I sold a deferred variable annuity to a client and took a check from him that I've been holding for more than a week now while I wait for my manager to approve the sale. I've heard, however, that holding a check for so long could cause problems. Can you tell me if there's a potential problem here?

— S.T., Florida

In January of this year, FINRA issued Notice to Members 10-05 clarifying member's obligations under FINRA Rule 2330. FINRA originally stated that "a firm may hold an application for a deferred variable annuity and a customer's ... check ... to an insurance company for up to seven business days without violating either NASD Rule 2330 or 2820 if the reason for the hold is to allow completion of principal review of the transaction pursuant to NASD Rule 2821." However, a recent amendment changed the starting point for the review period from the date the customer signs the application, to the date when a firm's office of supervisory jurisdiction (OSJ) receives a complete and correct application package.

In light of the amendment, FINRA's interpretation applies only if the following seven conditions are met:

• The reason the firm is holding the application and/or the check is to allow completion of principal review of the transaction.
• The associated person who recommended the purchase or exchange of the annuity makes reasonable efforts to safeguard the check and promptly prepares and forwards a complete and correct copy of the application package to an OSJ.
• The firm has policies and procedures in place that are reasonably designed to ensure that the check is safeguarded and that reasonable efforts are made to promptly prepare and forward a complete and correct copy of the application package to an OSJ.
• A principal reviews and makes a determination of whether to approve or reject the purchase or exchange of the deferred variable annuity in accordance with the provisions of FINRA Rule 2330.
• The firm holds the application and/or check no longer than seven business days from the date an OSJ receives a complete and correct copy of the application package.
• The firm maintains a copy of each such check and creates a record of the date the check was received from the customer and the date the check was transmitted to the insurance company or returned to the customer.
• The firm creates a record of the date when the OSJ receives a complete and correct copy of the application package.

If these conditions are not present, FINRA's interpretive relief will not apply and it will enforce FINRA Rules 2150(a) and 2320(d), as appropriate. So assuming you promptly sent the package to your OSJ and they sat on it for more than seven business days, you might have a problem. You should note, however, for future reference that firms are not required to collect and hold checks or funds prior to principal review and approval. A firm may elect to wait until after a principal approves the transaction to collect the check. See NTM 10-05 for more information.

My supervisor has just told me that the firm is lowering the limit on total commissions as a percentage of the total assets in an account that we can charge on an annual basis. He says they are doing this to prevent churning. Is there any rule that says they can do this?

— T. F., New York

Other than the general supervisory rule that requires firms to establish and maintain a system of supervision designed to achieve compliance with the securities laws, there is no specific rule that sets a limit on the total amount of commissions that can be charged to an account (either on a dollar amount or as a percentage of account assets). However, there are numerous cases and articles that discuss churning and various formulas that are typically used as evidence of excessive trading in an account. One of the most commonly used is the cost-to-equity ratio, which looks at the value of the portfolio as compared to the costs of the trades (primarily the commissions charged). Consequently, if a firm decides to use such a formula to prevent churning and establishes a percentage limit, they can do so under the auspices of NASD Rule 3010(a).

I was named in a FINRA arbitration case and was contacted (through my firm) by a FINRA regulation examiner who's looking into the complaint to see whether any disciplinary action is warranted. How does FINRA Regulation get involved in what I thought was a private arbitration proceeding and how worried should I be that they'll take disciplinary action against me?