A FINRA DISPUTE RESOLUTION CASE STUDY

HOW LIABLE ARE FINANCIAL AND OPERATIONS PRINCIPALS (“FINOPS”) FOR AN INVESTMENT-

RELATED SALES PRACTICE, SUITABILITY, OR CUSTOMER ACCOUNT SUPERVISION RELATED VIOLATION

AND HOW DO I PROTECT MYSELF?

By:

Patrick W. McKeon JD, CFP®

President, EXPERTWITNESS.Biz

July 24, 2014

1

1.0 INTRODUCTION

A Financial and Operations Principal (“FINOP”) plays a key part in the Supervisory Structure of

any broker-dealer. I can attest to that fact personally as I have been a FINOP with numerous FINRA

member firm’s over the years. It is imperative that any registered FINOP or aspiring FINOP have a full

and complete understanding of what their respective roles and responsibilities are and their respective

place in a broker-dealers supervisory structure. Failure to do so may lead to some unintended

consequences as the following case study will highlight.

2.0 CLAIMS AGAINST FINOP

My interest in this case study stems from the fact that any FINOP as an Associated Person1 of a

broker-dealer and as a Control Person2 can be potentially subject to a FINRA Dispute Resolution

Arbitration Claim, the subject of which can be any number of investment-related sales practice,

suitability, and customer account supervision related violations, none of which are the responsibility of a

FINOP. Arbitration cases are eligible to be heard in FINRA’s Dispute Resolution Forum3 if the following

criteria are met:

For disputes with investors:

o The cases involve an investor and an individual or entity registered with FINRA, such as cases

between investors and brokers, between investors and brokerage firms, and between

investors and brokers and brokerage firms; and

o The claim is filed within 6 years from the time the events giving rise to the dispute occurred.

I was recently retained as an Expert Witness by a law firm representing a registered FINOP

(“Respondent”) in a FINRA Dispute Resolution Arbitration Hearing to provide a report opining on

whether Respondent was responsible for gross misconduct and reckless mishandling of a customer

account (“Claimant”) by a former FINRA broker-dealer member (“Broker-Dealer”) and the Broker-

Dealer’s owner (“Owner”). Respondent was subjected to having to defend himself and his professional

reputation and livelihood as a result of an Arbitration claim.

Allegations made by Claimant against Respondent included failure to adequately supervise

Claimant’s account(s) and failure to fulfill required supervisory principal compliance responsibilities

which resulted in the following:

1. Churning

2

2. Unsuitable Trading

3. Unauthorized Trading, and

4. Selling Securities in a state without proper state registration.

My engagement was limited to whether Respondent, as the registered FINOP of Broker-Dealer,

had any duty to oversee the administration, handling and trading activity of Claimant’s account(s) and

whether he failed in that duty.

Respondent’s standard form of contract limited his access only to the records he would need to

prepare the following financial reports:

1. Monthly Net Capital Calculations

2. Quarterly FOCUS IIA/SSOI

3. Annual Focus Schedule 1

4. Assistance with Semi-Annual SIPC Forms

None of the above responsibilities would have required review of any account statements or

other records by Respondent that might have led to the discovery of activities related to Claimant’s

account(s).

3.0 Overview of Broker-Dealer, Respondent, and Owner

To put the facts of this case into context, I’ll summarize the profiles of the above three

referenced parties.

Broker Dealer Overview: Broker-Dealer was classified as a corporation formed in New York. The

firm is no longer functioning as a FINRA member broker-dealer. Broker-Dealer introduced and cleared

its Client accounts on a fully disclosed basis with non-affiliate clearing firm(s). The accounts and funds of

Broker-Dealer customers were held or maintained by the clearing firm(s). The Broker-Dealer was

qualified to do business as a full service broker-dealer and had numerous product lines.

