NASD Exam Topics to Consider

In a February 2007 letter to members, Robert C. Errico, Executive Vice President for Member
Regulation of the NASD, provided guidance and insight into topics to consider in preparation for NASD examinations. In the letter, he also discussed some of the improvements in systems that would support NASD member firms. Some of the highlights follow.

• The NASD will review information submitted through its various systems for accuracy in addition to timeliness. These reviews will encompass CRD filings (Forms U4, U5, BR and BR), the 3070 reporting system, and filing information required by clearing firms in accordance with NASD Rule 3150. During recent examinations, NASD examiners have looked at associated person's Form U4s to ensure that employment with affiliated entities is properly reported.
  
  
• Effective January 1, 2007, NASD member firms are required to file the following notifications via the NASD's regulatory form filing system: 15c3-1(e), 15c3-3(i), 17a-4(f)(2)(i), 17a-4(f)(3)(vii), 17a-5(f)(4), 17a-11(b), 17a-11(c)(1), 17a-11(c)(2), 17a-11(c)(3), 17a-11(d), and 17a-11(e).
  
  
• As a reminder, the requirement to file notification with the SEC is not supported by the NASD's regulatory filing system. Therefore, notifications required to be filed with the SEC must still be forwarded via facsimile.
  
  
• Best execution, TRACE Reporting and OATS Reporting will remain high priorities during NASD examinations. NASD Rule 2320(a), Best Execution and Interpositioning, were expanded to include best execution to customers of other broker/dealers as well as the firm's customers if an order was routed to another member firm. Those firms conducting a securities business in corporate bonds must report transactions within 15 minutes of execution utilizing the TRACE system. OATS requires the order routing and trade information for NASDAQ securities. Effective June 11, 2007, order routing and trade information for OTC equity securities will also have to be reported. Firms that utilize their clearing firm to report trades are reminded they still have the supervisory responsibility to review transactions reported on their behalf and ensure that trades are reported timely and correctly.
  
  
• NASD Rule 3060 prohibits any member or person associated with a member from giving or permitting to be given, anything of value in excess of $100 per individual per year, where such payment is in relation to the business of the recipient's employer. The rule does not prohibit ordinary and usual business entertainment where a member accompanies the recipient. Firms must develop written policies and procedures for supervising business entertainment to establish the appropriateness of the entertainment and threshold requiring prior approval.
  
  
• Business Continuity Planning must include an annual review of the plan and evidence of the approval of the plan by senior management. Copies of the firm's plan must be provided to customers when an account is opened and posted on a firm's web site if the firm maintains one.
  
  
• Anti-Money Laundering procedures must be reviewed and updated when changes to the USA Patriot Act take place. Additionally, the NASD Contact System must be reviewed and updated for the contact information of the Anti-Money Laundering Compliance officer within 17 business days from the end of each quarter.