Series 30 NFA Branch Manager Exam

Correct: Under 31 CFR Part 356, also known as the Uniform Offering Circular, bidders are required to report their Net Long Position (NLP) if it exceeds a specific threshold (typically $100 million for most Treasury notes) at the time of the bid. This calculation includes when-issued positions, futures contracts, and other related holdings to ensure market transparency and prevent any single bidder from dominating the auction. Incorrect: Restricting bids to 10% is incorrect because the actual regulatory limit for a single bidder is 35% of the offering amount. There is no rule requiring a 48-hour freeze on secondary market trading prior to an auction, as the when-issued market is a vital part of price discovery. Furthermore, the Treasury Department does not require a physical letter of intent five days in advance; bids are submitted electronically through systems like TAAPS or via authorized submitters. Takeaway: Bidders in Treasury auctions must disclose their net long positions when their holdings in the security reach or exceed the reporting thresholds established by the Uniform Offering Circular.

Correct: Under FINRA Rule 2121 and SEC recordkeeping requirements, firms must be able to justify their mark-ups and mark-downs. Providing a clear narrative of the methodology used when specific logs are missing, combined with implementing a prospective protocol for contemporaneous documentation, demonstrates a commitment to transparency and regulatory cooperation. This approach addresses the immediate regulatory gap while strengthening the firm’s internal controls. Incorrect: Requesting a waiver for basic pricing documentation is not a standard or accepted practice for regulatory inquiries, especially when the inquiry concerns fair pricing rules. Redacting client information in response to a formal regulatory request or subpoena is generally prohibited and can be viewed as an obstruction of the examination process. Delaying a response for a multi-year audit is an inappropriate response to a targeted inquiry and may lead to further disciplinary action for failure to cooperate with a self-regulatory organization. Takeaway: Compliance officers must ensure that the firm can provide clear, methodology-based documentation to regulators to justify pricing and commissions in accordance with FINRA and SEC standards.

Correct: Under FINRA Rule 3210, associated persons must obtain prior written consent from their employer before opening or maintaining an account at another financial institution. To effectively monitor for conflicts of interest, front-running, and insider trading, firms should implement a pre-clearance process. This proactive approach ensures that trades are vetted against restricted and watch lists before execution, rather than relying on retrospective reporting which cannot prevent the violation. Incorrect: Relying on monthly affidavits is a reactive measure that depends entirely on employee honesty and does not provide the firm with the necessary independent verification of trading activity. Limiting disclosure to only certain employees ignores the fact that all associated persons are subject to regulatory oversight regarding outside accounts. Post-trade surveillance within a 48-hour window is a useful secondary check but is insufficient as a primary control compared to pre-clearance, as it allows violations to occur before they are detected. Takeaway: Effective employee account monitoring requires a combination of prior written consent for outside accounts, direct receipt of duplicate statements, and a proactive pre-clearance mechanism to prevent regulatory breaches.

Correct: The Compliance Officer is responsible for ensuring that both manual and computer-based surveillance procedures are robust enough to detect and document regulatory compliance. Under NYSE Rule 127, block crosses outside the prevailing quotation require specific procedures, including price improvement for the orders involved. A principal’s review must be substantive; simply noting ‘market conditions’ without evidence of the required price improvement or the rationale for the cross indicates a failure in the supervisory procedure that the Compliance Officer must remediate. Incorrect: Increasing the threshold for alerts would likely lead to missing more regulatory breaches and does not address the underlying issue of poor principal documentation. While automation can assist, replacing manual oversight entirely with algorithms is not a regulatory requirement and may not capture the nuances of ‘clean cross’ rules. Filing a SAR based solely on a lack of documentation for a block trade is premature and incorrectly cites the Securities Act of 1933, which primarily governs new issues rather than secondary market trading practices like block crosses. Takeaway: Effective surveillance requires a combination of properly calibrated automated alerts and substantive, well-documented manual reviews by a principal to ensure compliance with specific trading rules like NYSE Rule 127.