Respondent Overview: Respondent was designated as Broker-Dealers FINOP for only a brief

period of time.4 Respondent’s services were procured by contract. Respondent’s services were

performed off-site from Broker-Dealer. Respondent was not a full-time employee of Broker-Dealer and

his interactions with Broker-Dealer were limited. The Broker-Dealers Supervisory Procedures Manual

designated Respondent’s areas of responsibility as follows:

1. NASD 1022(b)(2): Limited Principal Financial & Operations.

3

2. SEC Rules 17a-5: Reports to be made by certain brokers and dealers.

3. SEC Rule 17a-11: Notification provisions for brokers and dealers.

4. NASD By-Laws, Schedule A: Assessments and fees.

All of the above referenced responsibilities are financial in nature or back-office responsibilities.

The Broker-Dealers Supervisory Procedures Manual stated that “[t]he Financial and Operations Principal

has overall responsibility for the systems of financial control and reporting for the firm, under [NASD]

Code of Conduct Rule 1022(b) or (c) [Limited Principal- Financial and Operations or Limited Principal-

Introducing Broker/Dealer Financial and Operations]. The Broker-Dealers Supervisory Procedures

Manual did not reflect Respondent as being designated as a “Home Office Supervisor” or a “Branch

Office Supervisor.” The designated Supervisor for such persons was the Owner.

Respondent passed one principal/supervisory exam and one state securities law exam. The

examinations passed were as follows:

1. Principal/Supervisory

1. Series 27: Financial and Operations Principal

2. State Securities Law Examination

1. Series 63: Uniform Securities State Law Examination

Respondent was never registered with any state jurisdiction while associated with Broker-Dealer.

Owner Overview: Owner was designated Broker-Dealers President, CEO, Principal, Chief

Compliance Officer, and Executive Representative. Owner is no longer registered with FINRA. Owner

passed three principal/supervisory exams, two general industry/product exams, and one state securities

law exam. The examinations passed were as follows:

1. Principal/Supervisory

1. Series 4: Registered Options Principal

2. Series 24: General Securities Principal

3. Series 53: Municipal Securities Principal

2. General Industry/Product

1. Series 7: General Securities Representative

2. Series 3: National Commodity Futures Examination

3. State Securities Law Examination

1. Series 63: Uniform Securities State Law Examination

4

4.0 CLAIMANT CASE OVERVIEW

The Claimant’s allegations as made in its FINRA Dispute Resolution Arbitration Statement of

Claim can be summarized as follows:

Compliance Related

1. Failure to Supervise

Account Activity

1. Churning

“Churning” arises when a broker-dealer excessively trades a client’s account for the purpose of

generating commissions rather than furthering the client’s interests.

2. Suitability

“Unsuitable Trading” as alleged in the Claimant’s Arbitration Claim, is the recommendation for purchase

of unsuitable investments in Claimant’s account(s). “Suitability” refers to the well-established principal

that, in recommending a securities transaction to a client, a broker-dealer and its registered

representatives must have reasonable grounds for believing that the transaction is suitable for the

client’s financial and investment circumstances, needs, and objectives, based on the facts, if any,

disclosed by the client’s. This principal generally applies to all recommendations of securities

transactions.

3. Unauthorized Trading

“Unauthorized Trading”: Broker-dealers, who are generally legally bound based on contract and agency

principals, are required to follow client instructions and to act only as authorized. Failure to do so will

often lead to an allegation of unauthorized trading.

Types of Securities

1. Common Stock

2. Options

5.0 CASE ISSUES, OPINION, AND ANALYSIS

My Expert Witness engagement was related to the rendering an opinion on the following two

Issues:

1. What are a Designated Financial and Operations Principal (“FINOP”) Scope of Responsibilities

and Span of Supervision in a broker-dealer Supervisory Structure?

5

2. What are a Designated General Securities Principal Scope of Responsibilities and Span of

Supervision in a broker-dealer Supervisory Structure?

My conclusion was that Respondent was not responsible to ensure adequate supervision of

compliance and procedures, the failure of which may have resulted in losses to Claimant’s account(s).

