The Inactive Principal and the Columbus Office
Meridian Brokerage treats its nine-rep Columbus office as an OSJ. The designated principal there, D. Reyes, has held her Series 24 since 2016 but did not complete the Regulatory Element in either of the last two calendar years; her registration went inactive on January 2. She nonetheless approved new accounts, reviewed outgoing email, and signed off on two seminar flyers through the end of March, and no one at the home office noticed because the CE tracking spreadsheet is updated manually once a year. In February a client emailed compliance alleging that Columbus rep T. Okafor made unauthorized trades in her account. Separately, the firm wants to name its top producer, K. Lin, as Columbus branch manager in 30 days; Lin holds only the SIE and Series 7. The CCO asks you, as senior principal, to clean this up.
1. What must happen immediately with Reyes's supervisory activity, and what is the status of the approvals she signed after January 2?
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Rule frame. Completion of the Regulatory Element is a condition of continued registration (FINRA Rule 1210). A person who misses the annual deadline becomes inactive and may not perform any function requiring registration - approving new accounts, supervising registered persons, or signing off on advertising all qualify.
Immediate steps.
- Suspend Reyes from all principal and registered-representative functions today; document the date and time.
- Designate a currently registered principal (from another office if necessary) to perform OSJ functions, re-approve every new account, correspondence item, and flyer Reyes touched since January 2, and document each re-review.
- Direct Reyes to complete the Regulatory Element immediately. If she completes within two years of the lapse, her registration can be reactivated without requalification exams; beyond two years she must requalify.
Why this is more than one person's problem. The manual tracking spreadsheet is the actual failure - a supervisory system that cannot detect a lapsed principal is not reasonably designed under Rule 3110. Expect to show the firm's remediation in any exam or inquiry, and consider whether the lapsed approvals must be disclosed to FINRA.
2. Can Lin be named branch manager in 30 days? What has to occur first?
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Not as currently structured. Supervising registered persons is a principal function, and Lin holds no principal license. The 30-day title is fine only if she is an administrative office manager with no supervisory authority over registered activities.
Before she can supervise she must:
- Pass a principal qualification exam (typically the Series 24, or the Series 9/10 where the firm's procedures permit it for sales supervision only) and be fingerprinted;
- Have the firm file the appropriate Form U4 disclosure and receive registration;
- Be designated in the firm's written supervisory procedures, with a documented handoff of supervisory duties.
Until registration is effective, a registered principal must supervise the Columbus reps directly. Do not let the office operate on the theory that Lin is 'almost registered' - approvals she signs while unregistered are the same defect Reyes created.
3. What are the firm's obligations regarding the Okafor complaint?
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Treat it as a supervisory event, not a customer-service item.
- Log and route it. Written customer complaints must be captured in the firm's complaint record and reviewed by a principal.
- Investigate promptly. Pull the trade blotters, order tickets, confirmations, and any discretionary authorization; interview Okafor and the client. Unauthorized trading allegations must be tested against the actual order entry records.
- Assess reportability. A complaint is not automatically reportable on Form U4, but it becomes a reportable event if it turns into arbitration or litigation, produces a settlement, or generates a regulatory inquiry; Rule 4530 reporting should be evaluated as the matter develops.
- Interim controls. Consider heightened supervision, trade pre-approval, or a temporary restriction on the rep while the review is open.
- Close the loop. Document findings, any client remediation, and any disciplinary action in the rep's file.