June 27, 2002
Dear NASD Member Firm:
As you know, NASD established the Small Firm Advisory Board (SFAB) – comprising representatives from NASD member firms with 150 or fewer registered representatives – to provide a voice to small firms in matters that affect them and their customers. What follows below are updates on such matters.
I hope this letter gives you a strong sense of recent developments within NASD and our industry. We plan to communicate with you regularly about these and other issues. In fact, a Web Page will soon be added to the NASD Web Site where you can view these communications, as well as submit questions and comments to us. Please review the information below and feel free to contact me or any member of the SFAB with your questions or concerns. A roster of NASD SFAB members is enclosed.
Anti-Money Laundering (AML) and the PATRIOT Act
On October 26, 2001, in response to the events of September 11, 2001, President Bush signed into law the PATRIOT Act. Title III of the Act, referred to as the Money Laundering Act, strengthens the anti-money laundering provisions put into place earlier by the Bank Secrecy Act. Several provisions of the Money Laundering Act are relevant to NASD members. Of particular importance to NASD members, the PATRIOT Act requires broker/dealers to develop and implement AML compliance programs that, at a minimum, include: the development of internal policies, procedures, and controls; the designation of a compliance officer with responsibility for the firm's AML program; an ongoing employee training program; and an independent audit function to test the effectiveness of the AML compliance program. Among other things, the Money Laundering Act requires broker/dealers to report suspicious activities and follow new know-your-customer procedures. Rules implementing both of these requirements will be finalized in the coming months. NASD will be providing more information on these requirements as the information becomes available.
Detailed information about the Act and how it affects NASD members and other useful AML materials are available on NASD's Web site. Additionally, NASD will continue communicating with firms about this topic, and an AML template to assist firms in developing their AML programs is being developed. The template will provide a step-by-step process to assist small firms in putting together an effective AML plan. Furthermore, online AML training for NASD members is available. Feel free to email any questions you have regarding AML compliance.
Trade Reporting and Compliance Engine (TRACE)
On January 23, 2001, the Securities and Exchange Commission (SEC) approved proposed rules that require NASD members to report all over-the-counter (OTC) secondary market transactions in eligible fixed income securities to NASD, and subject certain transaction reports to dissemination. Prices on these trades are then shown to the investing public, subject to certain restrictions and limitations, for purposes of ascertaining comparability.
TRACE is the NASD-developed vehicle that facilitates this mandatory reporting. All broker/dealers that are NASD member firms have an obligation to report eligible secondary market, over-the-counter transactions in corporate bonds to TRACE under an SEC-approved set of rules. The implementation date for TRACE is July 1, 2002. To view the most up-to-date information about TRACE as we launch this new system, please visit the TRACE Web page regularly. NASD will continue to communicate with members before, during, and after the launch. NASD encourages members to ask any TRACE-related questions by sending email.
Common Exam Violations/Best Practices
NASD has published a new communication to assist members' compliance efforts. "Improving Examination Results" provides information alerting firms to issues found through the NASD's examination process. By citing frequently found violations, NASD hopes to alert firms to areas where it sees recurring problems and to offer some practical advice on how to avoid common pitfalls. Another section of the report, entitled Examination Priorities, will highlight areas of particular importance to the examination program in the coming year. This communication will be updated periodically during the year and is available on the NASD Web site.
In response to the events of September 11th, NASD requested comments on proposed rules that would require members to create and maintain business continuity plans (see Notice to Members 02-23). Building upon the lessons learned from September 11th, as well as an extensive survey conducted by NASD, NASD is considering steps that member firms can take to ensure that they are prepared for possible future business disruptions. The comments received generally support the proposed rule and NASD staff is preparing the matter for filing with the SEC. At this time no material changes are expected to the rule proposal.
Net Capital/Clearing Agreements/Penalty Clause
The SEC has recently agreed to eliminate the requirement that treats a termination fee contained in a clearing agreement as a non-allowable asset. Non-allowable asset treatment will no longer be required if the clearing agreement says that the clearing firm will not attempt to collect the penalty (other than as a general creditor) if the introducing firm is the subject of a SIPA proceeding. Detailed information on this topic will be covered in the "For Your Information" section of the July NASD Notice to Members.
Again, please feel to contact me or other members of the SFAB with any issues you would like to discuss affecting our small firm community.
William C. Alsover