Information about Nasd

NASD, Inc. (formerly known as the National Association of Securities Dealers) is an industry organization representing persons and companies involved in the securities industry in the United States. It is also the primary Self Regulatory Organization (SRO) responsible for the regulation of its industry, with oversight from the Securities and Exchange Commission (SEC).

History

The NASD was founded in response to the 1938 Maloney Act amendments to the Securities Exchange Act of 1934. In 1971, NASD launched a new computerized stock trading system called the National Association of Securities Dealers Automated Quotations (NASDAQ) stock market. The NASDAQ and AMEX stock exchanges merged in 1998. Two years later, the NASDAQ underwent a major recapitalization and became an independent entity from NASD. In July 2007, the SEC approved the formation of a new SRO to be a successor to NASD. The NASD and the member regulation, enforcement and arbitration functions of the New York Stock Exchange were then consolidated into the newly created Financial Industry Regulatory Authority (FINRA).See SEC Release No. 34-56145

Structure

The NASD Board of Governors consists of two staff members (the CEO and the President of one of NASD's divisions), seven individuals representing the industry, seven more individuals representing the industry, and two individuals categorized as "non-public" but also representing the industry. ^[1]

Functions: Regulation and licensure

NASD regulates trading in equities, corporate bonds, securities futures, and options, with authority over the activities of more than 5,025 brokerage firms, approximately 169,470 branch offices, and more than 658,170 registered securities representatives. All firms dealing in securities that are not regulated by another SRO, such as by the Municipal Securities Rulemaking Board ("MSRB"), are required to be member firms of the NASD.

NASD licenses individuals and admits firms to the industry, writes rules to govern their behavior, examines them for regulatory compliance, and is sanctioned by the U.S. Securities and Exchange Commission ("SEC") to discipline registered representatives and member firms that fail to comply with federal securities laws and NASD's rules and regulations. It provides education and qualification examinations to industry professionals. It also sells outsourced regulatory products and services to a number of stock markets and exchanges (e.g. American Stock Exchange ("AMEX") and the International Securities Exchange ("ISE").

NASD founded the NASDAQ ("National Association of Securities Dealers Automated Quotations") stock market in 1971. In 2006, NASD demutualized from NASDAQ by selling its ownership interest.

Size

NASD has a staff of nearly 2,000 and an annual budget of more than $500 million. ^[2] The NASD is funded primarily by assessments of member firms' registered representatives and applicants, annual fees paid by members, and by fines that it levies. The annual fee that each member pays includes a basic membership fee, an assessment based on gross income, a fee for each principal and registered representative, and charge for each branch office.

Criticism

In recent years, the securities market has become increasingly "retail"; with a majority of Americans owning stock through their employers and personal investing. Being an industry organization, the NASD has been accused of turning a blind eye to broker/dealers' biggest abuses. Some feel that while larger problems have gone unaddressed, the NASD has pursued minor rule violations. As a result of this, various groups feel that investors continue to lose money through various broker/dealer scams which should have been previously addressed.

FINRA moving away from large fines

After several years of punitive enforcement actions, FINRA has reduced the number of fines in excess of $1 million. According to a study by Deborah G. Heilizer and Brian L. Rubin, both partners in Washington with Sutherland Asbill & Brennan LLP, regulators with NASD – now FINRA – and NYSE Regulation obtained fines of over $1 million in 35 actions taken in 2005. But in 2006, that number dropped to 19. And the number of enforcement actions over $5 million also fell. In 2005, there were seven such actions as opposed to three in 2006. According to the written report, the “data suggest that securities regulators may have retrenched their efforts to regulate through the use of novel theories.”^[3]

Arbitration

The NASD operates the nation's largest arbitration forum for the resolution of disputes between customers and member firms, as well as between brokerage firm employees and their firms. Virtually all agreements between investors and their stockbrokers include mandatory arbitration agreements, whereby investors (and the brokerage firms) waive their right to trial in a court of law. The fairness of such mandatory arbitration clauses has been called into question; however, U.S. courts have consistently found them to be lawful.

As of June 2005, the pool of arbitrators consisted of 2,700 individuals classified by the NASD as industry panelists and 3,700 individuals classified as non-industry panelists.

In 1987, in Shearson/American Express v. McMahon, the United States Supreme Court ruled that account forms signed by customers requiring arbitration for disputes were enforceable contracts. Brokerage firms now require all customers to sign such documents, requiring binding arbitration.

For disputes between customers and member firms, the panel that decides the case consists of three arbitrators, one industry panelist and two non-industry panelists. For disputes between an employee and member firms, all three arbitrators are industry panelists. For a given case, the two sides are provided separate lists by NASD of local, available arbitrators, from which they chose. If one side rejects all listed arbitrators, NASD names the arbitrators who will serve; these can be rejected only for biases, misclassification, conflicts, or undisclosed material information, and biases or conflicts must be identified prior to the beginning of hearings. For an overview of the Securities Arbitration process, see Introduction to Securities Arbitration.

According to NASD, there were 6,074 cases for arbitration filed in 2005, a decrease from the peak of 8,945 cases filed in 2003. The average time to complete a case has risen from 10.5 months in 1995 to 14.3 months in 2005, a decrease from 2004 when it was 15.4 months. The percentage of cases where customers are awarded damages has fallen from slightly above 50% in the 2000-2002 period to slightly above 40% in 2005. The NASD rates any positive award to a customer as a win for the customer regardless of the magnitude of losses or legal fees.^[4]

NASD rules do not require parties to be represented by attorneys. A party may appear pro se, or be represented by a non-attorney in arbitration. However, representation by a non-attorney is not advised since this may be the unauthorized practice of law. ^[5] Brokerage firms routinely hire attorneys, so a customer who does not can be at a serious disadvantage. One organization whose members specialize in representing customers against brokerage firms in NASD and NYSE arbitration is the Public Investors Arbitration Bar Association ("PIABA").

In June 2006, Lewis D. Lowenfels, one of two partners at the New York law firm of Tolins & Lowenfels, and co-author of the looseleaf treatise Bromberg and Lowenfels on Securities Fraud and Commodities Fraud, 2d said of the NASD arbitration process: "What started out as a relatively swift and economical process for a public customer claimant to seek justice has evolved into a costly extended adversarial proceeding dominated by trial lawyers and the usual litigation tactics." ^[4]

See also

• FINRA
• NASDAQ
• List of finance topics
• American Academy of Financial Management
• Alternative display facility
• ACT (Nasdaq)
• Securities regulation in the United States

References

External links

• NASD home page
• Securities and Exchange home page
• NASD Regulations