WealthManagement Magazine

NASD's Auditor Finds Room for Improvement

While noting that the NASD has made substantial progress in complying with its remedial sanctions ordered last year in its settlement with the SEC, independent consultant Frederick Werblow has advised the NASD to further its efforts.In his first annual report since being hired to monitor the NASD's compliance with the terms of the settlement, Werblow said the NASD needs to complete more examinations

While noting that the NASD has made substantial progress in complying with its remedial sanctions ordered last year in its settlement with the SEC, independent consultant Frederick Werblow has advised the NASD to further its efforts.

In his first annual report since being hired to monitor the NASD's compliance with the terms of the settlement, Werblow said the NASD needs to complete more examinations and investigate more backing-away complaints. He noted that surveillance should be toughened in reviewing complaints of wide Nasdaq spreads "which generally do not lead to any actions against the members."

Werblow also concluded that the NASD was wasting resources examining more than 550 municipal securities dealers where the amount of municipal securities business done by each firm is less than $15,000 per year. Resources could be better spent elsewhere, he recommended.

Also recommended were the use of report cards to identify firms with significant or unusual late trade reporting compared to those with the best performance. "These are the firms that should be scheduled for the most frequent examinations," Werblow concluded.

Furthermore, Werblow found that the sanctions presently employed by the NASDR do not serve as a deterrent. The sanctions "seemed trivial, particularly considering the magnitude of the operations of the members and the NASDR resources devoted to the surveillance, examination and enforcement effort." The fines, as well, are nominal compared to the value of "executive time devoted to these matters."

In other recommendations, Werblow suggested that the definitions of "non-industry" and "industry" members be clarified, and that authority to determine which matters to investigate be given to NASDR staff instead of the NASDR board. He also found that additional resources were needed for district office examinations to ensure timely oversight of member firms.

Werblow submitted his report to the NASD Audit Committee, which in turn submitted it to the chairman of the NASD Board of Governors and the SEC. Under the remedial sanctions ordered last year by the SEC, the Audit Committee reports directly to the SEC.

Frank Zarb, NASD chairman, CEO and president said in a prepared statement: "The NASD has enhanced its regulatory oversight program in the last year through a major commitment in both technological and staff resources. We are pleased that the independent consultant recognized those actions, and we are absolutely committed to taking whatever steps we find necessary to be the most effective and efficient self-regulatory organization in the world."

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