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NASD: SRO Enforcement and Corporate Governance

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.

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NASD: SRO Enforcement and Corporate Governance

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  1. NASD: SRO Enforcement and Corporate Governance Latin American Corporate Governance Roundtable Steven Polansky

  2. Presentation Outline • NASD overview • Enforcement objectives • Organization • Source of cases • Investigative process • Hearing process • Priorities

  3. 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

  4. Regulatory Structure in the U.S. Federal State Self-Regulatory Organizations Member Firms

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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.

  11. 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

  12. Source of Cases • External • Referrals from states, federal agencies, and criminal prosecutors • Customer complaints • News media • Anonymous tips

  13. 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

  14. Investigative Process • Results of investigations • Informal action • Formal action • Settlements (AWCs) • Sanction guidelines • Complaints • Wells process • ODA must authorize complaints or settlements

  15. 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

  16. 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

  17. Formal Complaints and AWCs Issued

  18. Disciplinary Fines Collected *Includes single $20 Million Fine

  19. 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

  20. 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

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