December 16, 2002
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Proposed Rule Change Pursuant to 17 CFR 240.19b-4
Dear Mr. Katz,
Wall Street Financial Group, Inc. is a fully disclosed broker-dealer licensed to conduct business in all domestic jurisdictions, with over 230 Registered Representatives offering securities services through nearly 20 Offices of Supervisory Jurisdiction. As Executive Vice President of Wall Street Financial Group, Inc., 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. Wall Street Financial Group, Inc. 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.
Wall Street Financial Group, Inc. 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. Our Representatives 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 is 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.
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 OSJ Managers, who 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, our 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 may decline. As a matter of financial necessity, the audit cycle will be forced to extend inspections for a longer duration between inspections.
However, even stretching out the audit cycle to even more years represents a significant added expense for our Compliance Department, not just in terms of money, but time, as well. The firm continues to work on the implementation of all revised requirements for the maintenance of books and records and other changes related to the USA Patriot Act and new Anti Money Laundering Policies, along with day-to-day compliance functions. 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 component of our supervisory structure, changes in this area will impact all other areas of the compliance department budgeting system and personnel resources.
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 Compliance Department is responsible for the design, implementation and oversight of the firm's system of supervisory controls. Restricting the Compliance Department personnel 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.
Wall Street Financial Group, Inc.
Executive Vice President
|cc:||Robert Greer, President/CEO|
Michael Bewley, COO