American Express Financial Advisors Inc.
January 17, 2003
Mr. Jonathan G. Katz
Re: File No. SR-NASD-2002-162
Dear Mr. Katz:
American Express Financial Advisors Inc. ("AEFA") appreciates the opportunity to provide comments on the above-referenced proposal concerning broker dealer supervisory procedures. AEFA has 521 Offices of Supervisory Jurisdiction, 3079 branch offices, over 10,000 registered persons and conducts business in all 50 states.
AEFA wholeheartedly supports rules designed to ensure that the investing public is protected from unscrupulous acts by securities agents and that every reasonable step is taken to oversee the sales of products and services offered by securities firms.
While we certainly appreciate the necessity of ensuring that adequate supervisory controls are in place and the need to adjust and modify those controls in an ever changing business environment, we believe many of the proposed rule changes would create a negative impact upon the industry and fail to achieve the objectives stated.
We are particularly concerned about the provision requiring an "independent" review of office locations. Rule 3010 currently requires member firms to conduct an annual inspection of all OSJs and a periodic inspection of all branch offices. Proposed Rule 3010 (c)(2) would impose an additional requirement to have such inspections be performed by a person who is independent from the activities being performed at the office. Since many firms satisfy the branch office inspection requirement through the use of registered principals and other supervisors located in the field, requiring the use of an independent person would significantly increase the cost and complexity of compliance. AEFA would also argue that registered principals located in the field are more familiar with the sales practices and compliance history of agents in their respective market groups and are, therefore, in a better position to identify possible problems or concerns. There would be a significant cost associated with either hiring an independent entity or hiring additional home office personnel to conduct office inspections. Also, costs associated with independent review of branch offices would be greatly increased as a result of firms registering additional branches under the proposed amendments to the definition of a branch office.
The proposed rule would also require member firms to significantly increase the amount of verification and testing of supervisory controls. Rule 3012 would impose a requirement to have an independent entity test and verify that such controls are reasonably designed to achieve compliance with applicable securities laws and regulations. Currently, this function is performed by the firm's internal Compliance and/or Audit departments. The Compliance and Audit departments conduct continuous checks of various other areas within AEFA to ensure rules, regulations, and laws are being followed. We believe this review function is most appropriately conducted by our internal areas that contain the necessary expertise, experience with business areas, and authority to advise senior management of deficiencies and propose solutions. A more appropriate recommendation in the proposed rule would be to remind firms of their continuing obligation to internally assess risks and take corrective action when necessary.
AEFA strongly urges the Commission and the NASD to consider the number of other challenges facing the industry when considering adopting additional supervisory requirements. Other initiatives including the new books and records requirements, anti-money laundering requirements and privacy regulations are requiring firms to devote significant time and expense towards meeting necessary, yet complicated, new rules. Should the SEC and NASD decide to implement changes with regard to supervisory procedures, and add these requirements to the list of other major initiatives being imposed upon firms, AEFA respectfully requests as much time as possible to implement such changes.
Thank you again for the opportunity to provide comment. Should you have questions or would like to discuss our comments in more detail, please contact me at (612) 671-0584.