Correct: Implementing an automated exception report is the most effective surveillance enhancement because it provides a systematic, data-driven method to detect potential front-running or trading ahead of client orders. This directly addresses the gap identified in the analysis and ensures the firm is upholding FINRA Rule 2010, which requires members to observe high standards of commercial honor and just and equitable principles of trade by preventing the misuse of non-public client order information. Incorrect: Requiring a written rationale for trades in the last hour is a manual process that does not specifically target the relationship between proprietary and client orders. Prohibiting trading based on research lists addresses a different conflict of interest (research-related) rather than the specific gap of trading ahead of block orders. Mandating CFO approval for all trades is an impractical bottleneck that does not constitute a surveillance procedure designed to detect patterns of misconduct after the fact. Takeaway: Effective surveillance of proprietary trading requires automated systems that can correlate the timing of firm trades with non-public client order flow to identify and prevent front-running violations.

Correct: Under FINRA Rule 2121 and its supplementary material, the fairness of a mark-up or mark-down is determined by the prevailing market price. For a dealer acting as a principal, the best evidence of the prevailing market price is the price at which dealers are trading with one another (contemporaneous inter-dealer transactions). This ensures that the price provided to the customer is reflective of the current market environment rather than arbitrary internal metrics. Incorrect: The 5% policy is a guideline and not a safe harbor; mark-ups below 5% can still be considered unfair depending on the circumstances. Internal cost of acquisition is only relevant if it represents the prevailing market price at the time of the trade; if the market has moved, the cost basis is no longer the correct benchmark. Historical volume may explain why a spread is wide, but it does not serve as the primary benchmark for calculating the mark-up itself under the rule. Takeaway: Fair prices and commissions under FINRA Rule 2121 must be based on the prevailing market price, which is most accurately reflected by contemporaneous inter-dealer transactions.

Correct: FINRA Rule 7440 requires members to record specific information for each order, including the time of receipt, entry, and any modification. Rule 7440(a) specifically requires that all business clocks used to record the time of these events be synchronized to a common time source, which is the NIST atomic clock, to ensure an accurate audit trail. Furthermore, the rule requires the recording of the identity of the person or system (such as a specific algorithm ID) that originated or modified the order to maintain a complete and transparent record of the order’s life cycle. Incorrect: The suggestion to only synchronize the final execution time is incorrect because Rule 7440 applies to all events in the order life cycle, including receipt and modification. Allowing a five-second variance is incorrect because the standard for business clock synchronization is generally one second (and even tighter for certain electronic systems), and manual logs cannot replace the requirement for synchronized electronic timestamps. Exempting proprietary orders is incorrect because Rule 7440 applies to both customer and proprietary orders to ensure market integrity and a complete audit trail. Takeaway: Compliance with FINRA Rule 7440 requires precise clock synchronization with NIST and the detailed recording of every event and participant, including automated systems, throughout an order’s life cycle.

Correct: Under FINRA Rule 6730, transactions in TRACE-eligible securities, including Agency Debt Securities, must be reported within 15 minutes of the time of execution. If a trade is not reported within the required timeframe, the member must report the trade as soon as possible and include a late modifier. Additionally, the firm must maintain and update its Written Supervisory Procedures (WSPs) to ensure ongoing compliance and prevent recurrence of the reporting failure. Incorrect: Suppressing late reports or waiting until the end of the month is a violation of reporting integrity and transparency requirements. There is no regulatory provision that allows for a 24-hour or settlement-cycle delay simply because the error occurred during a system migration. Furthermore, the 15-minute reporting requirement for Agency Debt Securities applies regardless of the par value of the trade; there is no $1 million exemption for the timing of these reports. Takeaway: TRACE-eligible securities, including Agency Debt, must be reported within 15 minutes of execution, and any system-driven delays require immediate corrective reporting with a late modifier and a review of supervisory controls.

