INTERNAL AUDIT. Chapter 16 9 KATHMANDU, NEPAL, THE HIMALAYA S IN THE BACKGROUND

Transcription

1 INTERNAL AUDIT Chapter 16 9 KATHMANDU, NEPAL, THE HIMALAYA S IN THE BACKGROUND

2 R M. S T A R K & C O., I N C Chapter 16 INTERNAL AUDITS NASD Rule 3010(c)(1) requires each member to inspect, at least annually, each supervisory branch office. Any location that is responsible for supervising the activities of persons associated with a firm at one or more of a firm s non-branch office locations is considered to be a branch office. This rule also requires the firm to inspect all non-supervisory branch offices at least every three years. ABranch office is defined as any location identified by any means to the public or customers as a location at which the firm conducts investment banking or securities business. There are three types of offices: 1 OSJ Office of Supervisory Jurisdiction. 2 Non-OSJ Non-Office of Supervisory Jurisdiction. 3 Unregistered Office. OSJ and Non-OSJ OFFICE An OSJ and Non-OSJ is defined as any business location in which one or more of the following functions take place: 1 Order execution (OSJ). BRANCH MANAGER MANUAL INTERNAL AUDITS 16.1

3 R M. S T A R K & C O., I N C 2 Structuring of public offerings or private placements (OSJ). 3 Initial or final acceptance (approval) of new accounts on behalf of the member (OSJ and Non-OSJ)). 4 Review and endorsement of customer orders (OSJ and Non-OSJ). 5 Initial or final approval of advertising or sales literature for use by persons associated with the firm (OSJ and Non- OSJ). 6 Responsibility for supervising the activities of persons associated with the firm (OSJ and Non-OSJ). 7 May hold itself out to the public as an office, of the firm, doing business (OSJ and Non-OSJ). 8 Can use stationary with firm logo and branch s address and brokers can have business cards with address and telephone numbers of their office (OSJ and Non-OSJ). UNREGISTERED OFFICE 1 May not participate in structuring of public offerings or private placements. 2 May not give initial or final acceptance (approval) of new accounts on behalf of the firm or other brokers. 3 May not review and endorse customer orders. 4 May not hold itself out to the public as an office of the firm doing business. 5 May not have responsibility for supervising the activities of persons associated within the firm. 6 May not use stationary with firm logo and branch s address and brokers can not have business cards with address and telephone numbers of their office. BRANCH MANAGER MANUAL INTERNAL AUDITS 16.2

4 R M. S T A R K & C O., I N C 7 May not advertise their location in any publication and may not have their telephone listed in a telephone directory. a. However, broker(s) of the unregistered office may utilize business cards with the telephone numbers, fax numbers and address of their OSJ, which is responsible for all activities taking place in the unregistered office. REGISTRATION OF BRANCH OFFICES Branch offices must be registered in accordance with Article III, Section 27 of the NASD Rules of Fair Practice. The firm shall designate a branch as an OSJ (Office of Supervisory Jurisdiction) if it meets some or all of the criteria previous listed. The firm shall also ensure that each branch will be properly registered in accordance with laws and provisions of the state(s) in which it conducts securities business. The designated principal will promptly notify the NASD of a new branch office via Web CRD. INSPECTIONS OF BRANCH OFFICES The Firm shall conduct a review, at least annually of OSJ and Non-OSJ offices and at least every three years for unregistered offices, of the business in which its branches engage in, to detect and prevent violations of firm policies and achieve compliance with applicable securities laws and regulations. Reports regarding these audits will be issued to the Firm s senior management and to the Branch Manager. These reports will cite any deficiencies in adherence to firm policies and securities laws or regulations. The report may include any actions taken to have the branch adhere to such policies and rules, and if necessary, any disciplinary action taken. A report may be requested from the branch as to what corrective actions will be taken by the manager to correct any deficiencies and when these corrections will be in effect. HEIGHTENENED INSPECTION REQUIREMENTS NASD Rule 3010(c)(3) requires the Firm to provide heightened office inspections if two conditions are met: BRANCH MANAGER MANUAL INTERNAL AUDITS 16.3

5 R M. S T A R K & C O., I N C 1 The person conducting the inspection reports to the branch office manager s supervisor or works in an office supervised by the branch manager s supervisor. 2 The branch office manager generates 20 percent or more of the revenue of the business units supervised by the branch office manager s supervisor. The Firm may inspect offices more often then the required cycles, if the volume and nature of business conducted in the office raises concerns by the Compliance Department. Reasons for these concerns may be caused by, but not limited to: 1 Noticeable increase in volume of business. 2 A change in the type of business conducted by the broker(s) of the branch. 3 Customer complaints. 4 Firm policies and procedures are not being adhered to. INTERNAL COMPLIANCE AUDIT FORM The internal compliance audit form is located on the compliance releases page in the firm s website ( It is recommended that managers conduct audits of their own office at least on a quarterly basis and send the results to the Compliance Department for review. Doing this, will help the branch remain in compliance with the firm s rules and procedures. DOCUMENTS AND FILES REQUIRED FOR THE AUDIT The following is a step by step explanation of the different areas and documents that are reviewed and inspected in the internal audit. Upon receiving notice of an internal audit, the manager should print and review the internal audit forms to be come familiar with the files and documents needed by the internal auditor. The manager should insure that all the BRANCH MANAGER MANUAL INTERNAL AUDITS 16.4

