Interpretive Letter to Name Not Public
August 13, 1996
I am in receipt of your letters dated July 24 and July 30, 1996, in which you ask a number of questions regarding supervision. As you know, under NASD Conduct Rule 3010 (formerly, Article III, Section 27, of the NASD Rules of Fair Practice), each NASD member must establish and maintain supervisory procedures and systems that are designed to achieve compliance with applicable securities laws and regulations and NASD rules. Each member's supervisory system must be designed for the type of business in which the member engages and must provide for supervision of the activities of each registered representative and associated person.
Rule 3010(c) requires member firms to establish a schedule for and conduct inspections of Offices of Supervisory Jurisdiction ("OSJs") and branch offices. OSJs must be inspected at least once a year and branch offices must be inspected according to a cycle that the member firm establishes and memorializes in its written supervisory procedures. Rule 3010(c) provides guidance as to the needed frequency of such inspections by directing firms to consider the nature and complexity of securities activities for which the location is responsible, the volume of business done, and number of associated persons assigned to that location. The rule also requires that member firms retain a written record of the dates when each review and inspection is conducted. In addition, the firm must periodically review the activities of all offices, including non-branch business locations, to review customer accounts to detect and prevent irregularities or abuses.
With regard to your questions regarding supervision of off-site locations, I have enclosed a copy of the NASD Compliance Check List. The Check List contains a number of suggested compliance practices designed to assist firms in conforming their activities to various regulatory requirements. These items are taken directly from applicable rules or regulations or represent sound business practice, and include an 11-item checklist for inspections of branch offices by home office supervisors and a section on supervision of branch offices. The Check List may serve as a helpful reference in the development of your firm's supervisory system and the preparation of its procedures.
The NASD has issued several Notices to Members over the years that discuss supervision of off-site activities. While these Notices do not impose regulatory requirements, you may find them useful when writing and updating your supervisory procedures. The Notices expand on the provisions of Rule 3010, as well as offering additional guidance for formulating and writing supervisory procedures. I have enclosed copies of four such Notices that may be helpful to you: Notice to Members 86-65, dealing with compliance with the NASD Rules of Fair Practice in the Employment and Supervision of Off-Site Personnel; Notice to Members 88-84, announcing the adoption of and explaining the significant changes to former Section 27 that took effect in April 1989; Notice to Members 89-34, which contains a question and answer presentation of guidelines for compliance with the revised former Section 27, including a number of questions and answers about branch offices; and Notice to Members 92-18, which discusses amendments to the definition of the term "branch office." You should also periodically review the NASD Manual (CCH) for new Notices to Members on the subject of off-site supervision, as well as the NASD Regulatory & Compliance Alert for relevant articles.
I also have included copies of two articles that I had in my files that may be useful to you: one entitled Broker-Dealer Supervision of Registered Representatives and Branch Office Operations and an article that appeared in the National Law Journal.
If you have any more questions, I suggest that you contact either the persons who spoke at the District 2 training seminar or your District Office.
Very truly yours,
Mary N. Revell
Assistant General Counsel