The control principle that no one person should both initiate a transaction and approve or reconcile it, so that a mistake or a misappropriation has to survive a second pair of eyes. Where a firm is too small to split the roles, an independent review after the fact serves as the compensating control.
Practice questions using Segregation Of Duties
Original questions written against the published FINRA and NASAA exam content outlines — not actual exam questions. Every choice is explained.
At Marlstone Securities, the trading desk reports through the same manager as the settlement function that confirms and books the trades those traders execute. No individual performs both trading and settlement personally. Is this arrangement consistent with sound supervisory control?
A.No, because a shared reporting line undermines the independence between the trading and settlement functions.Correct. Sound supervisory control requires departmental independence, and a common manager over both functions defeats that even without any individual holding both jobs.
B.Yes, because different individuals process trading and settlement.Wrong. That satisfies individual duty segregation but not the separate requirement for independence among departments.
C.No, because settlement staff are not registered principals.Wrong. Registration status of settlement staff is not the issue; the defect is the shared reporting line over both functions.
D.Yes, provided the shared manager signs off on both departments' monthly reports.Wrong. More review from the same conflicted manager does not restore independence between the two functions.
Why: Sound supervisory control calls for segregation of functions and supervision among departments, not merely among individuals. A common reporting line lets one manager influence both the trading and the settlement of the same trades, which can undermine the independence the separation is meant to provide even though no single employee performs both roles. Departmental independence, including separate management, is what makes the check meaningful.
An operations associate at Bellcastle Securities transfers from wire processing to trade reconciliation. Her system access to initiate outgoing wires is never revoked. Months later she uses the retained access to process an unauthorized wire. Her new duties in reconciliation were properly segregated from the account she paid out from. What control failure occurred?
A.A failure to revoke her wire-initiation entitlement when her role changed.Correct. Her current duties were properly segregated; the gap was stale system access left over from her prior role.
B.A failure to segregate wire release from reconciliation of the same account.Wrong. The facts state her new duties were properly segregated from that account; the problem is retained access unrelated to her current job.
C.A failure to hold an annual compliance meeting.Wrong. Nothing in the facts involves the annual compliance meeting requirement.
D.An absence of a business continuity plan.Wrong. This scenario has nothing to do with disruption response; it is an access-control lapse during normal operations.
Why: This is an access-entitlement failure, not a segregation-of-duties failure. Segregation of duties concerns whether the tasks assigned to a role are compatible; here the associate's current job function was properly designed. The defect is that her prior wire-initiation entitlement was never revoked when her role changed, leaving her with system capability unrelated to her current duties. Entitlement reviews tied to role changes exist precisely to close this gap, and the firm's failure was procedural: nobody re-certified her access after the transfer.
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