The NASD has two new resources to support firmâ€™s Anti Money Laundering (AML) programs. A free webcast is available at http://www.nasd.com/webcasts/aml. This 10-minute webcast highlights the importance of reps knowing their customers and provides tips on spotting suspected money laundering. There are also two e-learning courses available, which offer more in-depth training.
FINCEN has released â€œThe SAR Activity Review,â€ which covers recent developments in suspicious activity reporting requirements. This review provides valuable information about the preparation, use and value of SARs, as well as trends in the industry. See www.fincen.gov/
Central Registration Depository (CRD)
See NTM 05-66 below regarding the requirements under the new Form BR. Member firms have until 5/1/06 to ensure that branches are properly registered and reps are appropriately assigned.
Notice to Members
NASD has filed an extension for compliance date for Rules 3012 and 3013 until 4/1/06 as the date by which members must submit their initial 3012 report and execute their first CEO certification. NASD Rule 3013 requires each member subject to the rule to adopt and implement written supervisory procedures that are reasonably designed to achieve compliance with the rulesâ€™ provisions. The rule also requires that a senior officer of the member attest annually to NASD that it has adopted and implemented such procedures. This annual attestation must be completed no later than the last business day of each calendar year.
The 2003 order provided that non-public broker dealers may file with the Commission and may send to their customers documents and information required by Section 178(e) certified by an independent public account, instead of a registered public accounting firm until January 1, 2005. This extension has been extended for fiscal years ending before January 1, 2006.
NASD Dispute Resolution offers a voluntary pilot program to improve the discovery process in arbitration.
The NASD has issued an alert on financial scams targeting non-U.S. investors. These scams utilize phony regulator websites and fake broker identities to prey on investors unfamiliar with U.S. securities products, markets, and regulators.
NASD has enhanced its e-mail subscription service to be sure the right people at each firm get relevant information. See www.nasd.com/subscriptions.
In Robert Glauberâ€™s speech at the SIA Soft Dollars and Institutional Brokerage Conference he stressed the need for disclosure in the industry and clear disclosure documentation for investors. The NASD is finishing an easy-to-use website to allow registered reps and investors to access key mutual fund discount and expense information right on their desktops.
In Mary Shapiroâ€™s speech at the SIA Conference she outlined fund-related issues on which the NASD is focused. These include:
(1) enforcement of rules involving gifts and cash and non-cash compensation incentives; (2) non-traditional products to ensure when a firm introduces a new product personnel are able to accurately and clearly explain the features; (3) quasi-securities products such as equity-indexed annuities are reviewed to ensure members understand regulatory and supervisory risks that may arise from these products; and (4) reviewing restrictions imposed in the transfer of proprietary funds.
OATS Update: (1) Oats requirements for manual orders (Phase 3) approved; (2) members are required to capture both the time the order is received from the customer and the time the order is received by the trading desk and if the time differs; (3) excludes certain members from the definition of â€œreporting membersâ€ if reported to OATS by another member; (4) permits NASD to grant exemptive relief from the OATS requirement in special circumstances.
NASD has paired with Bloomberg to launch two corporate bond indices â€” tools that investors can utilize on a daily basis to gauge market direction and measure performance of their corporate bond holdings against the broader market. See www.bondinfo.com/asp/dailyindices.asp.
NASD has created an on-line tool for looking up breakpoint schedules and linkage rules for mutual funds with front-end sales charges. See www.nasd.com/fundsearch.
In the Fall issue of NASD Regulatory Enforcement, the Office of General Counsel outlines areas which during exams resulted in disciplinary actions. These included: (1) failure to disclose information on a Form U4; (2) failure to respond to information requests; (3) forgery; (4) engaging in private securities transactions without providing prior notice or approval from their firm; (5) sales of securities without proper state registration; (6) sharing in the losses of a customer account and (7) violating rules of conduct by research analysts and disclosures in research reports.
The Alternative Display Facility (ADF) pilot has been extended until 4/26/06 or until approval of the ADF on a permanent basis. An agreement between the NASD, NYSE, and UKâ€™s S11 was reached to create a common qualifications exam for capital market professionals. Those passing the new Global Capital Markets exam will qualify for a new registration category in the area of equity and debt capital markets and syndicate and investment banking. The exam is slated for late 2006 and will consist of two parts. The core unit tests knowledge to perform entry-level capital markets work in the United States and the U.K. The second unit assesses knowledge in the respective jurisdictions.
