NASD: SRO Enforcement and Corporate GovernanceLatin 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

975 1012 10321051

1175 11961257

0100200300400500600700800900

100011001200130014001500

1995 1996 1997 1998 1999 2000 2001

Disciplinary Fines Collected

5.37.7

1011.1

27.1*

11.5

13.2

0

5

10

15

20

25

30

Do

llar

s in

Mil

lio

ns

1995 1996 1997 1998 1999 2000 2001

*Includes single $20 Million Fine

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