Risk Management, Trust Accounting, and Record Keeping
Trust accounting
Client money held by a brokerage is trust money and must be deposited into a pooled trust account at a designated financial institution. Candidates must know the rules: no mixing of brokerage operating funds with trust funds, timely deposits and withdrawals, proper records, and monthly reconciliations. Commissions and fees may be withdrawn only when earned and authorized. Interest on trust accounts is generally paid to the broker or as directed under the rules.
Records and risk management
Brokerages must keep records of transactions, service agreements, disclosures, and trust transactions for the required retention period. Risk management includes errors and omissions insurance, written service agreements, disclosure of conflicts, careful handling of subject clauses, and documenting instructions. Understand the reporting duties when a licensee becomes aware of a breach or a suspicious transaction.
Traps
Questions test whether a deposit may be held by a licensee personally (no - it belongs to the brokerage trust account), whether a deposit may be used to pay a commission before completion (generally no), and whether trust records may be kept informally (no). Another trap is the belief that a managing broker may sign off on a reconciliation without reviewing it.
Rule of thumb
Follow the money: every dollar of client money should be traceable from receipt to deposit to disbursement, with a written record at each step. If a question describes cash handling outside the trust account, suspect a breach.