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NASD Conduct Rule 3010

Under US federal law, virtually all security firms doing business with US public are members of NASD, a private, and not-for profit organization. Roughly 5,300 brokerage firms, over 92,000 branch offices and more than 664,000 registered representatives come under its jurisdiction. NASD registers member security firms, writes rules (prepares compliance manual) to regulate their behavior, examines them for regulatory compliance and disciplines those that fail to comply. With a view to promote regulatory compliance (of its compliance manuals), it provides education to industry professionals and investors. It also operate the largest securities dispute resolution forum- with arbitration and mediation programs- in the world.
NASD's compliance manual can be accessed online at the below given link:

NASD Conduct Rule 3010

3010. Supervision

(a) Supervisory System

Each member shall establish and maintain a system to supervise the activities of each registered representative and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with the Rules of this Association. Final responsibility for proper supervision shall rest with the member. A member's supervisory system shall provide, at a minimum, for the following:

The establishment and maintenance of written procedures as required by paragraphs (b) and (c) of this Rule.
The designation, where applicable, of an appropriately registered principal(s) with authority to carry out the supervisory responsibilities of the member for each type of business in which it engages for which registration as a broker/dealer is required.
The designation as an office of supervisory jurisdiction (OSJ) of each location that meets the definition contained in paragraph (g) of this Rule. Each member shall also designate such other OSJs as it determines to be necessary in order to supervise its registered representatives and associated persons in accordance with the standards set forth in this Rule, taking into consideration the following factors:
1. Whether registered persons at the location engage in retail sales or other activities involving regular contact with public customers;
2. Whether a substantial number of registered persons conduct securities activities at, or are otherwise supervised from, such location;
3. Whether the location is geographically distant from another OSJ of the firm;
4. Whether the member's registered persons are geographically dispersed; and
5. Whether the securities activities at such location are diverse and/or complex.
The designation of one or more appropriately registered principals in each OSJ, including the main office, and one or more appropriately registered representatives or principals in each non-OSJ branch office with authority to carry out the supervisory responsibilities assigned to that office by the member.
The assignment of each registered person to an appropriately registered representative(s) and/or principal(s) who shall be responsible for supervising that person's activities.
Reasonable efforts to determine that all supervisory personnel are qualified by virtue of experience or training to carry out their assigned responsibilities.
The participation of each registered representative, either individually or collectively, no less than annually, in an interview or meeting conducted by persons designated by the member at which compliance matters relevant to the activities of the representative(s) are discussed. Such interview or meeting may occur in conjunction with the discussion of other matters and may be conducted at a central or regional location or at the representative's(') place of business.
Each member shall designate and specifically identify to the Association one or more principals who shall review the supervisory system, procedures, and inspections implemented by the member as required by this Rule and take or recommend to senior management appropriate action reasonably designed to achieve the member's compliance with applicable securities laws and regulations, and with the Rules of this Association.

(b) Written Procedures

Each member shall establish, maintain, and enforce written procedures to supervise the types of business in which it engages and to supervise the activities of registered representatives and associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations, and with the applicable Rules of this Association.
The member's written supervisory procedures shall set forth the supervisory system established by the member pursuant to paragraph (a) above, and shall include the titles, registration status and locations of the required supervisory personnel and the responsibilities of each supervisory person as these relate to the types of business engaged in, applicable securities laws and regulations, and the Rules of this Association. The member shall maintain on an internal record the names of all persons who are designated as supervisory personnel and the dates for which such designation is or was effective. Such record shall be preserved by the member for a period of not less than three years, the first two years in an easily accessible place.
A copy of a member's written supervisory procedures, or the relevant portions thereof, shall be kept and maintained in each OSJ and at each location where supervisory activities are conducted on behalf of the member. Each member shall amend its written supervisory procedures as appropriate within a reasonable time after changes occur in applicable securities laws and regulations, including the Rules of this Association, and as changes occur in its supervisory system, and each member shall be responsible for communicating amendments through its organization.

Each member shall conduct a review, at least annually, of the businesses in which it engages, which review shall be reasonably designed to assist in detecting and preventing violations of and achieving compliance with applicable securities laws and regulations, and with the Rules of this Association. Each member shall review the activities of each office, which shall include the periodic examination of customer accounts to detect and prevent irregularities or abuses and at least an annual inspection of each office of supervisory jurisdiction. Each branch office of the member shall be inspected according to a cycle which shall be set forth in the firm's written supervisory and inspection procedures. In establishing such cycle, the firm shall give consideration to the nature and complexity of the securities activities for which the location is responsible, the volume of business done, and the number of associated persons assigned to the location. Each member shall retain a written record of the dates upon which each review and inspection is conducted.

(d) Written Approval

Each member shall establish procedures for the review and endorsement by a registered principal in writing, on an internal record, of all transactions and all correspondence of its registered representatives pertaining to the solicitation or execution of any securities transaction.

