NASD: SRO Enforcement and
Corporate Governance
Latin American Corporate Governance Roundtable
Steven Polansky
Presentation Outline
 NASD overview
 Enforcement objectives
 Organization
 Source of cases
 Investigative process
 Hearing process
 Priorities
Who We Are
For more than 60 years, NASD has helped bring integrity to the US
markets and confidence to investors
 World’s leading private-sector provider of financial regulatory services
 Self-regulatory organization for US securities industry
 Membership encompasses virtually entire industry
 Annual budget of $400 million
 Operationally separate from NASDAQ
Regulatory Structure in the U.S.
Federal
State
Self-Regulatory Organizations
Member Firms
NASD in the US Regulatory Structure
NASD is a frontline self-regulatory organization (SRO) in the US securities
market
 Overseen by the Securities and Exchange Commission
 Membership includes virtually all securities firms in the United States
 Authority to collect fines, order restitution to investors, expel firms and bar
individuals from the securities business
What We Do
We uphold high standards for ethics and business practices
 Register member firms and their representatives
 Write rules to govern their behavior
 Examine brokerage operations for compliance
 Discipline individuals and firms
 Provide education to industry professionals and investors
 Provide services to members to support their compliance efforts
 Operate the largest securities dispute resolution forum in the world
Membership
By law, virtually all US securities firms that transact business with the public must
be a member of NASD
 Members
-5,500 member firms
-91,000 branch offices of member firms
-678,000 registered representatives (stockbrokers)
 Types of members
- clearing firms
- variable contract dealers
- self clearing firms
- government security dealers
- introducing firms
- merger & acquisition firms
- market makers
- direct participation program firms
- mutual fund dealers
Enforcement Objectives
 Fair and efficient
 Maintain meaningful presence in all important program areas
 Effective use of limited resources
 Support NASD regulatory programs – such as the arbitration program
 Support other regulators
Enforcement actors
• Market Regulation
– Surveils NASDAQ and OTCBB
– Investigates and prosecutes cases arising from this surveillance
• Enforcement Department
– The Enforcement Department is primarily devoted to the identification, investigation,
and prosecution of high-profile, complex fraudulent activity
– Enforcement also oversees the Regional Attorney Program
Department of Enforcement
 Staff of approximately 150
– Attorneys
– Managers
– Professional investigators
– Administrative staff
 Headquartered in Washington DC
– Lawyers located in 14 regional offices throughout the U.S.
Source of Cases
 Internal
– Periodic examination of member firms
– Terminations for cause
– Customer complaints
– NASDAQ and OTCBB surveillance
– Corporate financing department
– Arbitration referrals
– Advertising violations
Source of Cases
 External
– Referrals from states, federal agencies, and criminal prosecutors
– Customer complaints
– News media
– Anonymous tips
Investigative Process
 Analyze documents gathered during on-site inspection
 Take on-the-record sworn testimony
 Interview customers
 Notify potential respondents of apparent rule violations
 Settle case or initiate hearing process
Investigative Process
 Results of investigations
– Informal action
– Formal action
 Settlements (AWCs)
- Sanction guidelines
 Complaints
- Wells process
 ODA must authorize complaints or settlements
Hearing Process
 Chief hearing officer assigns a hearing officer to each case
 Hearing officer duties include:
– Holding pre-hearing conferences
– Resolving procedural and evidentiary matters, discovery requests and non-dispositive motions
– Create and maintain the official record of the proceeding
– Draft a decision that represents views of the hearing panel majority
 Result: peer review augmented by participation of NASD staff
Appeals Process
 Hearing panel’s decision may be appealed to National Adjudicatory Council
(NAC) directly by either NASD staff or the respondent(s)
 NAC will be able to call any decision for review
Formal Complaints and AWCs Issued
1500
1400
1300
1200
1100
1000
900
800
700
600
500
400
300
200
100
0
1175
975
1995
1012
1996
1032
1997
1196
1257
1051
1998
1999
2000
2001
Disciplinary Fines Collected
Dollars in Millions
30
27.1*
25
20
13.2
15
11.5
11.1
10
7.7
10
5.3
5
0
1995
1996
1997
1998
*Includes single $20 Million Fine
1999
2000
2001
Enforcement Priorities
 IPO underwriting and allocation issues
– CSFB
 Analyst research reports
– Salomon Smith Barney, Jack Grubman and Christine Gochuico
– U.S. Bancorp Piper Jaffray
– Hornblower & Weeks
 Variable annuity sales practice and supervision
Contact Information
 For additional information, please contact:
Steven Polansky
NASD
1735 K Street, N.W.
Washington, DC 20006-1516
Tel.: 202 728 8331
Fax: 202 728 8089
E-mail: Steven.Polansky@nasd.com