Supervisors are rarely sanctioned for fraud they could never have seen. They are sanctioned for closing an exception report without asking about a turnover ratio, a six-month mail hold or a markup three times the desk's norm.
As a principal, you review securities transactions, recommendations and account activity, and verify that required disclosures are made on time. Every Securities and Exchange Commission (SEC) or Financial Industry Regulatory Authority (FINRA) rule becomes a question you ask of order tickets, confirmations, statements and exception reports.
The legal backbone is Section 17 of the Securities Exchange Act of 1934 (Exchange Act), covering accounts and records, reports, and examinations of exchanges, members and others. Section 17(a)(1) requires registered broker-dealers to make and keep the records and file the reports the SEC prescribes. Two record rules matter:
- Exchange Act Rule 17a-3(a)(8) requires copies of confirmations of all purchases and sales and notices of all other debits and credits to customer accounts.
- Exchange Act Rule 17a-4(b)(6) requires keeping account guarantees, powers of attorney, other evidence of discretionary authority and corporate resolutions empowering an agent for three years, the first two in an...
Common mistakes
- Treating 5% as a safe harbor. Example 1's 2.57% markup still needs a fairness review.
- Letting time-and-price discretion roll over. A next-morning fill with no signed, dated written instruction is unauthorized discretion, outside an institutional good-till-cancelled, not-held order.
- Still hunting for pattern day traders. The four-trades-in-five-days test and the $25,000 minimum ended June 4, 2026, though Rules 2130 and 2270 survive.
Bottom line
- Reg BI governs recommendations to retail customers through disclosure, care, conflict of interest and compliance obligations; Rule 2111 covers everyone else with reasonable-basis, customer-specific and quantitative suitability.
- Rule 2090 requires knowing and retaining the essential facts about every customer and everyone acting for them, recommendation or not.
- Red flags must be recognized, investigated, escalated and documented; turnover of 6 or a cost-equity ratio above 20% signals excessive trading.
- Rule 3260 requires prior written authorization, written acceptance, prompt written approval of each discretionary order and frequent review; time-and-price discretion ends with the business day absent a signed, dated instruction or an institutional good-till-cancelled, not-held order.
Exam shortcut
For disclosure questions, find the trigger first (account opening, the first extended-hours trade, a signature or a request), then the clock (yearly, 30 days, 60 days or 10 business days). Eliminate any answer that treats the four-day-trades test or the $25,000 minimum as current law. On red-flag stems, the best answer investigates, escalates and documents; merely reminding the representative or closing the alert is the trap.
The full lesson (about 5,149 words, 34 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- C12
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