The scope of Respondent’s Supervisory Responsibilities was very limited and did not include supervision

over persons or processes that would, if reasonably designed, help to mitigate or prevent the

mishandling of Claimant’s account(s). Respondent’s responsibilities were confined to financial and

operational matters as the Broker-Dealers FINOP. Respondent’s responsibilities were limited by NASD

Membership and Registration Rules, FINRA Conduct Rules, and the Broker-Dealers Supervisory

Procedures and Structure. In my opinion, Claimant’s allegations against Respondent failed to state a

claim for which a FINRA Dispute Resolution Arbitration Panel could render a judgment against the

Respondent.

NASD Membership and Registration Rule 1021(b) states the term “principal” applies to

individuals “actively engaged in the management” of a member firm’s business. Within the category of

principal are subcategories that relate to the scope of an individual’s qualifications. The broadest

subcategory of principal is that of General Securities Principal (“Owner”), but there are several

subcategories of Limited Principal’s, such as Financial and Operations Principal (“Respondent”). FINRA

requires all member firms and all firms applying for membership, with the exception of sole

proprietorships, to have at least two registered principals with respect to each aspect of the firm’s

investment banking and securities business.5 In addition, all FINRA member firms and all firms applying

for membership must also have at least one principal who is qualified as a Limited Principal- Financial

and Operations (“FINOP”).6 All principals are required to pass qualifications examinations7 or have the

examination requirement waived.8

FINRA clearly defines the scope and responsibilities as well as the “Span of Supervision” for

persons, such as Respondent, who are designated as FINRA Member FINOP’s. Pursuant to FINRA rules,

the term “Limited Principal-Financial and Operations (FINOP)”9 means a person associated with a

member whose duties include:

1. Final approval and responsibility for the accuracy of financial reports submitted to any duly

established securities industry regulatory body;

2. Final preparation of such reports;

6

3. Supervision of individuals who assist in the preparation of such reports;

4. Supervision of and responsibility for individuals who are involved in the actual maintenance

of the member’s books and records from which such reports are derived;

5. Supervision and/or performance of the member’s responsibilities under all financial

responsibility rules promulgated pursuant to the provisions of the Act [Securities Exchange

Act of 1934];

6. Overall supervision of and responsibility for the individuals who are involved in the

administration and maintenance of the member’s back office operations; or

7. Any other matter involving the financial and operational management of the member.

A person registered solely as a FINOP is not qualified to function in a principal capacity with

responsibility over any area of business activity other than those seven listed above.10 Supervision of

Client accounts do not fall within the Span of Supervision for a FINOP and is not a responsibility that

Respondent could have been delegated. FINOP responsibilities are limited back office operations,

preparation, and maintenance of member’s financial books and records, and compliance with financial

responsibility rules.

FINRA rules require the designation, where applicable, of an appropriately registered principal(s)

with authority to carry out the supervisory responsibilities of the member for each type of business in

which it engages for which registration as a broker-dealer is required.11 FINRA rules also require the

assignment of each registered person to an appropriately registered representative(s) and/or

principal(s) who shall be responsible for supervising that person’s activities.12 Broker-Dealers

Supervisory Procedures Manual allocated supervisory responsibilities for its registered representatives

to Owner. Respondent was not allocated any registered representative assignments and was not

designated as either a (1) Home Office Supervisor or a (2) Branch Office Supervisor.

Supervision of client accounts must be performed by appropriately registered principal(s).

Respondent was not an appropriately registered principal who could be responsible for supervision of

client accounts given the fact that his FINOP registration placed limits on his principal supervision

responsibilities to the listing of financial and operational responsibilities enumerated above. While it is

possible for a registered person to carry more than one principal registration, Respondent’s only

registration with Broker-Dealer was limited Principal-Financial and Operations (“FINOP”).

