Associated Securities Corp.
December 19, 2002
Jonathan G. Katz
Dear Mr. Katz,
I am the President and Chief Executive Officer of Associated Securities Corp. an NASD member broker dealer that has approximately 240 registered representatives located in 170 branch offices. Of our 170 branch offices, the majority are what the NASD has defined as Offices of Supervisory Jurisdiction ("OSJ") under its rules. As background, I started out in this business as an examiner trainee with the Los Angeles office of the NASD in 1976. Since that time, I have worked for three prior brokerage firms, and become an attorney here in California. I am a current member of the NASD District 2 (Los Angeles) Committee, current chairperson of the SIA's independent firms committee and a former member of the FPA's broker-dealer compliance advisory council (1998-2000).
As a matter of first impression, I was very disappointed that the NASD consciously chose to bypass getting any input from its membership before filing this proposal with the SEC. I am further disappointed with the timing of the rule filing-that is, picking the period between Thanksgiving and Christmas to file a proposal that I believe will have a significant operational and financial impact on many broker-dealers. As a current member of the NASD Los Angeles committee, even I was surprised to find out about this rule filing on a timely basis.
As I read through the NASD proposal, I was struck by the apparent intent to separate supervision of various business processes from anyone receiving compensation related to sales.
As a matter of reference, I have not seen any other business that realistically separates the responsibility and care of business production between line managers and an independent group of detached persons. In our case, we are a fairly typical broker-dealer, with experienced staff and experienced professional reps. Our reps are independent contractors, as far as the labor and employment laws are concerned, but are registered and regulated by NASD and other industry precepts, much as any other broker-dealer. We have a compliance department that conducts regular branch office exams, both on a scheduled and unscheduled (unannounced or "surprise") basis.
Many of our reps are former reps from more traditional brokerage firm models-employees who were either on salary or who were paid a percentage of the business that was generated. In our case, we have a number of OSJ-branch offices that have chosen to group a small number of reps, with one rep assuming a leadership role and becoming the so-called OSJ branch manager. As such, that person now takes on the traditional role of supervising the activities of the OSJ branch, as well as the people within it. One of those functions is to see that all business processed within the OSJ is done within the law.
Under current industry rules, we are also allowed to have small "satellite" offices that may report up to an OSJ and the OSJ manager.
Our OSJ managers are fully accountable for the actions of their staffs and their businesses. To somehow artificially separate a large portion of their supervisory responsibilities will result in less, not more, accountability.
To ask us to have a separate group of persons to supervise each and every bit of business that is conducted, is to unnecessarily duplicate the daily efforts of our branch office managers. I do understand the concept of supervising producing managers-we have a regional officer system that provides that every one of our OSJ managers has a regional manager above them. The regional manager is paid a salary, and does not directly participate in any percentage of the business generated.
What is interesting to me, is that one of the primary reasons that many of our most experienced reps have chosen to work alone, is that they don't want to be responsible for anyone else's production and work habits, nor do they want to make someone else responsible for their own conduct. They do understand the need to have some supervision and control under current laws, but would like at some point to be treated as working professionals, rather than as mere salesmen from an earlier era. The many men and women who work hard to satisfy an ever increasingly demanding public should be thought of in better terms than what is being proposed here.
I understand that much of the NASD proposal is a direct result to try and prevent a recurrence of the infamous Gruttadauria scheme. It is my opinion, that if you have put dishonest people in high places, no amount of law or regulation will deter such people. It is clear that everyone knows that it is wrong to steal money from unknowing clients, and it is clear that it is wrong to make up false statements for client accounts. I don't see it so much as a failure to have additional laws in place-perhaps it was a simply a failure of the higher-ups to take a look at a very large producer. In many cases, such behavior is well-hidden by the perpetrator, so that even a very sophisticated system of checks and balances cannot detect the wrongdoing.
It sometimes seems that every time there is wrongdoing, the answer is more rules and regulations. Often however, it seems that the only ones that suffer, are those that are attempting to follow the law, without inadvertently violating it.
If it was the NASD's intent to eliminate our business model (independent contractor reps located in small branch offices with no branch office staff that is paid directly by the broker-dealer), than this proposal will certainly accomplish that feat. We and many others, will simply not be able to afford an independent, paid compliance officer in each and every one of our branch offices.
If you would like publish the NASD's proposals as recommendations, that would be fine with me. But can we leave "a system of reasonable supervision" up to each firm, according to its business and people? That would be the best system of all.