Under the 49th: U.S. regulatory update

(March 16, 2005) Securities regulators in Canada keep a close eye on what their colleagues in the United States do to monitor and guide compliance at advisory and brokerage firms. And advisors here need to be aware of changes in rules that affect their southern trading partners. Here’s the latest regulatory update from down south.

Securities firms that deliberately distribute misleading communications to institutional clients, or the public at large, risk being fined up to $100,000 (US) and suspended for one or two years under new sanctioning guidelines that take effect March 15.

The National Association of Securities Dealers (NASD) issued the guidelines to accompany changes in rules governing communications with the public. NASD requires firms to file advertisements and other promotional materials with the self-regulator at least 10 business days before they’re used for the first time. Failure to do that will now lead to fines as high as $15,000. Stiffer monetary penalties are reserved for communications NASD deems reckless.

Further, firms that knowingly publish research reports containing errors or omissions may be fined up to $200,000 and have their research departments suspended for as long as two years. The SRO said it would consider expelling firms entirely, or levying bigger monetary fines in egregious cases.

NASD’s notice also sets new sanctioning guidelines for changes in rules relating to telemarketing. To read the NASD notice, please click here.

Here’s a roundup of other recent U.S. regulatory actions and compliance guidance:

Securities & Exchange Commission

Those “financial services supermarkets” envisioned by the passage of the Gramm-Leach-Bliley Act in 1999 will take a little longer to create. One component of the Act required banks that sold securities to either push the activity out to a separate office, or set up barriers (both physical and psychological) between banking and securities.

The goal was to create clear distinctions for clients for activity that took place under the same roof. The barriers were supposed to have been in place by May, 2001, but it never happened and banks have been stringing along on a series of temporary exemptions ever since. Last week, the SEC finally announced it would grant one last extension until September 30, 2005. In the meantime, the Commission said it would get busy and finalize Regulation B, which establishes new rules for bank-based brokerage operations.

To read the SEC’s order, please click here.

To read the SEC’s proposed Regulation B, please click here.

Respondents to an SEC concept release on clearance and settlement practices strongly endorse the commission’s suggestion that the industry move to Direct Registration of Shares (DRS) in order to reduce processing errors. Switching to DRS is a crucial step in cutting the time it takes to bring trades to settlement.

Since early 2000, the U.S. securities industry has been discussing ways it can cut the current three-day settlement cycle down to a single day. But efforts to adopt a straight-through processing model were hampered by the passage of the Patriot Act, and other post-September 11 security laws.

Those laws called upon advisory and brokerage firms to make major systems upgrades to comply with extensive anti-money laundering rules. The costs from those upgrades exhausted information technology budgets that would otherwise have been spent on the straight-through processing initiative.

To read the SEC’s concept release, please click here.

The self-regulatory organizations

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Under the 49th: U.S. regulatory update (February)

NASD wants registered principals, in addition to registered representatives and compliance officers, to attend their firms’ annual compliance meetings. A recent rule filing said the supervisory and compliance-related nature of the work performed by principals necessitates their attendance. Having them at the meetings will better help principals keep their subordinates current on changes to compliance procedures and regulations, according to NASD.

To read the rule proposal, please click here.

Next time: CE or not CE? NASD asks the question.

Filed by Philip Porado, Advisor’s Edgephilip.porado@advisor.rogers.com

(03/16/05)

Philip Porado