Correct: Under NFA Compliance Rule 2-13 and CFTC Regulation 4.34, Commodity Trading Advisors (CTAs) and Commodity Pool Operators (CPOs) have an affirmative duty to disclose material disciplinary actions involving the firm or its principals. A formal NFA disciplinary complaint is considered a material event that renders the existing Disclosure Document inaccurate. When a material change occurs, the firm must immediately cease using the outdated document and provide an amendment or a revised document to all current and prospective clients. This ensures that investors are making decisions based on full transparency regarding the professional conduct and regulatory history of the individuals managing their funds, consistent with the high standards of commercial honor required by NFA Compliance Rule 2-4. Incorrect: Waiting for a final adjudication or settlement is incorrect because regulatory requirements mandate the disclosure of pending formal proceedings, not just final outcomes; withholding this information until a verdict is reached leaves the firm in a state of non-compliance. Limiting disclosure only to clients who specifically ask about regulatory history fails the requirement for proactive disclosure and violates the principle of providing a complete and accurate Disclosure Document to all participants. Relying on internal registration updates or a perceived grace period for administrative changes is insufficient because the Disclosure Document is a primary disclosure vehicle that must be corrected as soon as it becomes materially misleading to ensure the protection of the public. Takeaway: Material disciplinary proceedings against a firm or its principals must be disclosed in the Disclosure Document immediately upon the filing of a formal complaint, rather than waiting for a final resolution.

Correct: Under FINRA Rule 4530, which governs the reporting of disciplinary events and is a core component of SRO disciplinary regulations, member firms are required to report to FINRA within 30 calendar days after the firm has disciplined an associated person by imposing a fine in excess of $2,500, or by suspending, terminating, or otherwise limiting the person’s activities. Incorrect: Reporting is not contingent on statutory disqualification or a $5,000 criminal threshold; specific internal disciplinary actions like fines or suspensions trigger the 30-day reporting requirement. The SEC is not the primary recipient for these specific SRO disciplinary reports under Rule 4530. Prior history, such as Letters of Caution, does not dictate the reporting requirement for a new, separate disciplinary action that meets the $2,500 fine threshold. Takeaway: Internal disciplinary actions such as fines over $2,500 or suspensions must be reported to FINRA within 30 calendar days under Rule 4530.

Correct: FINRA Rule 4210 requires that firms maintain a minimum amount of equity in margin accounts at all times. While NYSE Rule 179 allows for ‘seller’s option’ delivery (extending the settlement timeframe), this does not exempt the account from margin maintenance requirements. The compliance officer must ensure the firm monitors the account’s equity in real-time and issues a maintenance call if the equity drops below the required threshold, as the extended settlement of one trade does not provide immediate relief for the margin deficiency of the overall account. Incorrect: Granting a temporary credit based on projected proceeds is a violation of margin rules, as only settled or properly valued collateral can be used to meet maintenance requirements. Automatic liquidation is generally a secondary action taken if a margin call is not met, and a seller’s option trade does not inherently trigger a restricted status under Regulation T. Regulatory bodies like the NYSE do not grant waivers for margin deficiencies based on the existence of pending settlement contracts. Takeaway: Compliance officers must ensure that specialized settlement methods like seller’s options do not delay or circumvent the mandatory enforcement of margin maintenance requirements under FINRA Rule 4210.

Correct: Under CFTC Part 15 and 17 regulations, positions must be aggregated across all accounts where a person or entity exercises direct or indirect control or has a financial interest. When a firm identifies that it has failed to aggregate positions correctly, resulting in unreported large trader positions, it has a regulatory obligation to remediate the omission by filing delinquent reports (such as Form 102 or Form 40) and correcting the underlying control deficiency. This aligns with NFA Compliance Rule 2-9, which requires members to diligently supervise their employees and business activities to ensure compliance with reporting thresholds and aggregation rules. Incorrect: Filing only the current position mentioned in the inquiry is insufficient because it ignores the historical reporting failures and the requirement to provide a complete and accurate record to the CFTC. Relying on sub-advisers to report individually is a violation of aggregation principles, as the reporting obligation is determined by the ultimate controller or owner of the positions, not just the executing agent. Seeking a waiver after the fact is not a recognized regulatory procedure for reporting omissions and fails to address the firm’s immediate compliance deficit regarding existing large trader reporting rules. Takeaway: Large trader reporting requires the aggregation of all accounts under common control, and any identified failures must be remediated through retroactive filings and systemic control improvements.

