost of carry reaches zero. Finally, the cost of carry is not fixed; it is highly sensitive to market fluctuations in interest rates, storage availability, and insurance premiums. Takeaway: The cost of carry is the primary driver of the price differential between spot and futures markets, and any reduction in these costs will reduce the premium of the futures price over the cash price.

Correct: To offset a futures position, a market participant must take an equal and opposite position in the same delivery month on the same exchange. For a long position (a purchase), the offset is achieved by selling the same number of contracts. This process allows the clearinghouse to net the positions to zero, effectively liquidating the trader’s obligations and realizing any profit or loss. Incorrect: Purchasing a put option provides a hedge against price declines but does not liquidate the underlying futures contract; the original position remains open. Private swap agreements are over-the-counter (OTC) instruments and do not interact with the exchange’s clearing system to offset a listed futures contract. Futures contracts cannot be simply abandoned; they must be either offset, rolled over, or fulfilled through the delivery process. Takeaway: Offsetting a futures position requires an equal and opposite transaction for the same commodity, delivery month, and exchange to terminate the contractual obligation.

Correct: According to CFTC Regulation 4.21 and NFA Compliance Rule 2-13, a CPO or CTA is prohibited from using a disclosure document that is more than nine months old. This requirement ensures that the information provided to prospective investors, particularly performance data and fee structures, remains current and reflects the recent history of the operator or advisor. Incorrect: While filing with the NFA is required, there is no 60-day notarization requirement for verbal solicitation. Independent auditors do not certify the likelihood of positive returns, as such guarantees are prohibited in the futures industry. Restricting delivery to Qualified Eligible Participants (QEPs) may change the level of detail required in some disclosures under Rule 4.7, but it does not negate the fundamental responsibility to provide accurate and current information when a disclosure document is utilized. Takeaway: CPO and CTA disclosure documents must be updated at least every nine months to ensure that prospective participants receive timely and relevant information regarding risks and performance.

Correct: NFA Compliance Rule 2-9 requires each Member to diligently supervise its employees and agents in all aspects of their futures activities. When a gap in Written Supervisory Procedures (WSPs) is identified, the firm has an immediate obligation to rectify the deficiency. This includes updating the formal documentation and ensuring that the personnel responsible for carrying out the supervision are properly trained on the new protocols to ensure the firm’s operations are conducted in a compliant manner. Incorrect: Waiting for an NFA audit is a reactive approach that violates the principle of diligent supervision, as firms are expected to self-identify and correct issues. Relying on informal standards or the discretion of branch managers is insufficient because NFA rules require structured, documented, and uniform supervisory frameworks. Requesting a waiver for a failure to maintain adequate WSPs is not a standard regulatory procedure, as compliance with supervision rules is a continuous requirement for NFA membership. Takeaway: NFA Compliance Rule 2-9 mandates that firms must proactively maintain and update written supervisory procedures to ensure the diligent oversight of all business activities and personnel.