2006 BROKER DEALER COORDINATED EXAMS

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2006 BROKER DEALERCOORDINATED EXAMS

• North American Securities Administrators
  Association

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• Who Was Examined? 228 Broker Dealers
• 35 were home office exams (15)
• 193 were branch office exams (85)

Who Conducted the Exams? Securities examiners
from 28 states, the District of Columbia, and the
U.S. Virgin Islands
When Were They Conducted? Between May 1 and June
30, 2006
Are any exams for the period still ongoing? Yes,
a substantial number of examinations are still
ongoing. The majority of these are complex cases
relating to Sales Practice reviews.
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FACTS FIGURES

• Largest number of deficiencies found in one
  exam 23
• Exams with 10 or more deficiencies found 10
• Offices with 1,000 or more accounts 20

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OPERATIONS REVIEW
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NOTABLE EXCEPTIONS

• 80 of the examinations were conducted at small
  branches with 5 or less RRs
• Deficiencies occurred in the same 80 to 20
  ratio when comparing small branches to large
  offices except in the following categories
• Exception Reports 42 of deficiencies were in
  large branches or home offices
• Inaccurate U-4s - 37 of deficiencies were in
  large branches or home offices
• Failure to Follow Supervisory Procedures - 36 of
  deficiencies occurred in large branches or home
  offices

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HOT TOPICS AND BEST PRACTICES FOR BROKER DEALERS

• Develop, Update, and Enforce Written Supervisory
  Procedures. BDs should also ensure that
  staffing and expertise are commensurate with the
  size of the BD and type(s) of business engaged in
  by the firm.
• Ensure that the firm provides each customer
  within 30 days of account opening, upon updating,
  or on a rolling 36-month period each of the
  following
• Copies of the new account information(card)
• Copies of all customer agreements
• Plain English definition of the BDs investment
  objectives
• Customers must be provided with name(s) and
  address(es) for returning inaccurate account
  information and also where to direct customer
  complaints and questions. Responses should be
  directed to the firm rather than the RR.

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HOT TOPICS AND BEST PRACTICES (cont.)

• Develop effective standards and criteria for
  determining suitability.
• Ensure that exception reports are generated, when
  necessary, and that red flags are documented
  and resolved in a timely manner. If the BD
  elects to electronically recreate an exception
  report the BD must not only be able to recreate
  the report but also document how the exception
  was resolved.
• Develop a branch audit program which includes an
  effective audit plan, unannounced visits, a means
  to convey audit results, and a follow-up plan for
  requesting that the branch take corrective
  action.
• Ensure that outside business activity and
  requests to sell securities not yet approved by
  the BD are disclosed by each RR and adequately
  investigated by the firm.

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HOT TOPICS AND BEST PRACTICES (cont.)

• Advertisements and sales literature MUST make
  full and fair disclosure and be approved prior to
  use.
• Seminars and handout materials utilized MUST be
  approved by the BD prior to the seminar being
  held. Additionally, any guest speakers and their
  materials must also be reviewed prior to the
  seminar.
• Correspondence, both electronic and hard copy,
  MUST be effectively monitored by the BD including
  a system of capturing and maintaining E-mails
  sent by RRs from websites and ISPs outside the
  firm.