7

FINRA has strict requirements related to the Supervision of Client Accounts. FINRA account

information requirements implicitly require members to adopt procedures providing for an officer or

manager to accept client accounts.13 More particularly, FINRA rules require members to maintain

records capturing the signature of the registered representative introducing the account and of the

member or partner, officer or manager who accepts the account.14 FINRA Rules do not mandate that the

officer or manager be registered as a principal, but acceptance of accounts is defined as a function to be

performed at an office of supervisory jurisdiction, and it is customary industry practice for account

acceptance responsibility to be assigned to a registered principal.15 All client transactions are required to

be reviewed and enforced in writing by a registered principal.16 All client accounts are required to be

reviewed annually by a principal.17 Respondent was never designated any Supervisory obligations over

these responsibilities and was never designated a Home Office Supervisor or a Branch Office Supervisor.

If Respondent had been designated as having Supervisory responsibility for opening, maintenance, or

client account transaction reviews, I believe it would have been a violation FINRA Rules and Regulations

because Respondent lacked the appropriate principal qualifications.

Broker-Dealer’s Supervisory Procedures Manual allocated client account responsibilities as

follows:

Supervisory Activity Designated Supervisor

1. Acceptance of Client Accounts Home Office Supervisor; Branch Office Supervisor; Both

Supervisor types Supervised by Owner

2. Review of Client Transactions Home Office Supervisor; Branch Office Supervisor; Both

Supervisor types Supervised by Owner

3. Annual Client Account Review Home Office Supervisor; Branch Office Supervisor; Both

Supervisor types Supervised by Owner

Supervisory Review System

Overall Supervision Owner, Chief Compliance Officer

NASD Rule 3012 requires each member to designate and specifically identify to NASD one or

more principals who are responsible for establishing, maintaining, and enforcing a system of supervisory

control policies and procedures that include procedures that are reasonably designed to review and

supervise the client account activity conducted by the member’s branch office managers, sales

8

managers, regional or district sales managers, or any person performing a similar supervisory function.18

Broker-Dealer’s Supervisory Procedures Manual allocated this responsibility to Owner. As stated in the

Broker-Dealer Supervisory Procedures Manual:

The Chief Compliance Officer of Broker-Dealer is Owner, who shall serve as the

Registered Principal with responsibility for establishing supervisory systems and overall

oversight of compliance functions.

Broker-Dealer, like most FINRA members, allocated these responsibilities to its designated Chief

Compliance Officer. Owner was designated Broker-Dealer’s Chief Compliance Officer19 as evidenced in

the firm’s Supervisory Procedures Manual and thru Broker-Dealer’s Form BD, Schedule A filings.

Respondent was never designated Broker-Dealers Chief Compliance Officer. In fact Respondent was not

qualified to serve as Broker-Dealers Chief Compliance Officer due to lack of general securities principal

qualification.

FINRA rules require that Chief Compliance Officer’s be qualified as General Securities Principal’s

(“Series 24”) or, if applicable, the member’s activities are limited to particular areas of the investment

banking or securities business, the Chief Compliance Officer may apply for a limited principal

registration, such as the Limited Principal Investment Company and Variable Contracts Products (“Series

26”), Limited Principal Direct Participation Programs (“Series 39”), and Government Securities

Principal.20 Limited Principal’s- Financial and Operations (“Series 27”) do not qualify.

With respect to establishing the supervisory control system, one of NASD Rule 3012’s provisions

addresses the supervision of “producing managers.”21 In general, a Producing Manager is a branch office

manager, a sales manager, a regional or district sales manager, or any person who performs a similar

supervisory function and who services customer accounts in a capacity requiring registration. In the case

of Claimant, that would have been Owner. The procedures also must provide for supervisory reviews of

all account activity conducted by a firm’s producing managers. Generally, these supervisory reviews

must be conducted by a person who is either senior to or “independent of” the producing manager’s

influence.22 For purposes of NASD Rule 3012, “independent of,” is defined as a person that:

[M]ay not report either directly or indirectly to the producing manager under review;

must be situated in an office other than the office of the producing manager; must not

otherwise have supervisory responsibility over the activity being reviewed (including not

being directly compensated based in whole or in part on the revenues accruing for those

9

activities); and must alternate such review responsibility with another qualified person

every two years or less.”

