NASAA Examinations Identify Top BD Compliance Deficiencies

State Securities Regulators Propose Series of Best Practices

SAN DIEGO, CALIFORNIA (September 18, 2006) – The North American Securities Administrators Association (NASAA) at its annual conference here today announced a series of recommended best practices for broker-dealers to consider in order to improve their compliance practices and procedures.

NASAA President Patricia D. Struck said the best practices were developed after a nationwide series of examinations of broker-dealers state examiners in 28 NASAA jurisdictions in the United States revealed a significant number of problem areas.

NASAA Broker-Dealer Section Chair and Illinois Securities Director Tanya Solov said 228 examinations of broker dealers were conducted between May 1, 2006 and June 30, 2006. Of the examinations, 85 percent, or 193, involved smaller branch offices employing five or less registered representatives; and 15 percent involved larger offices with six or more registered representatives.

Overall, the examinations found 654 deficiencies in five compliance areas. The greatest number of deficiencies (49 percent) identified in the examinations involved books and records, followed by supervision (22 percent), sales practices (16 percent), registration and licensing (7 percent), and operations (6 percent).

Solov said the three most common deficiencies involved maintenance of customer account information, suitability, and failure to follow written procedures. Complete results of the examinations are available here.

The three most common books and records deficiencies involved maintenance of customer new account information, seminar advertising and sales literature, and outgoing/incoming correspondence. In the area of supervision, the most common deficiencies concerned the failure to follow written supervisory procedures, internal audits, and written supervisory procedures not maintained as current.

The most common deficiencies found in the area of sales practices involved suitability, outside business activity and selling away, and variable product suitability. The top problems in the registration and licensing area involved Form U-4 information, qualifications/licensing and special or heightened supervision. Operational deficiencies include issues related to sales seminars, handling of money and securities, and commission agreements and statements.

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:

1) Develop, update and enforce written supervisory procedures.

2) Ensure that the firm provides each customer within 30 days of account opening, upon updating, or on a rolling 36-month period each of the following: copies of the new account information; copies of all customer agreements; and “Plain English” definitions of the broker-dealer’s investment objectives.

3) Provide customers with names and addresses for returning inaccurate account information and also information about where to direct complaints and questions. Responses should be directed to the firm rather than the registered representative.

4) Develop effective standards and criteria for determining suitability.

5) Ensure that exception reports are generated, when necessary and that “red flags” are documented and resolved in a timely manner.

6) Develop a branch audit program that includes an effective audit plan, unannounced visits, a way to convey audit results, and a follow-up plan for requesting that the branch take corrective action.

7) Ensure that outside business activity and requests to sell securities not yet approved by the broker-dealer are disclosed by each registered representative and adequately investigated by the firm.

8) Advertisements and sales literature must make full and fair disclosure and be approved prior to use.

9) Seminars and handout materials must be approved by the broker-dealer prior to the seminar being held. Additionally, any guest speakers and their materials must also be reviewed prior to the seminar.

10) Correspondence, both electronic and hard copy, must be effectively monitored by the broker-dealer, including a system of capturing and maintaining e-mails sent by registered representatives from websites and Internet Service Providers (ISP’s) outside the firm.

“These recommended best practices are designed to promote the better understanding of compliance challenges among regulators, broker-dealers and their representatives,” Struck said. “This information can assist broker-dealers develop compliance programs to reduce the potential for regulatory violations and, in turn, build investor confidence in their activities.”

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, the provinces and territories of Canada, and Mexico.

For More Information
Bob Webster, Director of Communications
202-737-0900

2006 Headlines, Newsroom