The NASD announced they will file rule amendments to clarify and expand the scope of relief from NASD rules provided to securities industry professionals actively serving in U.S. Armed Forces. Firms are allowed to place a registered rep on â€œinactiveâ€ status while serving which excuses the rep from CE obligations, waives dues and assessments, and ensures that the rep is not subject to the two-year expiration. In addition, reps can continue to receive transaction-related compensation. The amendments will clarify that relief extends to principals as well as reps among other clarifications.
NTM 05-72 â€“ This NTM addresses reporting requirements for â€œpiggybackingâ€ arrangements effective 2/20/06. Firms that contract for clearing services with an intermediary firm are referred to as â€œpiggybackingâ€ firms. Under these arrangements only the intermediary firm has a contractual agreement with the clearing firm and the intermediary firm may be assigning account numbers to the piggybacking firm which is not identified to the clearing firm. The clearing firm in reporting to the NASD therefore does not identify which accounts are the intermediaries and ones that belong to the piggy-backer. The inability to separate the data can create issues if an intermediary firm goes to SEC liquidation. To resolve this, the NASD has taken the following action: (1) Rule 3150 â€” clearing firms are to report data for each piggyback firms separately from the intermediary if the arrangement is established on or after 2/20/06; (2) intermediary firms must maintain data to enable the NASD and the clearing firm to identify data pertaining to its own firm and that of the piggyback firm. Requirements only apply to relationships established on or after 2/20/06.
NTM 05-70 â€“ The examinations for Series 4, Series 6 and Series 9/10 have been revised. The exams were revised to reflect changes in relevant laws, rules and regulations and more accurately reflect the duties and responsibilities of the individuals taking these exams.
NTM 05-69 â€“ New Rule 2111 prohibits members from trading ahead of customer market orders in certain cases effective
1/9/06. The NASD will publish in a separate notice with questions and answers regarding the application of this new rule. The â€œmanning ruleâ€ generally prohibits members from trading for their own account at prices that would satisfy a customerâ€™s limit order unless the member immediately executes the customer limit order. The NASD created Rule 2111 because the principles in which the manning rule is based should apply to the treatment of customer market orders.
NTM 05-68 â€“ The Securities Industry/Regulatory Council on Continuing Education has issued their annual Firm Element Advisory for firms to use as a guide in developing their training plans.
NTM 05-67 â€“ On September 9, 2005 the SEC approved amendments to revise the definition of â€œbranch officeâ€ and guidelines on factors to be considered during internal inspections of offices. The current definition of â€œbranch officeâ€ remains in effect until 4/30/06.
NTM 05-66 â€“ Effective 10/31/05 the SEC has approved the Form BR and technical changes to Forms U4 and U5. The Form BR replaces Schedule E of the Form BD, the NYSE Branch Office Application Form and certain state branch office forms. This Form BR will enable firms to register branch offices electronically with the NASD, the NYSE, and states that require branch registration via a single filing on CRD. A timetable for transition and guidance is provided with this NTM. As of 10/31/05 firms with branch offices in existence prior to the close of business on 10/14/05 may (1) complete data fields for each conversion Form BR created by the NASD during the lock-out period and (2) file the completed forms BR through CRD. Firms will also be able to amend U4â€™s to assign each registered person to a registered branch office. These filings must be completed by 5/1/06.
NTM 05-65 â€“ Amendments to Rule 2790 exclude from the definition of â€œnew Issueâ€ securities offerings of a business development company, a DPP program and a REIT were approved.
NTM 05-64 â€“ Effective 1/2/06 members are required to provide price improvement to customer limit orders in certain circumstances and expand the application to exchange listed securities. These amendments are to IM-2110-2, Trading Ahead of Customer Limit Order referred to as the â€œmanning rule.â€
NTM 05-61 â€“ Comments are solicited on the possible realignment of the trading activity fee. This TAF helps fund NASD regulatory activities. Feedback on the potential impact to member firms if the TAF were to assess any customer transaction in a covered security regardless of whether an NASD firm is on the buy or sell side of the transaction and all proprietary transactions not effected in a firmâ€™s capacity as a market maker are requested.
NTM 05-60 â€“ This is a â€œspecialâ€ NTM regarding the suspension of trading in the securities of Bancorp International Group, Inc. (BCIT.PK) as it appears securities currently trading in BCIT are counterfeit.