6 R M. S T A R K & C O., I N C documents and files are set aside so the auditor can immediately begin the audit. Also, make certain that all the branches personnel are in the office when the auditor arrives. The audit will go smoother and with less interruption to the manager s busy day, and will conclude sooner if all the files needed are set aside for the auditor. CORRESPONDENCE FILES The manager should have both incoming and outgoing files set aside for the auditor. These files should contain all incoming and outgoing mail, facsimiles, and electronic mail. TRADING The auditor will need to review all copies of order tickets and/or daily trade blotters, trade corrections, error reports and letters of nonsolicitation. ACTIVE ACCOUNTS The auditor will need a list of the most active account in the branch including the files for the most active accounts including all activity letters, profit and loss work sheets, the manager s and/or the broker s log pertaining to active accounts. CUSTOMER STATEMENTS The auditor will need to receive statements reflecting the manager s review including any notes and action taken. COMPLAINTS All complaints including any sign of written dissatisfaction by customers should be made available to the auditor. MUTUAL FUND SWITCH LETTER FILE A file containing all mutual fund switch letters including managers comments, if any, should be given to the auditor. BRANCH MANAGER MANUAL INTERNAL AUDITS 16.5

7 R M. S T A R K & C O., I N C OPTIONS FILES The auditor should receive a file containing all the most active option accounts, if any, with evidence of the manager s review. SEMINAR FILES All seminar files and related documents should be made available to the auditor. ADVERTISING FILES All advertising files and copies of all final approved advertisements should be ready for audit review. COLD CALL PROCEDURES All leads, call sheets, and files should be made available to the auditor. SALES AND COMPLIANCE MEETINGS All notes and minutes should be set aside for the auditor. NEW ACCOUNTS Since it is unreasonable to have all new account files set aside for the auditor, it will be an on site judgment as to which documents or files the auditor will review. EMPLOYEE FILES Have all employee files available for the auditor. CASHIERING Have all related documents and files ready for review by the internal auditor. VARIABLE/FIXED INSURANCE The auditor will need a list of all brokers with insurance licenses and the name of the insurance companies they are licensed with. BRANCH MANAGER MANUAL INTERNAL AUDITS 16.6

8 R M. S T A R K & C O., I N C ACCOUNTS PAYABLE / RECEIVABLE The auditor will need to review payroll and all other bills paid including bank statements and cancelled checks. CORPORATE RECORDS Balance sheets and income statements should be available for the auditor s review. The internal audit coupled together with the Manager s monthly report are tools designed to make the manager s day to day supervisory responsibilities easier to prioritize. Although the audit form is not all inclusive, it is a helping guide for the manager to use as a reference. The following pages contain a copy of the Internal Audit forms which is available on the firm s website. BRANCH MANAGER MANUAL INTERNAL AUDITS 16.7

9 Date Of Audit: _ --- Branch Office: _ Branch Manager: _ DOCUMENTS REQUIRED List of Employee and Employee Related Accounts. List of brokers and their State registrations. List of most active accounts. List of Employees with access to the Internet. FILES REQUIRED Incoming Correspondence File (mail, fax, s). Outgoing Correspondence File (mail, fax, s). Error Report File. Trade Correction File Complaint File. Compliance File. Seminar File. Personnel Files. Advertising File. Sales and Compliance Meeting File. Check Received Transmittals. Securities Received Transmittals. Mutual Fund Switch File. Accounts Payable and Receivable. FOR INTERNAL USE ONLY 1

10 CORRESPONDENCE FILES INCOMING CORRESPONDENCE FILE Number of correspondence in file: Mail Fax Complaints memo Number of correspondence dated in current year: Number not signed by Manager: Comments: OUTGOING CORRESPONDENCE FILE Number of correspondence in file: Mail Fax Other Number of correspondence dated in current year: Number not signed by Manager: Comments: FOR INTERNAL USE ONLY 2

11 TRADING Persons approved to enter orders. Are order tickets used? Orders approved by. Transaction summary for the day approved by: Who maintains GTC orders? Trade corrections approved by: Process used to approve orders? _ How are order tickets maintained for the month? How are Letters of non-solicitation and trade corrections maintained? Does branch maintain a trade error file? FOR INTERNAL USE ONLY 3