Respondent was not responsible for conducting any reviews of Owner’s customer accounts

pursuant Broker-Dealers Supervisory procedures and was not qualified to review Owner as a “producing

manager” because he reported directly to Owner in his capacity as FINOP for Broker-Dealer. Any

designation, formal or otherwise, of Respondent as a reviewer of producing manager, Owner’s,

customer account activity pursuant to the supervisory control system established at Broker-Dealer

would have been a violation of NASD Rule 3012.

NASD Rule 3012 provides for a “Limited Size and Resources” Exception.23 The exception states

that if a member is so limited in size and resources that there is no qualified person senior to, or

otherwise independent of, the producing manager to conduct the required reviews, the reviews may be

conducted by a principal who is sufficiently knowledgeable of the member’s supervisory control

procedures, provided that the reviews are in compliance with the rule to the extent practicable.

Respondent as FINOP could not have been designated to conduct the required reviews pursuant to the

“Limited Size and Resources” Exception.24 FINRA was asked specifically whether a FINOP is a qualified

principal for purposes of NASD Rule 3012’s “limited size and resources exception.” The responses

related to the principal status required for application of the limited size and resources exception are as

follows:

Q: Does the person conducting reviews under the limited size and resources exception

have to be a principal?

A. Yes. Firms relying on the limited size and resources exception must have a principal

who is sufficiently knowledgeable of the firm’s SCPs (“Supervisory Control Procedures”)

conduct the required supervisory reviews.

Q: Is a FINOP a qualified principal for purposes of Rule 3012’s limited size and

resources exception?

A. No, unless the FINOP holds another principal license.

As noted earlier, Respondent held no other principal licenses with Broker-Dealer. Respondent was not

even remotely responsible for Broker-Dealers Compliance Obligations related to NASD Rule 3012.

FINRA (“formally NASD”) in issuing Notice to Members 06-23 dated May 2006 reminded

member firms and registered FINOPs of the FINOPs duties and responsibilities under NASD Membership

10

and Registration Rule 1022 (“Categories of Principal Registration”). FINRA stated that the duties and

responsibilities of a FINOP are applicable to all FINOPs, regardless of whether they are employed full-

time or part-time, perform such duties on-site or off-site of the member firm, or hold registrations with

more than one firm.

The Notice also provided additional guidance to assist FINOPs who are employed part-time,

operate off-site or hold multiple registrations in fulfilling their duties. The Notice did not put any

numerical guidelines on the number of engagements a FINOP may take on. The Notice was simply a

reminder that outsourced or part-time FINOP status does not negate or change in any way the FINOPs

responsibilities related to NASD Membership and Registration Rule 1022.25 Those responsibilities being

the seven functions listed below:

1. Final approval and responsibility for the accuracy of financial reports submitted to any duly

established securities industry regulatory body;

2. Final preparation of such reports;

3. Supervision of individuals who assist in the preparation of such reports;

4. Supervision of and responsibility for individuals who are involved in the actual maintenance of

the member’s books and records from which such reports are derived;

5. Supervision and/or performance of the member’s responsibilities under all financial

responsibility rules promulgated pursuant to the provisions of the Securities Exchange Act of

1934 (Exchange Act);

6. Overall supervision of and responsibility for the individuals who are involved in the

administration and maintenance of the member’s back office operations; and

7. Any other matter involving the financial and operational management of the member.

Nothing in Notice to Members 06-23 delegated to FINOPs any responsibilities related to (1)

oversight of customer account activity, (2) NASD Rule 3012 supervisory controls implementation or

review, or (3) changed the licensing types and qualifications articulated in the NASD Membership and

Registration Rules.

6.0 CONCLUSION

Respondent ended up in Arbitration as a result of his status as an Associated Person and Control

Person of Broker-Dealer. As I stated earlier, I strongly believe any finding against Respondent would not

11

have been supported by any NASD Membership and Registration Rules, FINRA Conduct Rules, or Broker-

Dealer’s Supervisory Procedures and Structure. I frankly believe a finding against Respondent would

have been unjust.

