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March 1, 1998

The Compliance Checklist

By Howard L. Haykin

Every investigation by the National Association of Securities Dealers carries the risk of fines and sanctions. A single sanctionable event can cost a dealer $20,000.

A penalty depends largely on how well the dealer responds to accusations. However, traders too often adopt the attitude that they have done no wrong, and choose to leave the trading practices in place.

Written responses are defensive and simplistic, leaving the NASD with little choice but to impose a significant fine or sanction against the firm. Second offenses carry even larger fines and sanctions.

Compliance Consultants

Compliance consultants can reverse the risk of regulatory fines and sanctions. Some trading desks turn to these consultants, my firm included, for help.

First, we represent and protect market makers in their dealings with NASD Regulation. Second, we learn about their business, help to remedy their deficiencies and make them more aware of compliance. Third, we fill the information void with answers to everyday questions.

We encourage traders to accept that deficiencies do exist and should be corrected. We bridge the communications gap between NASD expectations and trading realities, with carefully-prepared responses to NASD accusations of apparent rule violations and trading deficiencies that are both fair and effective.

Our responses put flesh and blood on the NASD Regulation staff's cold facts and statistics, introduce mitigating circumstances and account for supervisory procedures that firms may not have realized they were doing.

The NASD welcomes such an approach, and their initial reactions have been quite positive.

Scheduled Reviews

Whether or not your firm is the target of an NASD Regulation investigation, regularly scheduled reviews of compliance practices for trading and trade processing should be conducted. What worked in the past may no longer be sufficient. Compliance consultants can plan a tailored, comprehensive analysis that will reveal what supervisory and operational compliance procedures you are doing right, doing wrong and should be doing but are not.

As deficiencies are discovered, corrective action should be taken. Head traders should promote compliance awareness on the trading desk so that problems are resolved as they occur. Handling everyday compliance issues may not only save you money, it should promote a better working relationship between your traders and the regulators.

Compliance consultants can also help with everyday compliance issues. Even with new and improved compliance practices in place, traders will have problems staying on top of the issues and developments. Many are overwhelmed by the steady stream of correspondence from Nasdaq and the NASD, and they are struggling to comply with the rules. Compliance consultants can sort through the pronouncements and help fill the gaps left open by trader uncertainties.

Howard L. Haykin, CPA, is president of Compliance Solutions, a New York-based specialist in regulatory compliance for broker dealers and investment advisers.