NASD’S ZARB VOWS: QUICKER AUDITING FOR SMALL BROKERS

The National Association of Securities Dealers is devising an auditing process that should be less burdensome on small brokers than the current one, chairman and chief executive Frank Zarb promised an industry trade group.

NASDR Inc., the organization’s regulatory arm, is designing a “small-firm examination module” specifically for auditing the organization’s 5,000 small business members, Mr. Zarb told 90 members of the Long Island-based Independent Broker-Dealer Association. He spoke at their second annual dinner with him.

NASD, which operates the American and Nasdaq stock exchanges, is seeking to simplify and shorten the process of examining brokerages for compliance problems.

Equal audits, unequal hardship

The audits generally come anywhere from one to three years, depending on the nature of the business, with more complicated operations being audited more frequently. Currently all NASD member firms are audited the same way, regardless of size or volume of business, and the little guys say the procedure can needlessly shut them down for days.

Mr. Zarb said the association would submit the proposal to its 33-member board soon. If passed, the proposal would go to the Securities and Exchange Commission for final approval.

He conceded that using the same examination for all firms is “mindless” after an owner of a small broker-dealership complained at the dinner that the “never-ending” auditing process severely disrupts business.

Small brokerages say that unlike wirehouses they don’t have enough people to handle the plethora of requests made during an audit. Merrill Lynch & Co. Inc., for example, has more than 300 employees in its compliance department.

Small brokers also complain that the regulatory unit spends a disproportionate amount of time auditing them — audits typically last one week but can stretch much longer — which can essentially shut down their businesses and keep reps from clients.

Instead, Mr. Zarb is pushing for a simpler examination for small firms that would reduce paperwork and shorten the time regulators spend on site.

Some 3,100 of the association’s 5,570 members have 10 employees or less. The Independent Broker-Dealers Association has loudly criticized the national group on grounds that it overregulates and underrepresents small members.

The NASD clearly has an incentive to right its strained relationship with the little guys.

Over the past year, the agency has stepped up its lobbying to expand its regulatory powers to the more than 100,000 independent investment advisers currently registered with state regulators or the SEC, a move many advisers fear.

Some of them believe the NASD cannot adequately regulate both wirehouses and independent planners, a feeling similar to the major complaint of many small broker-dealers.

“This is the most revolutionary thing the NASD has done in the 10 years I’ve been a member,” says Alan Davidson, president of the Independent Broker-Dealer Association and head of his own firm on Long Island. “It calls for a kinder, gentler approach that will free up small firms from this onerous, intimidating process.”

Thomas Pringle, who heads Mark Securities Inc. in West Hartford, Conn., a 17-rep broker-dealer, agrees. “We’re not a big wirehouse so we shouldn’t have to sit here for days going through a checklist that has nothing to do with our business.”