NASAA Identifies Top Broker-Dealer Compliance Deficiencies

State Securities Regulators Offer Series of Compliance Best Practices

Download >> 2010 Broker-Dealer Coordinated Examination Report

WASHINGTON (October 12, 2010) – Based on coordinated examinations of broker-dealers throughout the United States, the North American Securities Administrators Association (NASAA) today identified the top compliance deficiencies and offered a series of recommended best practices for broker-dealers to consider in order to improve their compliance practices and procedures.

“We have flagged these deficiencies to help broker-dealers reduce the risk for regulatory violations by strengthening their internal compliance programs. Our best practices are designed to support broker-dealers in meeting their compliance challenges and providing better services to their clients,” said David Massey, NASAA President and North Carolina Deputy Securities Administrator.

Massey said the best practices were developed after a nationwide series of examinations of broker-dealers by state securities examiners from 30 NASAA jurisdictions in the United States revealed a significant number of problem areas. The 2010 examinations were conducted under the guidance of NASAA’s Broker-Dealer Operations Project Group.

A total of 290 examinations conducted between January 1, 2010 and June 30, 2010 found 567 deficiencies in five compliance areas. The greatest number of deficiencies (33 percent or 185 deficiencies) involved books and records, followed by sales practices (29 percent or 164 deficiencies), supervision (20 percent or 115 deficiencies), registration and licensing (10 percent or 56 deficiencies), and operations (8 percent or 47 deficiencies).

The three most commonly found problem areas involved failure to follow written supervisory policies and procedures, advertising and sales literature, and variable product suitability. Half of the examinations involved one-person branch offices, 19 percent were home offices, 18 percent were branch offices with two to five agents, 10 percent were branch offices with more than five agents and 3 percent were non-branch offices.

Best Practices

Based on the examination results, NASAA recommended a series of 10 “Best Practices” to help broker-dealers develop compliance practices and procedures. The best practices include:

  • Develop effective standards and criteria for determining suitability.
  • Ensure that exception reports are generated when necessary and that “red flags” are documented and resolved in a timely manner. If the BD elects to electronically recreate an exception report, the BD must not only be able to recreate the report but also document how the exception was resolved.
  • Develop, update and enforce written supervisory procedures. BDs should also ensure that staffing and expertise are commensurate with the size of the BD and type(s) of business engaged in by the firm.
  • Develop a branch audit program that includes a meaningful audit plan, unannounced visits, a means to convey audit results and a follow-up plan for requesting that the branch take corrective action.
  • Firms must ensure that adequate procedures are in place to prohibit and detect unauthorized private securities transactions (selling away). If this activity is permitted, the firm’s written supervisory procedures should be adequate to monitor this activity on an ongoing basis.
  • Outside business activity requests from registered representatives must be received and reviewed by the firm prior to the activity. The firm and its registered representatives are obligated to report the outside business activity on the representative’s Form U-4. The firm should have a supervisory procedure in place to address its approval/denial process.
  • Advertisements and sales literature must be balanced, make full and fair disclosure, and be approved, as necessary, prior to use.
  • Seminar notices/advertisements, seminars and seminar materials utilized must be approved by the BD prior to use and the seminar being held. Additionally, any guest speakers and their materials must also be reviewed and approved prior to the seminar. In instances where registered representatives routinely conduct seminars, a supervisory representative of the firm should randomly attend the seminar for compliance purposes.
  • Correspondence, both electronic and hard copy, must be effectively monitored by the BD including a system of capturing and maintaining e-mails sent by registered representatives from websites and Internet Service Providers outside the firm.
  • Upon receipt of a complaint, the firms must acknowledge receipt, update the registered representative’s Form U-4, if required, and conduct and document a thorough review of the customer’s allegations. In situations where the firm discovers wrongdoing, the firm should redress customer harm. Failure to do so may result in enhanced penalties under NASAA guidelines.

NASAA is the oldest international organization devoted to investor protection. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada and Mexico.

For more information:
Bob Webster, Director of Communications
202-737-0900

2010 Headlines, Newsroom