Workman Securities Corporation

1
Workman Securities Corporation

• 2006 Compliance Meeting
• August 7, 2006

2
Introduction

• Opening remarks
• The Compliance Team
• Afternoon Agenda

3
Afternoon Agenda

• 100 Compliance Topics
• 145 Break
• 200 Marketing to Affluent Women
• Cheri Kuick Neuberger Berman
• 300 Compliance Topics
• 345 Wrap Up

4
Compliance Topics

• Overview of Regulatory Landscape
• New Oversight Obligations
• Branch Offices
• Written Supervisory Procedures
• New Forms
• Audit Process
• Continuing Education

5
Overview of Regulatory Landscape

• Current Regulatory Landscape
• Primary Regulator NASD
• Other Regulators SEC, MSRB, NYSE, State
  Insurance and Securities Regulators
• Recent Disciplinary Actions

6
Overview of Regulatory Landscape Recent
Disciplinary Actions

• Registered Representative Fined 5,000 and
  Suspended he engaged in an outside business
  activity for compensation without providing his
  member firm prior written notification.
• Firm Fined 123,500 for failure to submit timely
  amendments to form U-4 or U-5 to disclose
  customer complaints and WSP.
• Firm Fined 315,000 in connection with its
  recommendations that clients purchase Class B and
  Class C shares, it did not consider, or did not
  adequately disclose on a consistent basis that an
  equal investment in class A shares would
  generally have been more advantageous for certain
  clients.
• MPLS Firm Fined 20,000 that it failed to
  establish adequate procedures related to the
  filing of Suspicious Activity Reports.

7
Overview of Regulatory Landscape

• Compliance is Shared Responsibility
• - Firm
• - Supervisory Personnel
• - Registered Representatives
• Efficient Compliance

8
New Oversight Obligations

• History The Case of the Poorly Supervised
  Branch Manager
• Changes to Rule 3010 Supervisory Systems
• New Rule 3012 System of Supervisory Controls
• New Rule 3013 Annual Compliance Certification
  and Designation of a Chief Compliance Officer

9
New Oversight Obligations Rule 3010

• Requires System of Supervision
• Establish Maintain Written Supervisory Policies
  Procedures (WSPP)
• Perform Inspections
• - ANNUAL REVIEW ALL BUSINESSES
• - INSPECT EACH BRANCH OFFICE
• Annually for OSJs Supervisory Branches
• Once every three years - Non-Supervisory
  Branches
• Planned periodic schedule -
  Non-Branches
• - Written Inspection Reports

10
New Oversight Obligations Rule 3012 -
Supervisory Control System

• Designated Principal(s) Presumably CCO
• Establish, Maintain, Enforce System
• Test and Verify Procedures Reasonably Designed
  to Achieve Compliance
• Add or Amend Procedures Where Testing Identifies
  Need
• Annual Report To Senior Management (by 12/1)
• Summarize Test Results
• Identify Significant Exceptions
• Describe Changes Responsive to Test Results

11
New Oversight Obligations Rule 3013

• Designate a Chief Compliance Officer
• Annual IM-3013 Certification

12
New Oversight Obligations Rule 3013 Annual
Certification

• Chief Executive Officer (CEO) Certifies
• The Firm has Processes To Establish,
  Maintain, Review, Test and Modify WSPPs
• Annual Meeting with the CCO
• Annual 3012 Report Reviewed By the CEO CCO
  and Other Necessary Officer
• Report Submitted to Firms Board and
• Audit Committee

13
Uniform Definition of Branch Offices

• NASD Rule 3010(g)(2)(A) Effective Date July 3,
  2006
• Definition of a Branch Office
• A Branch Office is generally defined as any
  location where one or more associated persons of
  a member (WSC) regularly conducts the business of
  effecting transactions in, inducing or attempting
  to induce the purchase or sale of any security,
  or is held out as such.
• What Types of Activities does this include?

14
Uniform Definition of Branch Offices

• The Uniform Definition excludes from Registration
  as a Branch Office
• Primary Residence (if certain conditions are met)
• Other Location (other than primary residence), if
  used less than 30 business days in any calendar
  year for securities business
• A Location of Convenience, if used occasionally
  and by appointment
• Non-Securities Business Location If no more
  than 25 securities transactions are effected
  annually

15
Uniform Definition of Branch OfficesPrimary
Residences - Conditions

• Only one person, or multiple persons who reside
  at the location and are members of the same
  immediate family, conduct business from the
  location
• The location is not held out to the public as an
  office and the RR does not meet with customers at
  the location
• Neither funds or securities are handled at the
  location and
• RR is assigned to a branch and branch office is
  reflected on all business cards, stationary, and
  other communications with the public.
• Disclosure Please send Correspondence To

16
Uniform Definition of Branch Offices

• What it means to be a Branch
• Formal Registration (Form BR/95 Annual Fee)
• Subject to Branch Audits (NASD States)
• SEC Books Records Requirements
• Trade Log
• Check Log
• Securities Log

