World Trade Financial Corporation
2010 Hancock Street, California 92110 619-325-2620 fax: 619-325-2630
Toll Free: 1-888-459-8883
December 31, 2002
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Comments on [Supervisory Controls]SR-NASD-2002-162
Proposed Rule Change Pursuant to 17 CFR 240.19b-4
Dear Mr. Katz,
World Trade Financial Corporation ("WORL") is a fully disclosed retail broker-dealer registered licensed to conduct business in most domestic jurisdictions, with Ten 10 Registered Representatives having the option of offering securities services through four  Offices of Supervisory Jurisdiction.
As President of WORL, I appreciate the opportunity to submit comments on the issues raised in the above captioned proposed rule change by the National Association of Securities Dealers, Inc. WORL is concerned that the rule changes proposed by the NASD will have a negative impact on its ability to supervise the sales activity of its registered representatives, delay implementation of recently proposed and adopted rules responding to the requirements of the USA Patriots Act, and substantially increase the costs of a significant percentage of member firms without providing a meaningful improvement in investor protection.
With regard to the substance of the proposal, we have the following specific concerns:
Attempting to separate supervision and auditing reduces the effectiveness of both functions and results in a waste of compliance resources.
WORL is particularly concerned over the requirement that the office audit function be independent of the supervisory function. As the majority of NASD Member Firms, we employ a hierarchical system of supervision. Some of our Representatives may work from non-OSJ Branch offices and unregistered locations ("satellite offices"), while each branch and satellite office is assigned to an Office of Supervisory Jurisdiction ("OSJ") for supervision. The OSJ Manager would also responsible for an annual inspection of each office under his/her supervision. In addition, the OSJ would be supervised and inspected by a salaried employee of the firm.
To divorce the inspection of Branch and satellite offices from the supervision of the Representatives assigned to those locations is to introduce an artificial distinction between the two activities. We believe that our choice of OSJ Managers, that are most familiar with the Representatives and activities associated with those locations, are the most qualified to perform the periodic inspection. The increased understanding gained from the inspections enhances the effectiveness of the OSJ Managers' supervision and the supervision activities provide additional information regarding the types of activities that should be more closely monitored in the inspection. In addition, when OSJ Managers audit the Branch and satellite offices, it serves to reinforce the OSJ Managers' accountability for their Representatives' actions. By appointing an outside party (such as the firm's Compliance Department or unrelated contractors as many small firms will be required to do) to audit the Branch and satellite offices, OSJ Managers will have a decreased sense of responsibility with regard to the activities conducted at the offices.
Currently, OSJ Managers understand that in the event of wrongdoing by a Representative, the OSJ Manager 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 lead some OSJ Managers to feel that their supervision is less important, as they begin 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.
For firms that do not own or operate the offices at which sales activities occur this proposal will lead to a substantial reallocation of resources at a time the financial and personnel resources of NASD Members are suffering. If the firm is faced with sending its compliance employees to audit hundreds of additional locations on a regular basis, the frequency and the quality of the audits will may decline. As a matter of financial necessity, the audit cycle will be forced to extend inspections for a multi-year duration between inspections.
However, even stretching out the audit cycle to three years represents a significant added expense for our Compliance Department, not just in terms of money, but time, as well. Our firm is awaiting guidance from the Treasury Department on customer identify verification. In addition, the firm continues to work on the implementation of the Commission's revised requirements for the maintenance of books & records. Even with increased funding for supervision, there is a limit to the amount of change that may be implemented to our systems at any one time. Because the office examination process is a core component of our supervisory structure, changes in this area will impact the timeline for completing changes in customer identification and books & records. It is my expectation that overall funding of the Department will remain constant, meaning that the increased expenditure for examinations of Branch and satellite offices will result in lower expenditures for other components of our supervisory system.
Therefore, we strongly suggest that by barring the firm from making appropriate use of its OSJ Managers, the proposal will result in decreased supervision of our representatives and a waste of the resources allocated to supervisory and compliance functions.
The proposed requirement regarding supervisory controls is flawed.
At our firm, similar to many of our peers, 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 such a review would compromise the quality and thoroughness of each review. An alternative would be to assign someone from Marketing or Operations to perform the review. We believe that such an alternative would likely result in a supervisory review that is less sensitive to securities compliance issues.
Finally, given the relatively small number of serious cases, as compared to the universe of firms and Representatives, it appears that the majority of firms clearly strive to conduct business in a manner that is compliant with industry rules and regulations. And if the public loses faith with the investment community, then we all lose.
We are confident that the current regulatory environment already provides the necessary tools and resources for firms to properly oversee their Representatives. And, for the reasons cited above, we strongly believe that the proposed changes will actually have a negative impact on the effectiveness of our overall supervision as well as place an efficient financial burden on the NASD"S members.
Again, we thank the Commission for the opportunity to comment on these important issues.
World Trade Financial Corporation
Rod P. Michel