That being said, Respondent was still put through the agony of having to defend himself and his

professional reputation and livelihood in a FINRA Dispute Resolution Forum with no guarantee of a

positive outcome. Respondent was required to amend his Form U-4 to reflect the filing of Claimant’s

Arbitration filing. At a minimum Respondent was out the cost of a legal defense and wasted time spent

defending himself against Claimant’s allegations.

Respondent was ultimately able to have all references to Claimant’s Arbitration Claim expunged

from his registration records maintained by the FINRA Central Registration Depository (“CRD”). I believe

this was a just result. The Arbitration Panel (“Panel”) determined that Respondent did not manage,

supervise, or trade in the account(s) owned by Claimant. The Panel further determined that

Respondent, pursuant to NASD Rule 1022(b), had neither the responsibility nor the authority to engage

in those functions that were at the heart of Claimants allegations.

7.0 HOW DO I PROTECT MYSELF?

This Arbitration Case highlights the potential perils that lie with being an Associated Person and

a Control Person of a broker-dealer. Innocent parties will get dragged into Arbitration periodically. That

is an unfortunate fact and a risk borne by any Associated Person.

For a FINOP, to best mitigate the risk of being the subject of a Customer Complaint or

Arbitration alleging an investment-related sales practice, suitability, or customer account supervision

related violation, one would be well advised to be aware of and implement the following six (6)

recommendations:

1. Before taking on any FINOP engagement, do extensive Due Diligence on the prospective broker-

dealer and its management paying specific attention to any regulatory actions, customer

complaints, or arbitrations;

2. Know your broker-dealers Supervisory Procedures Manual and ensure that it limits your

Supervisory obligations and Span of Supervision to the seven (7) functions articulated in NASD

Membership and Registration Rule 1022 and NASD Notice to Members 06-23 dated May 2006;

12

3. If your services are procured by contract, ensure that the contract is not ambiguous as to the

services being provided and clearly states that your Supervisory obligations and Span of

Supervision are limited to the seven (7) functions articulated in NASD Membership and

Registration Rule 1022 and NASD Notice to Members 06-23 dated May 2006;

4. Never hold yourself out or imply that you are the person or designated principal responsible for

establishing, maintaining, and enforcing the system of supervisory controls policies and

procedures mandated by NASD Rule 3012 or new FINRA Rule 3120;

5. Never hold yourself out or imply that you are the person or designated principal responsible the

(1) Acceptance of Client Accounts, (2) Review of Client Transitions, or (3) Annual Client Account

Reviews;

6. Be prepared to hire an Expert Witness with extensive knowledge of the required Supervisory

Structure that should be in place at a broker-dealer, the responsibilities of respective principals

and the role a designated FINOP plays in that Supervisory Structure and the FINOPs Span of

Supervision.

The opinions expressed in this paper are solely those of the author and do not represent those of any regulatory authority. These opinions should not be construed as any legal, financial or investment advice. ABOUT THE AUTHOR: Patrick W. McKeon JD, CFP® has served as a Financial & Operations Principal (“FINOP”) and Chief Compliance Officer for numerous broker-dealers and currently serves as the FINOP and Chief Compliance Officer for an SEC Registered Private Placement Agent and M&A broker-dealer and a member of FINRA. In addition Mr. McKeon is President of the following organizations. EXPERTWITNESS.BIZ is a firm dedicated to providing expert witness testimony in financial industry disputes. The philosophy of the firm is to provide qualified and unbiased expert witness testimony, drawing upon over 27 years of financial industry experience and over 13 years of financial industry arbitration and dispute resolution experience. COMPLIANCENOW.BIZ is a financial industry consulting firm dedicated to helping broker-dealer and advisor firms, both existing and aspiring, to keep abreast of ever-increasing compliance obligations, grow revenue, and expand their reach. The philosophy of the firm is grounded in experienced and creative business development consulting. FOR MORE INFORMATION: Call Mr. McKeon at (508) 435-7907 or (617) 947-2205, email him at info@expertwitness.biz or visit his website at http://www.expertwitness.biz/.

