NASAA Identifies Top Broker-Dealer Compliance Violations and Best Practices

On Sunday, the North American Securities Administrators Association released its list of broker-dealer compliance violations and best practices to avoid those violations.  The list is based on a compilation of 236 examinations by state securities examiners from 24 jurisdictions around the United States.  The exams were conducted in the first half of 2012 under the guidance of NASAA’s Broker-Dealer Operations Project Group. The top five types of violations involved:

• Failure to follow written supervisory policies and procedures

• Suitability

• Correspondence/e-mail

• Maintenance of customer information, and

• Internal audits

To avoid these issues, NASAA recommended ten best practices:

• Customer Complaints – Firms must acknowledge customer complaints, conduct and document a thorough review of the customer’s allegations, and, if necessary, update the salesperson’s Form U-4.  In wrongdoing is found, the firm should redress customer harm. Timely reporting and remediating customer harm are some of the factors under NASAA guidelines to determine if the firm is entitled to credit for cooperation.

• Suitability – Under FINRA Rules 2090 and 2011, know your customers and provide sufficient training to registered representatives to demonstrate sufficient knowledge of products before selling them.

• Develop, Update, and Enforce Written Supervisory Procedures – Also ensure that staffing and expertise are commensurate to the size of the B-D

• Exception Reports – Be sure to get these from clearing firms, then document and resolve “red flags” in a timely manner.

• Branch Office Audits – Develop a meaningful branch audit program that includes, among other things, unannounced visits and a follow-up plan requiring corrective action.

• Selling Away – Ensure that adequate procedures are in place to address private securities transactions, including mechanisms to review requests for such transactions.

• Outside Business Activity – Have a supervisory procedure in place to address approvals and denials of requests for these.

• Advertisements – Like Fox News, ads and sales literature must be fair and balanced, but also must be approved by the B-D or FINRA.  If sales people routinely conduct seminars, a supervisor should attend randomly for compliance purposes.

• Correspondence – Electronic and hard copy correspondence must be effectively monitored and maintained by the B-D.  Additional guidance is in FINRA Notice 11-39.

• Seniors – As Baby Boomers move into retirement, the cognitive abilities of some begin to wane. B-Ds should develop procedures for handling accounts of “senior” investors and be closely attuned to issues that could arise with those accounts.