|Thursday, August 7, 1997
Nancy A. Condon - (202) 728-8379
NASD Board Approves New Taping Rule and Approves Order Audit Trail System Implementation
Washington, D.C.-- The National Association of Securities Dealers, Inc. (NASDâ), today announced that the Board of Governors approved a new rule that, if approved by the Securities and Exchange Commission (SEC), would require brokerage firms to tape record all of their brokers’ phone calls with investors, if a certain percentage of their brokers were employed by an expelled brokerage firm within the last two years.
The taping rule defines an expelled firm as one that has been expelled from a securities industry self-regulatory organization, or has had its registration revoked by the SEC, for sales practice violations or telemarketing abuses. The threshold percentage of brokers from a disciplined firm that would thereby require recording, will vary from 40 percent for a small firm, to 20 percent for a large firm. Under the rule, every firm will be required to conduct a quarterly review to determine whether they must be taping. To ease compliance burdens, NASD RegulationSM will provide its members with lists of expelled firms and their former associated persons (organized by current employer).
"Putting potential problem brokers on notice that calls are being taped is a positive step for every investor. Firms that hire a concentration of brokers from a firm with an egregious disciplinary history have an obligation to the investing public to ensure that those brokers are properly supervised and conduct themselves appropriately," said Frank G. Zarb, NASD Chairman, Chief Executive Officer, and President.
This rule grew out of the results of the Joint Regulatory Sales Practice Sweep Report, a joint effort of the NASD, SEC, New York Stock Exchange, and the North American Securities Administrators Association.
The Board also ratified the approval by the NASD Regulation Board of Directors of the NASD’s Order Audit Trail System (OATS), which is currently in development. The proposed rule governing OATS was filed with SEC on July 29th.
The OATS project will capture important order surveillance information for use by regulators. The proposed rule allows for the phase-in of the full system beginning with the inclusion only of orders that are captured or input directly into an electronic system by August 1998. All orders in equity securities received by other than electronic means would be covered by January 1, 1999. All other orders would be phased-in by no later than January 31, 2000.
"This phase-in schedule has been developed in order to allow broker-dealer firms a greater opportunity to efficiently implement the OATS system’s technical requirements while also making necessary changes to fully implement the SEC order handling rules and Year 2000 protocols. Because the majority of Nasdaq’s order flow comes to us electronically, the initial phase will, in itself, provide us with an extremely useful surveillance tool," Zarb added.
The National Association of Securities Dealers is the largest securities-industry self-regulatory organization in the United States. Through its subsidiaries, NASD Regulation, Inc., and The Nasdaq Stock Market, Inc., the NASD develops rules and regulations, provides a dispute resolution forum, conducts regulatory reviews of members activities and designs, operates and regulates securities markets all for the benefit and protection of the investor.