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02-29 NASD Regulation Provides Guidance On Order Audit Trail System Rules
Order Audit Trail System
NASD Regulation, Inc. (NASDR) is issuing this Notice to Members as part of its continuing efforts to provide members with guidance on requirements relating to the Order Audit Trail System (OATS), NASD Rules 6950 through 6957 (the OATS Rules). In particular, NASDR is reminding members of their supervisory responsibilities under the OATS Rules and NASD Rule 3010, which requires members to establish a supervisory system and develop and maintain written supervisory procedures.
Questions concerning this Notice should be directed to NASDR's Market Regulation Department at (240) 386-5126 or NASDR's Office of General Counsel at (202) 728-8071.
Members have a variety of ways in which they may comply with the OATS Rules. For example, a member may develop or purchase a proprietary system for OATS reporting; it may enter into a Reporting Agent agreement with another member or other party to report on its behalf under Rule 6955(c); it may manually report OATS information through NASDR's Web interface; or it may use any combination of these and other methods. Under all of these scenarios, the member receiving the order for Nasdaq® securities is responsible for complying with the OATS Rules.
Through its review and examination process, NASDR has found numerous instances where members have not complied with the OATS Rules as a result of technological problems with automated systems or errors on the part of Reporting Agents. Although members may consider such OATS reporting problems outside their immediate control, the member remains ultimately responsible for OATS compliance and cannot contract or otherwise shift away this responsibility. In such instances, the member's supervisory system becomes crucial to ensure that the OATS requirements are being met. Thus, in accordance with Rule 3010, all members must establish and maintain a supervisory system that is designed to ensure compliance with the OATS Rules.1 A well designed and implemented supervisory system is particularly important when a member is using a Reporting Agent to comply with the requirements of the OATS Rules to ensure that the third party is conducting OATS activities as agreed upon and in compliance with the rules.
Given the different business models of members and that members can achieve compliance with NASD Rule 3010 through a variety of methods and systems, this Notice only addresses some of the general elements that members should consider in assessing the adequacy of their supervisory systems and written supervisory procedures regarding the OATS Rules. NASDR is not mandating any particular type or method of supervision, nor is it intending to provide a checklist of steps that if followed would constitute an adequate supervisory system. NASDR will continue to examine members' supervisory systems and written supervisory procedures and, where appropriate, initiate disciplinary action for failure to adopt, implement, and enforce appropriate supervisory procedures.
Considerations For OATS Supervisory Systems And Procedures
Provided below are recommended steps that members should consider incorporating into their OATS supervisory systems and procedures. Members that use a Reporting Agent to fulfill their reporting obligations also should review their Reporting Agent agreements to specify which, if any, supervisory activities will be performed by the Reporting Agent on behalf of the member. Members remain ultimately responsible for all supervisory activities, and therefore, must periodically review and assess the effectiveness of the Reporting Agent's activities.
Common OATS Supervisory Deficiencies Noted During Reviews
To assist members in developing adequate supervisory systems and procedures, NASDR staff has compiled below examples of supervisory deficiencies that are found most frequently during the course of OATS compliance reviews. Merely avoiding these practices in no way ensures that a member's supervisory systems or written procedures will be adequate. Avoiding these particular practices, however, may assist members in developing their supervisory systems and procedures.
Many of the topics mentioned in this Notice are discussed in detail in documents available on the NASDR Web Site. Members can access the documents by going to www.nasdr.com and then clicking on OATS Information under Regulation Systems or by contacting the OATS Help Desk at 1-800-321-NASD.
1 In addition, NASD Rule 3010(b) requires each member to establish, maintain, and enforce written supervisory procedures that are reasonably designed to achieve compliance with applicable NASD Rules. See also NASD Notice to Members 99-45, NASD Provides Guidance On Supervisory Responsibilities (June 1999).
2 Each member should be certain that the number of New Order, Route, and Execution Reports is consistent with the member's expectations.
3 Each member should review closely any Reporting Agent agreements into which it has entered to establish whether the member or its Reporting Agent is responsible for the repair and resubmission of any rejected data.
4 To ensure it receives all pertinent OATS announcements and other relevant information in a timely manner, each member must add its e-mail address to the Firm Administration page on the OATS Web interface. Although NASDR generally will communicate pertinent OATS information to the membership via e-mail, all announcements and other important information will be made available on the OATS Web Site.
5 If a Reporting Agent is submitting data on a member's behalf, it is the member's responsibility periodically to obtain from its Reporting Agent a complete set of OATS data submitted on its behalf in order to perform the above outlined review or to validate that its Reporting Agent is monitoring the accuracy of data submitted on its behalf.