Poor recordkeeping, supervisory lapses, and sales practices infractions top the list of compliance violations uncovered in recent examinations of broker-dealers, the North American Securities Administrators Association (NASAA) reports.
The group of regulators released a report at its annual conference today detailing the most common compliance violations exposed in coordinated examinations of U.S. broker-dealers, and setting out recommended best practices for firms to follow to improve their compliance.
It reports that a total of 236 examinations conducted between January 1 and June 30, 2012, found 453 types of violations in five compliance areas. The greatest frequency of violations involved books and records (29%), followed by supervision (27%), and sales practices (24%). Registration & licensing (14%), and operations (6%) made up the rest.
“The top five types of violations found involved: failure to follow written supervisory policies and procedures, suitability, correspondence/e-mail, maintenance of customer account information, and internal audits,” it says.
Indeed, suitability issues comprised the majority of the sales practices violations, followed by outside business activity. Just a handful of the sales practices violations involved unauthorized trading, churning, and more serious offences such as fraud and misappropriation.
In terms of recordkeeping, the most common problems were with maintaining new client account information, followed by issues with advertising and sales literature, and correspondence.
Based on the exam results, NASAA recommended 10 best practices, which call on firms to do things such as: develop effective standards and criteria for determining suitability; ensure that staffing and expertise are commensurate with the size of the dealer and the type of business it does; develop a branch audit program; properly supervise private securities transactions and outside business activity; along with recommendations dealing with advertisements, correspondence, and complaint handling. Additionally, it said that dealers and financial professionals should develop best practices for handling accounts of ‘senior’ investors.
“We highlighted types of violations to help broker-dealers strengthen their internal compliance programs. Our best practices are designed to help enable broker-dealers to address their compliance challenges and provide better client service,” said Jack Herstein, president of NASAA and assistant director of the Nebraska Department of Banking & Finance, Bureau of Securities.