Maybe the last time you looked at it was on your first morning at work. I'm talking about the gospel of do's and don'ts collected in a three-ringed binder and, just maybe, in some computer folder — your firm's Written Supervisory Procedures (WSPs). If you've ignored it because you think it's a joke, keep in mind that the NASD doesn't share your opinion.
It's certainly no joke for your firm. Take, for example, the case of Keating Securities (AWC/E3A20 040024-01/ January 2006). The NASD found, among other things, flaws in the Greenwood, Colo., firm's anti-money laundering program. The program, according to the NASD, was poorly designed to “report suspicious activity because the procedures referred to prospective reporting rules and had not been updated to reflect that such rules had become effective.” That's right, the NASD cited no problems with the firm's wording of the new rules, only that Keating didn't say they were now in force. Talk about picky. As part of a settlement, Keating was censured and had to pay a $25,000 fine.
It might not get my dander up so much if complying with WSP requirements wasn't such a headache. For starters, go online to the NASD's Web site and take a look at NASD Rule 3010: Supervision — which is where you find the requirements for WSPs. As of the writing of this column, this warning appears on the Web page:
This version of the rule (or interpretive material) does not become effective until May 1, 2006. To view other versions open the Future Versions tab on the right.
Even if they got their update in on time, it's not as if everything is crystal clear. On the right-hand side of the Web page, you are confronted with the news that NASD Rule 3010 comes in two future versions and is explained in 21 notices to members. Don't you love it? In order to understand one NASD rule, you need to read some 23 documents.
In the Beginning
Even more WSP fun with the NASD is the self-regulator's version of bait-and-switch. Here's how it goes: When you apply for NASD membership, you must submit a draft of your WSP, which is reviewed by the staff. Changes are often required, but once that's done you're finished, right? Not so fast. Months later, the NASD often charges members for having inadequate WSPs — as if what had once been rigorously vetted by the staff suddenly became deficient. This inconsistency infuriates the industry but seems lost on the regulator.
What compliance professionals would like is for the NASD to approve a template WSP. As it is, few (if any) Wall Street veterans can draft a full set of WSPs. Many WSPs are purchased from consulting firms or law firms. The end product is most likely a creature of “search and replace” and “add and delete” word-processing functions. Despite that reality, the NASD refuses to give WSP-by-numbers its blessings.
Why is that? Here's a possibility: The NASD could be making money off the present system. For $1,150 (NASD members get a special discount of $950), you can attend a nearly nine-hour seminar entitled: “Drafting and Maintaining Written Supervisory Procedures.” Am I the only one who questions the ethics of this mercenary approach? If this is so important a rule, how about free classes to ensure that the public is fully protected and the industry suitably trained? I guess the NASD believes that every member has the money to send an employee to New York or San Francisco for a full-day WSP seminar.
Oh well, it's said that in China they charge the families of executed prisoners for the cost of the bullets.
Writer's BIO: Bill Singer is a practicing regulatory lawyer and the publisher of RRBDLAW.com