FFP Securities, Inc.
December 18, 2002
Jonathan G. Katz
Re: Proposed Rule Change Pursuant to 17 CFR 240.19b-4
Dear Mr. Katz,
FFP Securities ("FFP") is a broker-dealer with over 500 Registered Representatives offering securities services through nearly 55 Offices of Supervisory Jurisdiction.
I appreciate the fact that the SEC is giving affected organizations the chance to make comments about how the NASD's proposed changes to 17 CFR 240.19b-4 may:
Effective supervision is one of the cornerstones of investor confidence and efficient markets and we believe that to truly enhance supervision, both the industry and the regulatory authorities need to work together in creating clear, effective rules. The issues the industry faces and the changes the NASD proposes are of such importance that member firms should be afforded the time to fully evaluate the issues presented in this proposal.
I respectfully request that further time be allotted to the comment period so that all member firms may more diligently and intelligently review the proposal and its effect on their business and forward suggestions regarding the proposal. I alternatively request that the proposal be sent back to the NASD and they be directed to seek input from all NASD members prior to Commission approval. The way in which this proposal has been forwarded sacrifices the benefits of self-regulation in that NASD member input can be helpful in creating meaningful rules. Regardless of how you handle it, I respectfully request that you extend the comment period to at least ninety (90) days.
The existing rules are effective and appropriate. The key point is that the existing rules were and are sufficient to prevent unlawful conduct. Current regulations are reasonable and sufficient when effectively implemented and enforced. Enforcement of existing rules will serve the interests of investors. New rules simply add complexity and cost without additional guarantees against unlawful conduct. Industry resources should be spent fully implementing the existing rules.
The proposed rule may increase confusion and inconsistency in the industry in that it is unclear and overly complex.
If additional rule making is inevitable, the proposed rule change requires refinement. As written, the rules are too vague and may actually have a negative impact on member firms' practical ability to supervise the sales activity of registered representatives, delay implementation of recently proposed and adopted rules responding to the requirements of the USA PATRIOT Act, and substantially increase costs without really improving investor protection.
Important words and concepts are not defined in the rule proposal.
The proposed rule "misses the mark" in that it may actually undermine effective supervision by creating supervisory controls with further distance between the supervision function and the supervisor. At our firm, the Chief Compliance Officer ("CCO") is responsible for the design, implementation and oversight of the firm's system of supervisory controls. Restricting the CCO from performing and/or overseeing the review of those controls would compromise the quality and thoroughness of the system as the flaws uncovered become more remote from the person responsible for making changes and alterations.
Calling for "independent" auditors for branch audits will eliminate the benefits of direct supervision FFP has diligently tried to make supervision more timely, more hands on and as close to the point of sale as possible. The theory being that the closer you are to sales practices the more effective you can be at identifying problems quickly and taking prompt remedial action. To support these efforts, FFP has invested substantial resources in training its principals to audit effectively. FFP believes these individuals understand the pitfalls of running a branch office thoroughly and can detect problem situations effectively because of their close involvement with the branch offices. The audit function reinforces the supervisory function and vice versa. FFP's OSJ Managers are direct supervisors and are also responsible for an annual inspection of each office under his/her supervision. In addition, the OSJ is supervised and inspected by a salaried employee of the firm.
Currently, we reinforce to our OSJ Managers that they will be held accountable by the firm and its regulators unless he/she is able to demonstrate effective supervision over the Representative. The NASD's proposal may undermine that perception of direct accountability as the proposed rules causes them to rely on the firm's Compliance Department to detect problems during the periodic office inspections. In essence, the overall level and quality of supervision over the Representatives may decline as a result of this rule change.
The proposed rule affects business negatively in that it is financially and logistically onerous .
By requiring "independence" in the audit function, the NASD has changed the supervisory dynamic and essentially prohibited numerous supervisory systems and structures that function well. As a result, good systems created to link supervisory functions will be abandoned for a forced system that may not fit the geography, structure or function for a given firm.
The existing regulatory scheme requires that firms adopt policies and procedures reasonably designed to prevent and detect violations. That mandate provides firms the necessary guidance and a reasonable standard against which to be measured as they establish their customized supervision system.
The proposal may turn the industry focus away from other important issues because it may result in implementation delays for other key rule changes.
The vast majority of firms clearly strive to conduct business in a manner that is compliant with industry rules and regulations. Members realize that if the public loses faith in the investment community, then we all lose.
The proposed rules seem to impose new requirements that appear extremely burdensome for firms, particularly small, independent contractor firms to implement and seems, therefore, to have a very negative impact on competition.
FFP urges the Commission to consider the real world ramifications and costs of this proposal and to consider alternatives that would allow firms to meet their obligations with internal resources and minimal disruptions to existing supervisory structures.
Thank you for the opportunity to comment on these important issues.