Correct: Developing automated exception reports is the most effective way to monitor for trading ahead or front-running. By correlating proprietary activity with client orders and research, the firm can identify conflicts of interest in near-real-time, which is a core component of a modern surveillance program under FINRA and NYSE standards. This approach moves the firm from a reactive manual review to a proactive, risk-based surveillance model. Incorrect: Increasing record retention is a record-keeping improvement but does not enhance the active surveillance or detection of misconduct. Secondary sign-offs for high-volume trades focus on market impact and risk rather than the detection of manipulative intent or front-running. Disciplinary policies are reactive and do not improve the underlying surveillance mechanism used to identify the behavior in the first place; they also risk creating a culture of fear that may lead to under-reporting of genuine errors. Takeaway: Modern trading surveillance must move beyond manual reviews to automated systems that correlate proprietary, client, and firm-wide data to detect sophisticated market abuse.

Correct: According to FINRA Rule 2210, any written or electronic communication that is distributed or made available to more than 25 retail investors within any 30-calendar-day period is defined as a retail communication. Retail communications generally must be approved by a registered principal of the member firm before the earlier of first use or filing with FINRA. In this scenario, the distribution to 32 retail investors exceeds the 25-person threshold, triggering the prior approval requirement. Incorrect: The threshold for correspondence is 25 or fewer retail investors; once the number exceeds 25 within a 30-day window, it is no longer correspondence and requires pre-approval. Institutional communications apply only to specific entities such as banks, insurance companies, or other registered members, not to prospective retail clients. Standardized templates or materials filed by a manufacturer do not exempt a member firm from its own internal principal approval requirements when distributing those materials to the public. Takeaway: Communications distributed to more than 25 retail investors in a 30-day period are retail communications and must be approved by a registered principal prior to use.

Correct: Rule 13e-1 of the Securities Exchange Act of 1934 prohibits an issuer from purchasing its own equity securities during a tender offer by another person unless the issuer files a specific statement with the SEC. This statement must include the title and amount of securities, the names of the persons or markets from which they are to be purchased, the purpose of the purchase, and the source and amount of funds used for the transaction. Incorrect: The requirement for SRO approval or a 10-day non-objection period is not a provision of Rule 13e-1. While public communication is common, a press release does not satisfy the specific SEC filing requirement mandated by the rule. Limiting volume to 25% of ADTV refers to the safe harbor provisions of Rule 10b-18, which is distinct from the disclosure requirements triggered by a third-party tender offer under Rule 13e-1. Takeaway: Under Rule 13e-1, an issuer must file a detailed disclosure statement with the SEC before purchasing its own shares while a third-party tender offer for those shares is active.

Correct: Rule 137 provides a safe harbor for broker-dealers who are not participating in a distribution. It specifies that such a broker-dealer is not considered an ‘underwriter’ if they publish research on an issuer in registration, provided the issuer is a reporting company, the research is distributed in the regular course of business, and the broker-dealer receives no compensation (consideration) from the issuer, any selling security holder, or any participant in the distribution. Incorrect: Option B describes a scenario where the firm is a participant, which would fall under Rules 138 or 139 rather than Rule 137. Option C is incorrect because Rule 137 is designed to prevent the report from being classified as an ‘offer’ or ‘prospectus,’ thus removing the filing requirement. Option D is incorrect because Rule 137 explicitly prohibits the receipt of any consideration from the issuer or distribution participants; receiving a fee from the lead underwriter would invalidate the safe harbor. Takeaway: Rule 137 allows non-participating broker-dealers to publish regular-course research on reporting companies in registration without being deemed underwriters, provided they receive no compensation from the offering participants.