(e) Qualifications Investigated

Each member shall have the responsibility and duty to ascertain by investigation the good character, business repute, qualifications, and experience of any person prior to making such a certification in the application of such person for registration with this Association. Where an applicant for registration has previously been registered with the Association, the member shall obtain from the Firm Access Query System (FAQS) or from the applicant a copy of the Uniform Termination Notice of Securities Industry Registration (Form U-5) filed with the Association by such person's most recent previous NASD member employer, together with any amendments thereto that may have been filed pursuant to Article IV, Section 3 of the Association's By-Laws. The member shall obtain the Form U-5 as required by this Rule no later than sixty (60) days following the filing of the application for registration or demonstrate to the Association that it has made reasonable efforts to comply with the requirement. A member receiving a Form U-5 pursuant to this Rule shall review the Form U-5 and any amendments thereto and shall take such action as may be deemed appropriate.

(f) Applicant's Responsibility

Any applicant for registration who receives a request for a copy of his or her Form U-5 from a member pursuant to this Rule shall provide such copy to the member within two (2) business days of the request if the Form U-5 has been provided to such person by his or her former employer. If a former employer has failed to provide the Form U-5 to the applicant for registration, such person shall promptly request the Form U-5, and shall provide it to the requesting member within two (2) business days of receipt thereof. The applicant shall promptly provide any subsequent amendments to a Form U-5 he or she receives to the requesting member.

(g) Definitions

Office of Supervisory Jurisdiction" means any office of a member at which any one or more of the following functions take place

order execution and/or market making;
structuring of public offerings or private placements;
maintaining custody of customers' funds and/or securities;
final acceptance (approval) of new accounts on behalf of the member;
review and endorsement of customer orders, pursuant to paragraph (d) above;
final approval of advertising or sales literature for use by persons associated with the member, pursuant to Rule 2210(b)(1); or
responsibility for supervising the activities of persons associated with the member at one or more other branch offices of the member.

"Branch Office" means any location identified by any means to the public or customers as a location at which the member conducts an investment banking or securities business, excluding:

any location identified in a telephone directory line listing or on a business card or letterhead, which listing, card, or letterhead also sets forth the address and telephone number of the branch office or OSJ of the firm from which the person(s) conducting business at the non-branch locations are directly supervised
any location referred to in a member advertisement, as this term is defined in Rule 2210, by its local telephone number and/or local post office box provided that such reference may not contain the address of the non-branch location and, further, that such reference also sets forth the address and telephone number of the branch office or OSJ of the firm from which the person(s) conducting business at the non-branch location are directly supervised; or
any location identified by address in a member's sales literature, as this term is defined in Rule 2210, provided that the sales literature also sets forth the address and telephone number of the branch office or OSJ of the firm from which the person(s) conducting business at the non-branch locations are directly supervised.
any location where a person conducts business on behalf of the member occasionally and exclusively by appointment for the convenience of customers, so long as each customer is provided with the address and telephone number of the branch office or OSJ of the firm from which the person conducting business at the non-branch location is directly supervised.

A member may substitute a central office address and telephone number for the supervisory branch office or OSJ locations referred to in paragraph (g)(2) above provided it can demonstrate to the Association's District Office having jurisdiction over the member that it has in place a significant and geographically dispersed supervisory system appropriate to its business and that any investor complaint received at the central site is provided to and resolved in conjunction with the office or offices with responsibility over the non-branch business location involved in the complaint.

[Amended eff. June 12, 1989; Apr. 30, 1992; amended by SR-NASD-97-41 eff. Sept. 4, 1997.]
Selected Notices to Members: 86-65, 88-84, 89-34, 89-57, 92-18.

Selected SEC Decisions

Juan Carlos Schidlowski, SEC Rel. No. 34-23347 (1986).
Wedbush Securities, Inc. (f/k/a Wedbush Noble, Cooke, Inc.), SEC Rel. No. 34-25504 (1988).
Seco Securities, Inc. and Stanley Richards, SEC Rel. No. 34-26054 (1988).

Other Information of interest in the context of regulatory compliance:

Advertising Regulation Electronic Filing
Member firms can now send PDF files of advertisements and sales literature directly to the Advertising Regulation Department for review via the Web. The enhanced system promotes regulatory compliance by the security firms as it enables firms to track filings through the review process. In response to requests for Expedited review, the system sends Review Status Confirmation letters confirming whether the review has been accepted on an Expedited basis.

Accessing AREF
AREF is one of several Web-based applications provided to NASD member firms as part of the Regulation Form Filings System.

AREF System Highlights
The enhanced AREF system permits users to:

Submit PDF files of communications with the public for review by the Department.
Track pending filings awaiting review by the Department.
Receive and view Review Status Confirmation letters in response to requests for Expedited review.
Search for, view, print, and save Department letters, including archived letters dating from the previous three years.
Receive e-mail notification when a new NASD letter is available.
Set two distinct permission levels:
- Read Own Comments: allows the user to see only those comment letters addressed to that individual.
- Read All Firm Comments: allows the user to see all comment letters sent to the member firm.

Regulatory Short Takes
NASD Disciplinary Action Emphasizes Requirement to Disclose Special Cash Compensation Arrangements in the Sale and Distribution of Mutual Funds.

Reminder to Members That Their Supervisory Systems and Written Supervisory Procedures Must Be Periodically Amended Firms should direct their questions regarding the compliance with NASD supervisory requirements to the NASD Department of Member Regulation at (202) 728-8221.

TRACE
SEC Approves Expanding TRACE Corporate Bond Price Reporting

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