Study guide
This is the broadest function on the exam, covering the records a broker-dealer must create, how long it must keep them, and the operational and regulatory framework surrounding daily business. Think of it in layers: make the records, preserve the records, settle the trades, and supervise the people.
Records to Be Made: SEA Rule 17a-3 and the FINRA 4510 Series
SEA Rule 17a-3 lists the records every broker-dealer must create. The foundational records are blotters, which are daily chronological records of original entry showing purchases, sales, receipts and deliveries of securities, and receipts and disbursements of cash. Next come the ledgers: the general ledger reflecting all asset, liability, income, expense, and capital accounts, plus customer and non-customer ledgers showing each account's cash and margin activity, and subsidiary ledgers for items like securities borrowed and loaned, dividends and interest, and securities failed to receive and deliver. The securities record, or stock record, shows every security the firm carries, with the long side identifying ownership and the short side identifying location, and the two sides must always balance. Rule 17a-3 also requires memoranda of orders, meaning order tickets showing terms, time of receipt, time of execution, and the account involved, along with confirmations, trial balances, net capital computations, associated person records, and customer account records. FINRA's 4510 series builds on this. Rule 4511 is the umbrella requirement to make and preserve books and records required by FINRA rules and the Exchange Act. Rule 4512 specifies customer account information: name, address, whether the customer is of legal age, the names of associated persons responsible for the account, and, for accounts with a suitability obligation, investment profile information; it also requires a reasonable effort to obtain a trusted contact person. Rule 4513 requires records of written customer complaints at each office of supervisory jurisdiction, kept for at least four years.
Preservation: SEA Rule 17a-4 Retention Periods and Electronic Storage
Rule 17a-4 dictates how long records live. The six-year records, kept in an easily accessible place for the first two years, are the core financial books: blotters, the general ledger, customer and non-customer ledgers, the stock record, and, under FINRA rules, customer account records. The three-year records, also easily accessible for two years, cover most everything else: order tickets, confirmations, trial balances and net capital computations, communications, employment applications, and records of associated persons, which must be kept until at least three years after the person leaves. Lifetime records, kept for the life of the firm, are the organizational documents: articles of incorporation or partnership agreements, minute books, stock certificate books, and Forms BD and BDW with amendments. A helpful mental model: money movement records live six years, transaction and personnel paperwork lives three, and the firm's identity documents live forever. Electronic recordkeeping is permitted if the system meets Rule 17a-4(f). Historically that meant WORM storage, write once read many, which prevents any alteration of a stored record. Amendments adopted in 2022 added an alternative: an audit-trail system that preserves every version of a record so any change can be reconstructed. Firms using electronic systems must be able to produce records promptly, keep a duplicate backup, and satisfy an access condition, traditionally an undertaking from an independent third party who can access and produce the records, or under the amended rule an undertaking from a designated executive officer. When regulators request records, the firm must furnish them promptly; failure to produce is treated nearly as seriously as failure to keep them.
Clearance, Settlement, and Uniform Practice Rules
Regular-way settlement for most corporate securities is one business day after trade date, T+1, following the industry move from T+2 in 2024. FINRA's Uniform Practice Code, the 11000 series, governs dealer-to-dealer mechanics when trades do not settle smoothly. Under Rule 11810, if a seller fails to deliver, the buyer may close the contract by buying in: the buyer delivers written notice and, if delivery still is not made, executes a buy-in and holds the seller responsible for any loss. Rule 11820 covers the mirror image, sell-outs, where a buyer fails to accept delivery and the seller may sell the securities for the buyer's account. Rule 11140 sets ex-dates, the first date a buyer purchases without the right to a pending dividend; with T+1 settlement, the ex-date for a regular cash dividend normally falls on the record date itself, and special rules apply to large distributions. Rule 11740 provides for marking open contracts to the market, letting either party demand a deposit reflecting adverse price movement on an open fail. Rule 11870 governs customer account transfers through ACATS, the Automated Customer Account Transfer Service: the carrying firm must validate or take exception to a transfer instruction within one business day and complete the transfer within three business days after validation. Two related obligations round this out. Rule 17a-13 requires a physical count and verification of all securities at least once each calendar quarter, with differences recorded within seven business days, and FINRA Rule 4522 reinforces the count requirements. SEA Rule 10b-10 requires trade confirmations at or before completion of each transaction, disclosing capacity, price, and required compensation details.
