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Industry Spotlight > Broker Dealers

NASD Tells Members To Keep Tabs On Vendors

By Allison Bell

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The National Association of Securities Dealers is warning member firms against trying to outsource responsibility for tasks such as preparing for disasters and supervising sales representatives.[@@]

In most cases, when NASD member firms hire outside companies that are not NASD members to manage compliance, supply data, handle disaster recovery services or serve as transfer agents, the outside companies will be “considered associated persons of the member,” NASD officials write in NASD Notice To Members 2005-48.

Members of the NASD, Washington, a self-regulatory organization, can continue to use contracts to turn some responsibility, for tasks such as maintaining books and taking custody of funds, over to registered clearing broker-dealers, officials write in the guidance.

But the NASD officials note that NASD members now are asking outside companies to handle many tasks not covered by traditional clearing agreements.

Investigators at the NASD and the New York Stock Exchange conducted a survey of broker-dealers in October 2004 to study the broker-dealers’ use of outsourcing arrangements.

Most participating broker-dealers had some mechanisms in place to monitor the quality and accuracy of the outside vendors’ services, but some broker-dealers did not have written quality control procedures in place, investigators found.

Although many of the broker-dealers’ vendors were regulated by organizations such as the U.S. Securities and Exchange Commission or the NASD, many of the foreign information technology and communications vendors were not regulated by any U.S. agency.

Unless some rule or law states otherwise, any outside vendors handling tasks that require registration or qualification under NASD rules should have all necessary registrations and qualifications, NASD officials write in NTM 2005-48.

An NASD member can, for example, use compliance software from an outside vendor, but it must verify for itself that the compliance software does what it’s supposed to do, officials write.

In addition to having written policies and procedures in place to ensure that outside vendors are following the rules and meeting quality standards, any NASD member using outside vendors “should ensure that NASD and all other applicable regulators have the same complete access to the service provider’s work product for the member, as would be the case if the covered activities had been performed directly by the member,” NASD officials write.

The NASD has posted the outsourcing guidance on the Web at //www.nasd.com/web/groups/rules_regs/documents/notice_to_members/nasdw_014735.pdf

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