The National Association of Securities Dealers Inc. is requiring brokerage firms to set policies for reviewing clients' written communications to brokers.
The new rule, effective March 15, is designed to help ensure that complaints reach the proper authorities within the brokerage, and that customer funds are not mismanaged.
At least some incoming mail must be looked at, but the method of review may vary depending on a firm's "size, structure, and customers," the NASD said Monday in a notice to members. No specifics regarding firm size or customers were included.
Previously the NASD required members to review outgoing mail but did not specifically address the screening of incoming communications, said John E. Pinto, a former executive vice president of the association.
The requirement could mean extra work for some bank brokerages, particularly those that have several thinly staffed offices, observers said.
"Unfortunately, there are too many broker-dealer firms who don't watch their brokers as they should," said Harry Harper, chief compliance officer at the brokerage arm of Keystone Financial Inc. of Harrisburg, Pa.
Anticipating the rule change, Keystone Brokerage Inc. adopted review procedures several months ago, he added.
The new rules were approved by the Securities and Exchange Commission in November as amendments to Rule 3010, which required the supervision of electronic communications and outgoing written communications.
Rule 3010 originally included provisions on supervising all written communications, but some NASD member firms-primarily insurers-objected. They claimed that a rule requiring a review of every single piece of mail a broker received would be too onerous.
"I don't know how anyone would have done that," said Mr. Harper of Keystone. Keystone, which sells securities through 188 bank branches, would have had a particularly tough task keeping up, he added.
The rule's new version has tempered its approach, allowing members to assign a registered representative or associated person to review all incoming communications in cases where "the office structure permits," the NASD said.
Alternatively, brokerages would have to develop procedures to assure adequate handling of complaints and checks, the NASD said.
That could include forwarding communications to the supervising branch weekly. Brokerages could also maintain separate logs for all checks received and securities products sold and forward them to the supervising branch weekly.
The NASD recognized the need for regulation but understood that it needed to be "worked out within the environment in which many members operate," said Lawrence Kosciulek, an assistant director.
Though the amendments will require some bank brokerages to adopt new procedures, Karen LaTourette, compliance manager of National Penn Bancshares' brokerage unit, said the rules are flexible and not too burdensome.
For example, she said, brokerages can train an unregistered person to handle correspondence. "You can use a clerical person who has been adequately trained and is adequately supervised," she said.
The amendments will not affect large brokerages that are members of the New York Stock Exchange. They are already required to review all incoming correspondence, said Lou Moschetta, chief compliance officer of Quick & Reilly and Fleet Securities Inc., a division of Fleet Financial Group, Boston.
