April 16, 2004
NASD is publishing this article to provide further guidance regarding proper OATS supervision. Specifically, this article is designed to educate firms on the difference between operational and supervisory procedures.
OATS is a highly technical application, as a result, many firms utilize operational procedures to give their staffs guidance on such tasks as how to create and send a file, how to repair a reject or how to view reporting statistics. Non-registered operations personnel often are the individuals assigned to carry out these tasks. Although these operational procedures are both necessary and effective, they do not qualify as supervisory procedures for purposes of NASD rules.
Members should consult NASD Notices to Members 99-45 and 02-29 as well as the Supervision section of the NASD OATS Reports for more guidance on what constitutes proper supervision under NASD rules. In short, proper supervisory procedures document the steps that a firm principal for a Reporting Member takes to achieve compliance with OATS rules and requirements. These procedures do not necessarily contain the technical steps required to submit a file to OATS. A member needs written supervisory procedures even if the member uses a reporting agent to fulfill its reporting obligations. Members remain ultimately responsible for all supervisory activities, and therefore, must periodically review and assess the effectiveness of the reporting agent's activities.
NASD rules specify that proper supervisory procedures must meet four criteria. First, the firm principal or principals assigned to perform OATS supervision must be identified, must be qualified and must have the authority to supervise. The individual(s) may be identified by title or by name. Qualifications include a registration as a General Securities Principal. The requisite authority means having the ability to affect the conduct of the person or persons who perform OATS operational or technical functions that are subject to OATS supervision. For example, if an operations person were charged with repairing ROE rejects, the OATS supervisor for this function should have the ability to direct the operations person in the repair of ROE rejects and how the repairs are documented.
Second, proper OATS supervisory procedures identify steps the OATS supervisor must take to ensure that the firm's OATS reporting obligations are met. This could include reviews of the OATS website or a review of Daily logs or notes. This part of the procedures should also specify what the OATS supervisor would do if there were any variance from what was documented by the operations person. At a minimum, a member firm must have a valid User ID and password to access its data on the OATS Web Interface, and be familiar with use of the website to review the status of its data.
The third criterion requires the firm to specify the frequency of the supervisory reviews. Due to the interactive nature of OATS, NASD recommends at least a weekly supervisory review. A monthly review may be too infrequent to ensure that any potential problem is detected and handled on a timely basis. Of course, it is always inappropriate to designate such reviews on an "as needed," or "frequent" basis. The frequency of reviews must be specific.
The final criterion requires the firm to specify how the review will be documented. This is critical. Without written evidence of supervision, there is no record that supervision in fact occurred. A supervisor could evidence the review by initialing and dating each item/page of a supervisory log and by providing any appropriate notations on any action taken.
Proper supervision is an important part of any aspect of a member's business. It is equally important in the OATS context.
Should you have any questions regarding supervision or OATS in general, please contact the OATS Helpdesk at 1-800-321-NASD.