Correct: Under SEC Rule 17a-11, broker-dealers are required to provide early warning notices to the SEC and their designated examining authority (such as FINRA) when their net capital falls below certain levels, typically 120% of the required minimum. Establishing an automated tool and a formal protocol ensures that the firm can meet these mandatory reporting obligations promptly and maintain its operational integrity. Incorrect: Treating all customer debits as allowable assets is incorrect because SEC Rule 15c3-1 requires specific deductions for unsecured or aged debits. Relying only on annual audits is insufficient because net capital must be maintained at all times, not just at year-end. Unsecured lines of credit do not qualify as regulatory capital; only subordinated debt that meets specific regulatory criteria and has been approved by the SRO can be used to increase net capital. Takeaway: Effective capital requirement compliance requires real-time monitoring and a clear protocol for early warning notifications to regulators when net capital approaches minimum thresholds.

Correct: Under FINRA Rule 2010, members must observe high standards of commercial honor and just and equitable principles of trade. Selective disclosure of material non-public information (MNPI) regarding a corporate restructuring violates these principles and potentially federal securities laws. The correct response involves immediate preservation of evidence (isolating records), a formal investigation into the failure of information barriers (Chinese Walls), and assessing the need for self-reporting to regulators. Incorrect: Updating the restricted list after the fact is a necessary administrative step but fails to address the existing breach of confidentiality or the potential insider trading. Retroactive non-disclosure agreements are ethically and legally insufficient to cure a selective disclosure violation. Notifying the subject of a whistleblower report before an investigation is conducted compromises the integrity of the inquiry and violates standard internal control and anti-retaliation protocols. Takeaway: Compliance officers must prioritize the integrity of information barriers and immediate investigative action when material non-public information regarding corporate restructuring is selectively disclosed.

Correct: Under FINRA Rule 2150, sharing in profits or losses is prohibited unless there is prior written authorization from both the firm and the customer, and the sharing is in direct proportion to the financial contribution of each party. However, an exception to the proportionality requirement exists for accounts of immediate family members. Therefore, the first step in addressing a potential deficiency is to verify the existence of any formal documentation and the relationship between the parties to determine if an exemption applies. Incorrect: Guaranteeing an account against loss is itself a violation of FINRA Rule 2150(b) and would exacerbate the compliance failure. Terminating the representative via Form U5 is a disciplinary action that should follow a completed investigation rather than being the initial step. Retroactive capital contributions are generally not permitted to cure a violation of the rule, as the requirement for proportional sharing and written authorization must be met prior to the commencement of the arrangement. Takeaway: Compliance officers must verify the existence of prior written authorization and the relationship of the parties before determining if a profit-sharing arrangement violates FINRA Rule 2150.

Correct: Under Rule 144 of the Securities Act of 1933, which provides a safe harbor for the resale of restricted and controlled securities, a seller of restricted securities of a reporting company must have held the shares for at least six months. Additionally, the issuer must have adequate current public information available, which is typically satisfied by being current in its periodic SEC filings. Incorrect: NYSE Rule 179 regarding ‘Seller’s Option’ relates to settlement timing and does not provide an exemption for the registration requirements of the 1933 Act. The volume limitation under Rule 144 is actually the greater of 1% of the outstanding shares or the average weekly trading volume of the previous four weeks, not 5% over six months. A promise of future registration (S-1 filing) does not exempt a current sale from the registration requirements of Section 5 of the Securities Act of 1933. Takeaway: To legally sell restricted securities without registration, a firm must ensure strict compliance with Rule 144, specifically focusing on holding periods and the availability of current public information about the issuer.

Correct: Under NYSE Rule 7.31(d)(1), a Reserve Order is a Limit Order with a portion of the size displayed and a portion not displayed. When the displayed portion is replenished from the non-displayed reserve, the new displayed portion is assigned a new time stamp. This means it loses its time priority relative to other displayed orders already at that price. However, the non-displayed portion of the order retains its original time stamp for the purpose of determining priority against other non-displayed interest. Incorrect: The suggestion that the entire order retains the original time stamp is incorrect because it would allow hidden liquidity to ‘jump the queue’ of displayed orders once it becomes visible. Automatic cancellation after a specific timeframe like one minute is not a standard feature of Rule 7.31 Reserve Orders. Assigning the time stamp of the last execution or arbitrarily moving non-displayed interest to the top of the queue violates the fundamental price-time priority principles of the exchange’s matching engine. Takeaway: When a Reserve Order’s displayed quantity is replenished, the new displayed portion receives a new time stamp, while the non-displayed portion maintains its original priority relative to other non-displayed interest.