NTM 05-59 â€“ The NASD has provided guidance regarding the sale of structured products. Structured products are securities derived from or based on a single security, a basket of securities, an index, a commodity, a debt issuance and/or a foreign currency. There are many structured products â€” some offering full protection of principal others with no principal protection. Responsibilities in these sales include (1) providing balanced disclosure in promotional efforts; (2) ascertaining the accounts are eligible to purchase structured products; (3) dealing fairly with customers with regard to derivative products; (4) preparing a reasonable-basis suitability determination; (5) preparing a customer-specific determination suitability determination; (6) have a supervisory control system; and (7) training associated persons.
NTM 05-58 â€“ Reporting requirements for the automated submission of trading information via the Blue sheet System and information on the validation of certain data fields is provided. Contact information for various SRO individuals is also provided. In order to ensure organizations are reporting EBS data correctly, the ISG SROs require all members, or their EBS provider, to conduct a validation of all required EBS data elements to ensure EBS transmissions are consistent with current standards and accurately reflect membersâ€™ books and records. This must be completed by 3/31/06 and will require documentation confirming that the validation has occurred be retained by members.
NTM 05-57 â€“ Members affected by Hurricane Katrina are provided guidance on emergency office relocations, continuing education requirements for registered reps, registered reps engaged in active military duty, books and records, handling of customer funds, and customer communication.
NTM 05-56 â€“ Rule 2860 imposes a ceiling or position limit on the number of conventional and standardized equity options contracts in each class on the same side of the market that can be held or written. The rule provides that the position limits for stock options are determined by a five-tiered system. The pilot program for Rule 2860 that increases certain stock options position and exercise limits has been extended to 3/3/06.
NTM 05-52 â€“ SEC approved adding an enterprise fee structure and lowering another fee related to the receipt of real-time TRACE transaction data. This fee change will enable a broker dealer to display real-time TRACE transaction data on an unlimited number of internal display devices for a fee of $7,500 per month. The fee for Level 11 Full Service Web browser access was lowered for the first user ID to $50 per month. These changes are effective as of 10/1/05.
NTM 05-51 â€“ Firms are reminded when executing a volume-weighted average price (VWAP) or other large market-moving transaction for a customer, it is inconsistent with Rule 2110 (principles of trade) and Rule 2320 (best execution) to engage in propriety trading activity that compromises the customerâ€™s interests. Members who receive such orders must disclosure in writing to the customer that the member may engage in hedging or other positioning activity that could affect the market. Best execution obligations always pertain once an order is received.
NTM 05-50 â€“ This NTM outlines the responsibilities for supervising sales of unregistered equity-indexed annuities. Equity-indexed annuities are financial instruments in which the issuer guarantees a stated interest rate and some protection from loss of principal and provides an opportunity to earn additional interest based on performance of a securities market index. Some EIAs are not registered under the Securities Act as they are considered insurance products. The NASD is concerned about the manner in which these products are marketed and sold, as they are complex investments. Marketing material in some situations could be deemed broker-dealer communications with the public and subject to NASD advertising rules. Many firms treat the sale of EIAs as outside business activities under Rules 3030 and beyond their supervisory responsibilities. However, if a rep sold an EIA deemed a security, Rule 3040 requires the sale be treated as a private securities transaction and supervision is required.
NTM 05-49 â€“ Members are reminded of their obligation to maintain policies and procedures that are intended to protect customer information and to ensure that their policies and procedures reflect changes in technology or alternative work arrangements particularly in light of the wireless technologies and the ease of conducting business remotely.
NTM 05-48 â€“ This NTM outlines the memberâ€™s responsibilities when outsourcing activities to a third-party service provider. Any parties conducting activities or functions that require registration under NASD rules will be considered associated persons of the member. In addition, outsourcing an activity or function to a third-party does not relieve members of their ultimate responsibility for compliance. Members may need to adjust their supervisory structure to ensure that an appropriately qualified person monitors the arrangement. This includes conducting a due diligence analysis of the third-party service provided.
NTM 05-47 â€“ This notice provides guidelines to members regarding the application of Exchange Rules 15c3-1 and 15c3 3, NASD Rule 2520 and Federal Reserve Regulation T in an event of an unexpected securities market close. It clarifies in an unexpected close situation what is to be considered as â€œregular business dayâ€ and a â€œnon-business day.â€
NTM 05-44 â€“ Effective 7/25/05 Rule 3010(a)(7) as amended requires that registered principals, in addition to registered representatives, attend an annual compliance meeting. This interview or meeting must cover compliance matters relevant to the activity of the registered person and can be held individually or in a group at a central or regional location. The interview or meeting can be conducted by video conference, interactive classroom setting, telephone, or other electronic means provided that certain safeguards are in place.