NASD Spring Securities Conference, May 17-19, 2006
Small Firms Compliance Pre-Conference

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Clearing and Introducing Firm Relationships

Your clearing agreement must, at a minimum, specify the responsibilities of each party with respect to the following:

• Opening, approving and monitoring customer accounts
• Extension of credit
• Maintenance of books and records
• Receipt and delivery of funds and securities
• Safeguarding funds and securities
• Confirmations and statements
• Acceptance of orders and execution of transactions
• Whether customers are considered customers of the clearing member for purposes of financial responsibilities
• Responsibility to send customers notification of the clearing firm and clearing agreement pursuant to NASD Rule 3230(g)
• Proprietary assets of the introducing firm maintained at the clearing firm (PAIB agreement)
• Risk management of introducing firm’s business activities and financial position
• Clearing deposit
• AML and CIP responsibilities
• Execution of orders and transactions
• Commissions received by clearing form for transactions of introducing firm customer accounts
• Termination clause and return of clearing deposit

Written customer complaints received by the clearing firm must be forwarded to the introducing firm and the NASD; the clearing firm must provide written acknowledgement to the customer of receipt of the complaint.

Your clearing firm must provide you annually, in writing, with a list of exception reports it offers.

As of 2/20/06 all piggyback clearing arrangements must maintain proprietary and customer account information in a manner to enable the NASD to identify data belonging  to the proprietary and customer accounts of each introducing firm through the use of an MPID number.

Outside Business Activities
Associated persons must notify their firm, in writing; of all outside business activities pursuant to NASD Rules 3030 and 3040 (charitable, civic, fraternal or religious activities are excluded).

Examples of violations (OBA’s subject to Rule 3030 or 3040):

• Participation in private offerings
• Selling insurance products (equity indexed annuities, promissory notes, viatical settlements

Spring Securities Conference

Disaster Recovery Plans
NASD Rule 3510 requires every member firm to have a Business Continuity Plan which must be reviewed annually by senior management.  Common exam findings include:

• Lack of emergency contact information
• Disclosure requirements
• Periodic review, testing and annual update

NASD noted most firms do not have continuity plans in place in the event of a pandemic

Foreign Correspondent Accounts (Section 312): effective July 5, 2006 (and for accounts opened prior to July 5^th by October 2, 2006) firms must:

• Determine whether the foreign financial institution is a foreign bank
• Assess the money laundering risk presented – what is the nature of their business?
• Apply risk-based procedures and controls to those accounts

Private Banking Accounts:
    - $1,000,000 minimum aggregate deposit of funds or assets required – determine the source of funds and the purpose and use of the account

    - If the account is established or maintained on behalf of one or more non-US individuals who are direct or beneficial owners of the account  - determine whether any owner is a SFPF and identify all owners of the account

CRD & IARD
NASD teams up with Equifax and, for an annual fee of $500, provides an employment screening service.

Branch offices are required to file Form BR by July 3, 2006.  Some firms must register their main office as a branch; if you are unsure of whether you meet the requirements of a branch office, please contact us at BDC.

Advertising Regulation
529 Plans – MSRB & NASD propose new advertising rules (MSRB G-17 & NASD 2210 & 2211)
Equity Indexed Annuities – Advertising must:

• balance discussions of guarantees and principal safety
• accurately explain how product operates
• disclose costs
• avoid misleading statements

See NTM -5-50 for further information

Electronic Recordkeeping

See attached outline for detailed information. >> View document here

Research Analysts

A joint report by NASD and NYSE on the operation and effectiveness of the research analyst conflict of interest rules is available on the NASD’s website: http://www.nasd.com/web/groups/rules_regs/documents/rules_regs/nasdw_015803.pdf

Market Regulation

A discussion of OATS reporting presented by Wilmer Cutler Pickering Hale and Dorr LLP is attached.
>> View document here

NASD Exams
Exam Process

1. go online and complete Web IR requests and prepare documents for examiner.
2. prepare your staff
3. review WSP’s, AML, Continuing Ed & BCP to make sure they are up to date
4. notify your clearing firm and request any needed documents
5. once the exam is completed, respond to the exit conference promptly

Common Issues:

firms not ready for exam or improperly prepared
firm is slow in reacting and coming into compliance with new rules
firm does not keep current with NTM’s
firm is overly reliant on outside consultants and its clearing firm for compliance
firm does not notify NASD in changes to key personnel

Common Exam Findings:

o    inadequate WSP’s & supervisory system
o    Inadequate AML supervision
o    Inadequate preparation and storage of records
o    U4/U5 deficiencies

2006 Exam Priorities

Insurance products – overselling of enhanced riders, replacements, product recommendations to elderly, secondary market activity, contract financing, EIA’s
Mutual Funds – breakpoints, sales charge waivers, supervision
AML – adequacy, CIP, SAR, testing
Electronic storage – notification to NASD, required maintenance
Branch office - sales practices, supervision
Sales seminars – 2210 adherence, approval of materials
Private securities transactions – approval process documentation
Regulation S-P – sharing, protecting and disposing of consumer information
Supervision
New products and non-conventional instruments – suitability, internal controls, training, supervision

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