Correct: Firms have a continuing obligation to ensure that Form U5 filings are accurate and complete. According to FINRA rules, if a firm discovers that a previously filed Form U5 is inaccurate or incomplete—such as failing to disclose an internal investigation that was ongoing at the time of the representative’s departure—the firm must file an amended Form U5 within 30 days of the discovery of the new information. Incorrect: Waiting for a final adjudication is incorrect because the Form U5 requires disclosure of the existence of an internal review, regardless of the final outcome. Notifying the new firm privately does not satisfy the regulatory requirement to update the Central Registration Depository (CRD). Filing a Form U4 amendment is incorrect because the Form U4 is the responsibility of the current employer, whereas the Form U5 amendment must be filed by the firm that terminated the registration to correct their previous filing. Takeaway: Member firms must amend a Form U5 within 30 days if they learn that a previous filing was inaccurate or if new information requires a disclosure regarding a former employee’s conduct.

Correct: The Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA) specifically mandates that broker-dealers and investment advisers establish, maintain, and enforce written policies and procedures to prevent the misuse of material non-public information (MNPI). In a scenario involving a Restricted List and potential access to MNPI, the firm’s primary duty is to have robust internal controls and ‘Chinese Walls’ to prevent the transmission of such information, regardless of the social nature of the event. Incorrect: While attestations are a common compliance tool, they do not satisfy the broader statutory requirement to have a comprehensive system of supervision and enforcement. Notifying the SEC of a simple meeting request is not a requirement of the Act, as the Act focuses on internal firm controls and penalties for violations. The $100 gift limit refers to FINRA Rule 3220 regarding gifts and gratuities, which generally excludes business entertainment where the host is present, and it does not address the insider trading risks central to ITSFEA. Takeaway: ITSFEA 1988 shifts the burden to firms to proactively establish and enforce written supervisory procedures to prevent the misuse of material non-public information.

Correct: Under FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade), a representative is strictly obligated to follow a customer’s specific instructions. While Regulation Best Interest requires representatives to act in the client’s best interest when making recommendations, it does not grant them the discretion to ignore or override a client’s explicit, lawful order. Disregarding a client’s instruction, even if the representative believes it is for the client’s benefit, constitutes a failure to observe high standards of commercial honor and just and equitable principles of trade. Incorrect: The Care Obligation under Reg BI relates to the diligence and skill used when making a recommendation, but it does not authorize a representative to ignore a client’s directive. A books and records violation is secondary to the primary ethical breach of failing to follow instructions. The Disclosure Obligation and Form CRS relate to the nature of the relationship and fees, rather than the execution of specific trade instructions or the failure to follow them. Takeaway: A representative’s subjective belief regarding a client’s best interest or suitability never overrides the mandatory obligation to execute a client’s specific and lawful instructions.

Correct: Under Section 13(f) of the Securities Exchange Act of 1934, institutional investment managers with at least $100 million in 13(f) securities must file Form 13F within 45 days of the end of each calendar quarter. However, the SEC allows managers to request confidential treatment for specific holdings under Rule 24b-2 if they can demonstrate that public disclosure would reveal an ongoing investment strategy and cause substantial competitive harm, such as during a sensitive accumulation phase. Incorrect: Delaying the filing beyond the 45-day window is a regulatory violation regardless of the investment strategy. The $100 million threshold applies to the aggregate value of 13(f) securities held at the end of any month, not the duration of the holding. Omitting a security from a filing without an approved or pending confidential treatment request constitutes the filing of an inaccurate and incomplete report, which is a violation of SEC rules. Takeaway: Institutional investment managers exceeding the $100 million threshold must file Form 13F quarterly but may utilize confidential treatment requests to protect sensitive, ongoing investment strategies from public disclosure.