17
Uniform Definition of Branch Offices

• NASD Branch Examination Program
• Exam will generally last a week
• Examiners will be from Kansas City Office
• Review will include
• - Customer Complaints
• - Litigation
• - Correspondence, Sales Literature,
  Advertising
• - Evidence of Supervision
• - Suitability of Activity in Selected Accounts

18
Uniform Definition of Branch Offices NASD Branch
Examination Program

• Recent NASD Branch Exam Findings
• Failure to update new account information as
  required by SEC Rule 17a-(3)(17)(i)(A). The rule
  was effective May 3, 2003 requiring accounts in
  existence at the time to be updated within three
  years of the rule.
• Failure to supervise correspondence (including
  e-mail), sales literature, advertising and/or
  seminars. Findings within correspondence include
  undisclosed customer settlements, outside
  business activities, and private securities
  transactions. Additionally, incoming
  correspondence found in which investors made
  complaints which were incorrectly viewed as
  something the representative needs to handle.
• Failure to timely forward complaints to the home
  office for proper reporting under NASD Rule 3070
  and/or U-4 or U-5.
• Failure to have an effective branch inspection
  program in place.

19
Uniform Definition of Branch OfficesBooks
Records Requirements

• Oats Phase III (Order Audit Trail System)
• Effective date May 8, 2006 (NTM 05-78)
• Reporting Requirements for Manual Orders of
  Securities Listed on NASDAQ
• Capture the Time the Order is Received From the
  Customer Through the Process of Execution
• Provides for Market-wide Synchronization of
  Clocks
• Atomic Clock on EST

20
Written Supervisory Procedures

• Requirement under NASD Rule 3010
• Supervision is an Exam Focus
• Tailored to your Business
• Salomon Grey Financial

21
New FormsNew Account Form

• Time spent here is time well spent
• One of the most important documents NASD auditors
  look to for information
• Directly connected to AML issues, suitability,
  etc.
• Representative must sign and date
• Frequency of updates should be addressed

22
New Forms

• New Account Form
• Update Every Two Years - SEC Rule
  17a-(3)(17)(i)(A)
• Suitability Information
• Customer Verification by BD Every 3 Years
• NASD MF Disclosure, Business Continuity Plan
  Privacy Notice

23
New/Revised Forms

• WSC Transaction Processing Transmittal Form
• Mutual Fund Sales Disclosure Acknowledgement
• WSC Breakpoint Worksheet
• Disclosure for Variable Annuities
• Disclosure for VUL Contracts
• REITS Disclosure Checklist
• Request for Signature Guarantee
• Address Change Completion Form

24
New/Revised Forms

• Advertising Sales Literature Approval Form
• Compensation/Travel/Expense Reimbursement
• Complaint Resolution Form

25
Audit Process

• Perform Inspections (NASD Rule 3010)
• - INSPECT EACH BRANCH OFFICE
• Annually for OSJs Supervisory Branches
• Once every three years - Non-Supervisory
  Branches
• Planned periodic schedule -
  Non-Branches
• - Written Inspection Reports
• -TYPES OF AUDITS

26
Compliance Audits of Office Locations

• Recent NASD audit asked us to improve
• Important audit checklist items
• Safeguarding of customer funds and securities
• Maintaining books and records
• Transmittal of funds between customers and
  registered representatives and between customers
  and third parties
• Validation of customer address changes
• Validation of changes in customer account
  information

27
Audit Process

• Planning Stage
• Field Work
• Reporting

28
Audit Process

• Common Findings
• New Account Forms
• - Missing or Incomplete
• - Have Not Been Updated within 2 years
• - Client Copies in Rep File
• Books Records
• - Missing or Incomplete
• - Trade Log
• - Securities Log
• - Check Log

29
Audit Process

• Common Findings
• Business Cards Letterhead
• - Missing or Incomplete Disclosures
• - Non-Branch Address Locations
• - Unapproved web-sites or e-mail addresses
• Inaccurate or Incomplete U-4
• - Undisclosed Outside Business Activities
• - Old Addresses

30
Email/Communication With The Public

• E-Mail Retention
• Rule 17a-4(b)(4) requires broker-dealers to
  preserve originals of all communications
  received and copies of all communications sent
  (and any approvals thereof) by the member, broker
  or dealer (including interoffice...) relating to
  its business as such, including all
  communications which are subject to rules of a
  self-regulatory organization of which the member,
  broker or dealer is a member regarding
  communications with the public

31
Email/Communication With The Public

• How Long/How E-mails Need to be Retained
• General Requirement 3 years
• Opening or Maintenance of Account 6 years
• RIAs 5 years (2 years in the office)
• Rule 17a-4(f) states that
• Electronic storage media must preserve the
  records in a non-writable, non-erasable format

32
Continuing Education

• Annual Compliance Meeting - 3010(a)(7)
• Firm Element CE Program
• Regulatory Element CE Program

33
Conclusion

• Closing Remarks
• Final Questions
• Thank You