13

1 See NASD Rule 1011(b)(1).The term “Associated Person” means a natural person registered under NASD Rules.

2 FINOPs are defined as Control Persons on Form BD, Schedule A.

3 See FINRA Dispute Resolution website: http://www.finra.org/ArbitrationAndMediation/index.htm

4 Respondent was registered with and designated as the Broker-Dealers FINOP for less than a year.

5 NASD Membership and Registration Rule 1021(e)(1).

6 NASD Membership and Registration Rules 1021(e)(3) and 1022(b)(1).

7 NASD Membership and Registration Rule 1022(a)(1).

8 NASD Membership and Registration Rule 1070(d) and FINRA Procedural Rule 9610.

9 NASD Membership and Registration Rule 1022(b)(2).See also NASD Notice to Members 06-23 dated May 2006

10

NASD Membership and Registration Rule 1022(b)(3). 11

NASD Conduct Rule 3010(a)(2). Rule to be replaced by FINRA Rule 3110 effective December 1, 2014. See filing of SR-FINRA-2013-025 which has been approved by the SEC. 12

NASD Conduct Rule 3010(a)(2). Rule to be replaced by FINRA Rule 3110 effective December 1, 2014. See filing of SR-FINRA-2013-025 which has been approved by the SEC. 13

FINRA Financial and Operational Rule 4512(a)(D). 14

FINRA Financial and Operational 4512(a)(C)&(D). 15

NASD Conduct Rule 3010(g)(1)(D). Rule to be replaced by FINRA Rule 3110 effective December 1, 2014. See filing of SR-FINRA-2013-025 which has been approved by the SEC. 16

NASD Conduct Rule 3010(d)(1). Rule to be replaced by FINRA Rule 3110 effective December 1, 2014. See filing of SR-FINRA-2013-025 which has been approved by the SEC. 17

NASD Conduct Rule 3010(c). Rule to be replaced by FINRA Rule 3110 effective December 1, 2014. See filing of SR-FINRA-2013-025 which has been approved by the SEC. 18

NASD Conduct Rule 3012(a)(2)(A). Rule to be replaced by FINRA Rule 3120 effective December 1, 2014. See filing of SR-FINRA-2013-025 which has been approved by the SEC. This rule becomes effective on December 1, 2014. 19

FINRA Conduct Rule 3130(a) requires each ember to designate and specifically identify to FINRA on Schedule A of Form BD one or more principals to serve as a chief compliance officer. 20

See NASD Rule 1022(a)(1), NASD Notice to Members 01-51 (August 2001) and Qualifications Frequently Asked Questions (FAQ)- Registration posted on FINRA website: http://www.finra.org/Industry/Compliance/Registration/QualificationsExams/Qualifications/faq/p011102#1-6

14

21

See NASD Notice to Members 05-08 dated January 2005, Page 3, Q&A Question #1. 22

See NASD Conduct Rule 3012(a)(2)(A)(i). Rule to be replaced by FINRA Rule 3120 effective December 1, 2014. See filing of SR-FINRA-2013-025 which has been approved by the SEC. This rule becomes effective on December 1, 2014. 23

See NASD Conduct Rule 3012(a)(2)(A)(ii). Rule to be replaced by FINRA Rule 3120 effective December 1, 2014. See filing of SR-FINRA-2013-025 which has been approved by the SEC. This rule becomes effective on December 1, 2014. 24

See FINRA Frequently Asked Questions, Limited Size and Resources, Questions 7 & 8 posted on FINRA’s website at http://www.finra.org/Industry/Issues/SupervisoryControl/P038001 25

See NASD Membership and Registration Rule 1022(b)(2)(A) through (G) and (c)(2)(A) through (G).