Correct: Under NFA Compliance Rule 2-4 and general regulatory standards for the handling of customer funds, all deposits intended for futures trading must be made payable directly to the carrying Futures Commission Merchant (FCM). Introducing Brokers (IBs) and their branch offices are prohibited from accepting customer funds in their own name or depositing them into firm operating accounts. This requirement is fundamental to ensuring the proper segregation of customer funds as mandated by CFTC Regulation 1.20, which protects client assets from the firm’s creditors and prevents the commingling of funds. Even in urgent situations like a margin call, the branch manager must ensure that the funds are directed to the correct entity to maintain the integrity of the regulatory framework and the safety of the client’s capital. Incorrect: Accepting the check and wiring the funds from the branch’s operating account is a severe violation of segregation rules and creates a risk of commingling customer and firm assets. Granting a one-time exception for a margin call does not mitigate the regulatory failure of an IB accepting funds in its own name. Depositing the funds into a branch-level account and requesting a journal entry is inappropriate because IBs typically do not maintain the required segregated accounts for customer funds; those accounts are held at the FCM level. Endorsing a check made out to the branch over to the FCM is an irregular practice that bypasses standard anti-money laundering controls and custodial protocols, potentially leading to disciplinary action by the NFA. Takeaway: Customer deposits must always be made payable directly to the carrying Futures Commission Merchant to comply with segregation requirements and prevent the prohibited commingling of funds at the branch or IB level.

Correct: Under a risk-based approach to AML and sanctions compliance, firms are expected to use publicly available information (PAI) or open-source intelligence (OSINT), such as media reports and research, to identify ‘red flags.’ While a media report is not a legal mandate to freeze assets like an OFAC listing, it provides the necessary context to trigger Enhanced Due Diligence (EDD). This ensures the firm is not inadvertently facilitating sanctions circumvention or exposing itself to significant reputational and regulatory risk. Incorrect: Ignoring media reports simply because they are not on official lists fails to meet the expectations of a robust risk-based compliance program. Conversely, treating a media report as a ‘conclusive match’ is incorrect because media reports are not legally binding in the same way as government sanctions lists and require verification through EDD. Restricting compliance to only automated systems ignores the qualitative nuances that human review of media and research can provide in identifying complex financial crimes. Takeaway: Compliance officers must utilize media and research reports as supplemental risk indicators that trigger enhanced due diligence, rather than relying solely on automated government list matching.

Correct: NFA Compliance Rule 2-10 and CFTC Regulation 1.35 require that all records, including order tickets, be maintained for a period of five years and be readily accessible during the first two years. Furthermore, NFA Compliance Rule 2-38 requires firms to maintain a written Business Continuity and Disaster Recovery Plan (BCDRP) that includes backing up mission-critical data to a geographically diverse off-site location. The correct approach addresses both the technical redundancy required for business continuity and the supervisory obligation under NFA Compliance Rule 2-9 to ensure that records like order tickets are prepared accurately, including mandatory timestamps and sequencing. Testing the restoration process is a critical component of a valid BCDRP to ensure that records remain accessible as required by regulation. Incorrect: Transitioning to a purely paper-based system is an outdated approach that fails to address the modern regulatory expectations for electronic record redundancy and does not solve the supervisory failure regarding missing timestamps. Attempting to use disclosure documents or client waivers to mitigate the risk of data loss is legally and regulatorily insufficient, as NFA recordkeeping obligations are non-waivable mandates that exist for the protection of market integrity. Delegating the core supervisory duty of record verification to a third-party vendor is a violation of NFA Compliance Rule 2-9, which holds the firm and its registered principals responsible for the adequacy of supervision regardless of the service providers employed. Takeaway: Branch Managers must ensure that electronic recordkeeping systems include tested, redundant backups and that active supervisory reviews are conducted to verify the presence of all regulatorily mandated data on order tickets.