Those associated with broker-dealers are put in a position where they can easily commit financial crimes. We watch it played out in movies and we see it happening in real life. One preventative measure firms should take is to establish sound supervisory practices that require oversight of all associated persons’ outside brokerage accounts and transactions. This regulatory obligation is established in NASD Rule 3050.
NASD Rule 3050 states that “a person associated with a member, prior to opening an account or placing an initial order for the purchase or sale of securities with another member, shall notify both the employer member and the executing member, in writing, of his or her association with the other member.” Once a firm receives notification that its associated person is going to open an outside account or make an initial transaction, the rule requires that the executing member, upon written request by the employer member, transmit duplicate copies of confirmations, statements, or other information with respect to the account.
Once the firm receives account statements or any other information pertaining to the account, it should look for any evidence of suspicious activity. It is sound practice to compare the transactions in the associated person’s outside account to the transactions that the associated person has made on behalf of his clients. As the firm reviews the account statements, it should look for any red flags that would indicate that the associated person is involved in market manipulation, front running, insider trading, or any other wrongdoing. Firms should continue to supervise statements on a monthly basis to ensure that its associated persons are not committing any of these crimes. According to NASD Rule 3050, even if the account was established prior to the association of the person with the employer member, the associated person shall notify both members in writing promptly after becoming so associated. This will give the employer member the opportunity to request account statements.
Although still in effect, it has been announced that NASD Rule 3050 will be replaced with FINRA Rule 3210 (Accounts at Other Broker-Dealers and Financial Institutions). The new rule will take effect on April 3, 2017. The purpose of FINRA Rule 3210 is to combine and streamline longstanding provisions of NASD and NYSE rules that address the area of accounts at other brokerage firms or financial institutions. Follow the link to view the Full Notice.