The Branch That Approved Itself

Five distinct failures:

1. Unqualified approval. Account approval by a Series 7 assistant with no principal registration is invalid. Every options account approved on that log since the practice began is in question; the fix requires a qualified principal to re-review the population, not just change the process going forward.
2. Inspection overdue. Non-OSJ branch offices must be inspected on a cycle not exceeding three years. Four years and two months is out of compliance, and the inspection should have covered the approval-log practice.
3. No annual compliance meeting. The annual meeting is a required element of the supervisory system. Missing it is a documented procedural breach and undermines every training-based defense the firm might later raise.
4. Unregistered activity. Two reps solicited or accepted options orders before their registration was effective. Orders taken by unregistered persons are a registration violation regardless of whether the trades were suitable.
5. Late disclosure. Learning of a customer arbitration in March and amending the U4 in July exceeds the 30-day reporting window for reportable events.

Note the common thread: the firm has one person doing production and supervision, so the supervisory function loses every contest with the production function.

The arbitration. The late amendment cannot be cured by filing it now and moving on. File immediately if not already done, and document what caused the delay and who knew what, when. Then determine whether the arbitration itself implicates supervision: an allegation of unauthorized options trading against a rep who was taking orders while unregistered is not a routine customer dispute, and the firm should review that rep's options tickets for evidence of discretionary trading in non-discretionary accounts. Preserve the recordings, tickets, and correspondence now.

The two representatives. Their orders were taken during a gap the firm created by letting registration lapse or by permitting work before effectiveness. Actions: identify every order in the gap window; have the ROP review each for suitability; notify affected customers if any trade was unsuitable; and impose a written supervisory consequence. Whether either rep is permitted to continue in options depends on whether they knew they were unregistered - a rep who was told to wait and traded anyway is a different case from one who was never told.

Also check whether compensation was paid on those trades; paying commissions on unregistered activity compounds the problem.

The structural problem is that Rick's compensation depends on the activity he supervises, and he has no realistic capacity for 22 reps across four locations. Options:

• Designate a second Registered Options Principal (or more) with clear authority over account approval and no production incentive tied to the reps he approves.
• Prohibit the sales assistant from any approval function and rebuild the log so that each approval carries a registered principal's identifier and timestamp.
• Stand up an independent review function - compliance, not the branch - that samples options approvals monthly and reports to a principal outside the producing chain.
• Restore the inspection calendar and the annual meeting, with named owners and dates.

Documents an examiner will ask for: the written supervisory procedures covering options account approval and their revision history; the approval log with principal identifiers; the inspection reports for all four locations with dates; the annual compliance meeting materials and attendance; the registration effective dates compared against order timestamps; the Rule 3120 supervisory control report and its identified deficiencies; and evidence that each finding above was assigned an owner and a remediation date. Narrating the fix without records is the same failure as never having had a procedure.