NASAA publishes list of considerations for reg actions

Oct 17, 2005 @ 12:01 am

By Sara Hansard

WASHINGTON - State securities regulators have published a list of considerations to be taken into account when punishing brokerage firms for regulatory violations.

While the brokerage industry supports the action, state regulators clearly want firms to aid them in prosecuting violations.

The North American Securities Administrators Association Inc. of Washington on Oct. 4 released the list of "principal considerations for regulatory actions," which was compiled by its broker-dealer section.

One of the criteria listed specifies that firms should make the results of their reviews available to state regulators promptly, providing sufficient documentation showing their response to the situation. Regulators should consider whether the company identified possible violations with sufficient precision to aid enforcement actions.

Four-year effort

"Did the company produce a thorough and probing written report detailing the findings of its review?" the release said. "Did the company voluntarily disclose information not directly requested by the state securities regulators and that otherwise might not have been uncovered?"

Also queried is whether the company asked employees to cooperate with state securities regulators, whether the company made "all reasonable efforts to secure such cooperation" and whether it identified additional misconduct.

Compiling the list of considerations has taken four years, according to Rex Staples, general counsel of NASAA. "We had talked about a variety of methodologies for enabling firms to self-report," said Mr. Staples, who was chairman of the organization's regulatory policy group at the time.

Some brokerage firms had complained about disparities between violations and remedies, he said.

"We wanted to say, 'Here are some of the principal considerations that I think we all look at anyway on any case. To the extent this is set forth on a list, it can help you in determining what kind of remedy you want to impose,'" Mr. Staples said.

"It's a good thing for the firms and for us, too," he added.

The 15 criteria on the list aren't formal guidance but represent what NASAA's broker-dealer section considers to be best practices for regulators to follow.

Several industry lawyers worked with NASAA to compile the list of criteria. One of the most active, Andrew Kandel, first vice president and assistant general counsel in charge of state regulation, legislation and government relations at Merrill Lynch & Co. Inc. in New York, thinks that it is a positive development.

"It's a great thing," he said. "It helps our existing commitment to compliance."

The release, however, specifies that the fact that a brokerage firm cooperates or takes proactive steps shouldn't necessarily absolve it from liability. It is intended to encourage firms to self-police, self-report and act cooperatively with state regulators.

Mr. Staples said NASAA's broker-dealer section isn't following federal regulators in publishing the list. However, there has been controversy over the Securities and Exchange Commission's practice of demanding a level of cooperation from firms being investigated that some have claimed pits companies against their employees and borders on violating individuals' right not to self-incriminate.

Where appropriate, the NASAA advisory says, firms should notify self-regulatory authorities, federal and state regulatory authorities, criminal authorities, and the Central Registration Depository and Investment Adviser Registration Depository online public-disclosure systems, in a timely manner, of violations.

Firms, it says, should act promptly and fully to address client complaints and losses prior to any intervention by regulators, including seeking out those harmed by the wrongdoing. Companies should identify the extent of damage

to investors and other corporate constituencies.

What effect the proposed action would have on public-policy concerns should be considered by regulators, according to the release.

Also to be considered, it states, is how the misconduct happened, and whether it was the result of pressure on employees to achieve specific results, "or a tone of lawlessness set by those in control." How high up in the organization the misconduct occurred is another factor to be considered by regulators, including whether senior personnel participated in, or ignored obvious signs of, misconduct.

Also to be considered is how long the misconduct lasted and whether it was an isolated event.

Listed first among the criteria to be considered is whether brokerage firms have adequate written supervisory policies and procedures in place to identify and prevent the misconduct that is the subject of the regulatory action.

That includes having qualified supervisory personnel assigned

to implement the policies and whether the misconduct was discovered through internal compliance procedures.

Firms should take prompt and adequate measures to avoid future occurrences of the same type of misconduct, the advisory says.

In addition, it says, firms should review all the facts of a case and make a diligent effort to identify everyone involved.

Whether the misconduct was inadvertent, or the result of inadequate training, error, simple negligence, or reckless or deliberate indifference, willful misconduct or "unadorned venality" should be considered, according to the advisory.


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