internal chapter audit 16 9 - r.m. stark · the himalaya’s in the background. r m . s t a r k...

Chapter

169

INTERNALAUDIT

KATHMANDU, NEPAL, THE HIMALAYA’S IN THE

BACKGROUND

R M . S T A R K & C O . , I N C

BRANCH MANAGER MANUALINTERNAL AUDITS

16.1

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.

Branch 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).

Chapter

16

A

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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.

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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:

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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 (www.rmstark.com).

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

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16.5

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 non-solicitation.

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.

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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.

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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.

R. M. Stark & Co., Inc.Internal Compliance Audit

FOR INTERNAL USE ONLY 1

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, e-mails). ___Outgoing Correspondence File (mail, fax, e-mails). ___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. ___



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:



TRADING

Persons approved to enter orders. _________________________

Are order tickets used? _________________________

Orders approved by. _________________________

Transaction summary for the dayapproved 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?



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: ________________



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? ______



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? ______

_______________________________________________________



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? ______________________________________________________________________



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?_______________________________________________________

_______________________________________________________



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? ________________



INSURANCEVARIABLE / FIXED

Do any brokers have insurance licenses? ______If yes, who? Type of license, which states and which insurancecompanies?______________________________________________________

_______________________________________________________

_______________________________________________________

_______________________________________________________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____________________________________________________________________________________________________________



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 e-mails? _________Does the manager check computer files? _________

MANAGER LOGS AND BROKER’S RECORDS

Is a manager log maintained? _________Do brokers maintain a log? _________



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 accountsat other broker dealers? ______

Brokers with court orders, garnishment, levies, alimonyor child support paid to court? ______

Brokers or immediate family act as trustee or guardianfor an account at RMST? ______



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

EXIT MEETING

______ ______________ _______________ ______Date Audit by Manager Page


FOR INTERNAL USE ONLY

NOTES_______________________________________________________

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internal chapter audit 16 9 - r.m. stark · the himalaya’s in the background. r m . s t a r k...

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