NASD

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NASD executive office on K Street in downtown Washington, D.C.

NASD, Inc. (formerly known as the National Association of Securities Dealers) is the primary Self Regulatory Organization (SRO) responsible for the regulation of persons and companies involved in the securities industry in the United States, with delegated authority from the Securities and Exchange Commission.

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 individuals representing the public, and two individuals categorized as "non-public". ^[1]

1 Functions: Regulation and licensure
2 Size
3 Criticism
4 Arbitration
5 See also
6 References
7 External links

[edit] Functions: Regulation and licensure

NASD regulates trading in equities, corporate bonds, securities futures and options, with authority over the activities of more than 5,000 brokerage firms, approximately 150,000 branch offices, and more than 650,900 registered securities representatives. All firms dealing in securities that are not regulated by another SRO, such as 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 can discipline those who fail to comply. 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.

NASD maintains an ownership position in The Nasdaq Stock Market, a public company, which in turn operates NASDAQ.

[edit] 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.

[edit] Criticism

A major criticism of the NASD is that it has pursued relatively minor abuses, while the major problems related to the NASDAQ market are largely ignored. Many believe that the NASD turned a blind eye to the abuses and rampant speculation of the late 1990's. Since that time, the majority of industry abuses have been addressed primarily by the New York State Attorney General and the SEC, calling to question the relevancy of this self regulating organization. Considering that many investors lost fortunes in the crash of the NASDAQ market following its peak in 2000, many consider the NASD having failed in its effort to protect the individual investor.

[edit] 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. As of June 2005, the pool of arbitrators consisted of 3,700 individuals classified as representing the public and 2,700 individuals considered industry panelists.

In 1987, in Shearson/American Express v. McMahon, the 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 representing the securities industry and two designated as public investor representatives. 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. ^[3]

NASD rules do not require parties to be represented by attorneys. A party may appear without an attorney, or be represented by a non-attorney in arbitration. However, representation by a non-attorney may be considered to be the unauthorized practice of law in some states. ^[4] 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, an expert in securities law at a New York law firm, 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." ^[3]