Registration, Continuing Education, and Supervision
FINRA Rules 1210 and 1220 establish registration categories. The Financial and Operations Principal category covers principals responsible for financial and operational matters at clearing and carrying firms, qualified by the Series 27; certain firms with lower minimum net capital requirements may instead use an Introducing Broker-Dealer Financial and Operations Principal, qualified by the Series 28. Every member must designate a Principal Financial Officer responsible for financial filings and a Principal Operations Officer responsible for operations functions such as possession or control and the reserve computation; introducing firms may combine these roles in one person, while firms that self-clear or clear for others generally must designate separate persons unless FINRA grants a waiver. Continuing education under Rule 1240 has two parts: the Regulatory Element, which every registered person must complete annually by December 31, and the Firm Element, annual training the firm designs from its own needs analysis. The Maintaining Qualifications Program lets individuals who leave the industry preserve their qualification for up to five years by completing continuing education. Supervision lives in the 3100 series. Rule 3110 requires a supervisory system with written supervisory procedures, designated principals, review of correspondence and transactions, and internal inspections: offices of supervisory jurisdiction and supervisory branch offices at least annually, non-supervisory branches at least every three years. Rule 3120 requires a supervisory control system that tests the supervisory procedures and produces an annual report to senior management. Rule 3130 requires the chief executive officer to certify annually that the firm has processes to establish, maintain, review, test, and modify its compliance policies, after consulting the chief compliance officer.
AML, Insider Trading, Business Continuity, and Arbitration
FINRA Rule 3310 requires a written anti-money-laundering program approved by senior management. The program must be risk-based and include a customer identification program, procedures to detect and report suspicious activity, independent testing at least annually for most firms, a designated AML compliance officer identified to FINRA, and ongoing training. Suspicious activity reports are generally due within 30 days of detecting a reportable transaction, and currency transaction reports apply to cash transactions over $10,000. Insider trading is policed under SEA Rule 10b-5, the general antifraud rule, and the Insider Trading and Securities Fraud Enforcement Act of 1988, which authorized civil penalties up to three times the profit gained or loss avoided and, importantly for principals, requires broker-dealers to establish, maintain, and enforce written procedures reasonably designed to prevent misuse of material nonpublic information. Firms typically use information barriers, watch lists, and restricted lists to meet this duty. FINRA Rule 4370 requires a written business continuity plan addressing data backup, mission-critical systems, alternate communications with customers and employees, and prompt access to customer funds and securities in a disruption; the plan must be reviewed annually, key disclosures made available to customers, and two emergency contact persons designated to FINRA. Disputes are resolved in FINRA arbitration under the Code of Arbitration Procedure: the 12000 series for customer disputes and the 13000 series for industry disputes between firms and associated persons. Claims are generally ineligible after six years from the occurrence or event, smaller claims can proceed under simplified procedures, and arbitration awards are final and binding with very limited grounds for court challenge.
Key terms
- Blotter
- — A daily record of original entry showing an itemized chronological record of purchases, sales, securities received and delivered, and cash received and disbursed; retained six years under Rule 17a-4.
- Stock record
- — The securities record showing each security the firm carries, with long positions identifying ownership and short positions identifying location; the two sides must balance.
- WORM storage
- — Write once read many electronic storage that prevents alteration of preserved records; one permitted method under Rule 17a-4(f), alongside the newer audit-trail alternative that preserves all versions of a record.
- Lifetime records
- — Records preserved for the life of the broker-dealer, including articles of incorporation or partnership agreements, minute books, stock certificate books, and Forms BD and BDW with amendments.
- Buy-in
- — The Uniform Practice Code remedy under FINRA Rule 11810 allowing a buyer to close out a contract when the seller fails to deliver, purchasing the securities elsewhere for the seller's account.
- Ex-date
- — The first date on which a security trades without the right to a pending distribution, set under FINRA Rule 11140; with T+1 settlement it normally coincides with the record date for ordinary cash dividends.
- ACATS
- — The Automated Customer Account Transfer Service used under FINRA Rule 11870; the carrying firm validates a transfer instruction within one business day and completes the transfer within three business days after validation.
- Quarterly security count
- — The physical examination, count, and verification of all securities held required at least once each calendar quarter by SEA Rule 17a-13, with differences recorded within seven business days.
- Principal Financial Officer
- — The designated principal with primary responsibility for financial filings and the related books and records; carrying firms also designate a Principal Operations Officer for operations functions.
- Regulatory Element
- — The FINRA continuing education requirement that each registered person complete prescribed training annually by December 31, complemented by the firm-designed Firm Element.
- AML compliance officer
- — The person designated under FINRA Rule 3310 to oversee the firm's anti-money-laundering program, identified to FINRA, supported by independent testing and ongoing training.
- Business continuity plan
- — The written plan required by FINRA Rule 4370 addressing data backup, mission-critical systems, and customer access to funds and securities during a significant business disruption; reviewed annually.
Exam tips
- Sort retention periods into three buckets: six years for blotters, ledgers, and the stock record; three years for order tickets, confirmations, communications, and personnel records; lifetime for organizational documents; and remember the first two years must be easily accessible.
- Know the direction of remedies: buy-ins under 11810 cure a failure to deliver, sell-outs under 11820 cure a failure to receive or pay.
- For account transfers, the pairing is one business day to validate and three business days after validation to complete.
- Tie each supervision rule to its output: 3110 produces written supervisory procedures and inspections, 3120 produces the annual supervisory control report, and 3130 produces the CEO certification.
- Security counts under 17a-13 are quarterly, and count differences must be recorded within seven business days; unresolved short differences ultimately create net capital and buy-in consequences.