12 ACTIVE ACCOUNTS Active accounts are reviewed by: How often reviewed? Review indicated with action taken? List of active accounts maintained? Are reviews indicated in Mgr. Log? Does manager send activity letters? STATEMENTS Does Manager review statements? How often? Does statements indicate review (initials)? Is file maintained for employee statements? Are employee statements coded for dupe? COMPLAINTS Complaint file maintained: Number complaints found: Complaints unanswered: Complaints not signed by manager: Complaints not sent to Compliance: _ FOR INTERNAL USE ONLY 4

13 MUTUAL FUNDS Is mutual fund switch file maintained? Manager approval indicated on mutual fund orders. Are prospectus current? OPTIONS Is file maintained for active option clients? Does branch maintain a supply of option booklets? Does every option account receive OCC booklet? Who sends OCC booklets to clients? _ SEMINARS Do any brokers conduct seminars? If yes, who? How often? Was Compliance approval received? Is a seminar log and plan maintained? Manager approval indicated? FOR INTERNAL USE ONLY 5

14 ADVERTISING Does branch maintain an advertising file? Do all ads have proper approval? Are any ads in violation of Firm or Industry rules: _ COLD CALL PROCEDURES Is the most current No Call List posted? Have all leads been screened for No Calls? SALES / COMPLIANCE MEETINGS How often are meetings conducted? Who supervises / conducts the meetings? _ Is manager s log maintained regarding meeting? _ FOR INTERNAL USE ONLY 6

15 NEW ACCOUNTS Who reviews new account forms? Is new account filing current? Number of new account files checked? Number of new account files incomplete. What is the procedure for address changes? Any discretionary accounts? Any clients employed by another BD or Bank? Any investment advisor accounts? Any investment club accounts? _ EMPLOYEE FILES Who maintains employee files? Are files maintained in an orderly fashion? Do files seem complete? _ FOR INTERNAL USE ONLY 7

16 MAIL Who opens the mail? _ Where is the mail opened? _ Is a time stamp used? _ Are original correspondence filed? _ Are copies given to the brokers? _ Does manager review mail? _ Is review indicated on mail? _ Who gets checks? _ Who gets stock certificates? What is the procedure when checks are received? What is the procedure when stock certificates are received? FOR INTERNAL USE ONLY 8

17 CASHIERING Who does the Check Received Transmittals? _ Who reviews and signs the transmittals? _ Who stamps the back of checks and when? _ Who makes the bank deposits? _ What if a check is received late in the day? _ Who does Securities Received Transmittals? _ Who reviews and signs the transmittals? _ Are copies of certificates maintained? _ Where are copies maintained? _ How are securities sent to the main office? _ What is the procedure if securities are received late in the day? How is each day s cashiering maintained? How are journal requests maintained? How are Fed Fund requests maintained? How are check requests maintained? Is manager s review indicated on all above? _ FOR INTERNAL USE ONLY 9

18 INSURANCE VARIABLE / FIXED Do any brokers have insurance licenses? If yes, who? Type of license, which states and which insurance companies? _ Need copy of all current licenses. Where are client files kept? Is any business done directly with an insurance co.? If yes, by whom and what insurance companies? How is insurance business supervised? GENERAL APPEARANCE OF OFFICE FOR INTERNAL USE ONLY 10

19 COLD CALLERS Do brokers use cold callers? Are cold callers registered in states called? ON LINE COMPUTERS Number of computers on line? Names of employees with on line computers. _ How are broker s activities on the Internet supervised? Does anyone use private s? Does the manager check computer files? MANAGER LOGS AND BROKER S RECORDS Is a manager log maintained? Do brokers maintain a log? FOR INTERNAL USE ONLY 11

20 POSTING Do brokers post their transactions? Are all brokers current in their posting? Does the manager review broker s books? STATE REGISTRATIONS Does each broker have a current list of registrations? How are registrations supervised? Is the fax machine(s) in a secured location Is the activity on the fax machine(s) monitored? E.E.O memo posted? NASD sign posted? Does office have appropriate signs? Is there a notary in the office? If yes, what is notarized? Business cards and stationary conform to firm policy? Brokers or their immediate family with personal accounts at other broker dealers? Brokers with court orders, garnishment, levies, alimony or child support paid to court? Brokers or immediate family act as trustee or guardian for an account at RMST? FOR INTERNAL USE ONLY 12

21 ACCOUNTS PAYABLE / RECEIVABLE Any billing addressed to RMST? Any contracts to RMST? Any payroll records to outside employees? How are bank statements verified and maintained? Does branch maintain copies of all checks paid? CORPORATE RECORDS State of Incorporation. Partnership, sole ownership or other Balance Sheets. Income Statement. Who does the accounting for the branch? FOR INTERNAL USE ONLY 13

22 EXIT MEETING Date Audit by Manager Page FOR INTERNAL USE ONLY

23 NOTES FOR INTERNAL USE ONLY