NASD Issues Open Letter
Regarding Evolving Compliance Issues

Robert Errico, executive vice president of member regulation at NASD, has issued an open letter to member firms highlighting shifting regulatory issues and rules that deserve compliance attention. The letter alerts membership the regulatory environment has changed due to new, recently revised and impending rules. As a result, the items specified in his letter will be the focus of NASD's current routine member examination program.

An underlying theme in the letter is that it is not the same NASD inspection program as in the past. While many of the new and/or enhanced rules were introduced in 2004 and 2005, Errico says those that haven't been inspected by the NASD recently and are on two- and four-year inspection cycles will likely have to demonstrate compliance in these areas for the first time in the next few months.

The regulatory and compliance topics highlighted in Errico's letter include:

• Supervision - chief executive certification and heightened supervision for producing managers.
• Discretionary accounts - price and time limitations.
• Anti-money laundering - annual independent testing requirement.
• NASD contact system - quarterly certification of critical contact personnel.
• Sales of new products - suitability of structured products and equity indexed annuities.
• Use of electronic systems - periodic testing of compliance systems.
• Use of e-mail - retention requirements and adherence to standards governing communications with the public.
• Branch offices - implementation of the revised branch office definition through Form BR filings by July 3 2006.
• Business continuity planning - annual review of plans.
• Municipal transaction reporting - 15 minute trade reporting requirements.
• Initial public offerings - prohibition against the sale of all IPOs to restricted persons.
• Regulation SHO - uniform locate and delivery requirements, prohibition against naked shorts, and uniform marking requirements.
• Order audit trail system reporting - recordation of order acceptance and transmittal times; applicability to manual orders commencing July 10 2006.
  
  To review the full content of the letter, please go to the following web site: http://www.nasd.com/web/groups/corp_comm/documents/home_page/nasdw_016638.pdf