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Re: How The NASD Handles Inforcement
Chapman, Spira & Carson

From: Robert Spira
Date: 2/18/99
Time: 8:07:57 AM
Remote User:


Good Point. The NASD has a rule that what goes on in arbitration is sacrosanct relative to the other NASD departments such as enforcement.

Each part of the country is divided in districts by the NASD with the most powerful being the one in New York, that is called District 10. If you believe that a broker has committed an act that is criminal, going to arbitration does not necessarily do the whole job. You should report the infraction to the NASD who will investigate the matter and then refer it to the District Business Conduct Committee for action.

It is the Business Conduct Committee that sets the tone for enforcement within the district but there are variations from district to district on strict the committee will be.

When the investigation of an infraction has been completed, the person assigned to the matter, (the investigator) gives a report to the Committee. Usually NASD attorneys are present and the matter is discussed as to what should be done, or even if the infraction is serious enough to do anything at all.

If the committee determines that the infraction is serious, they hold a hearing at which time the accused gets every opportunity of defending himself. The results of the hearing are presented to the committee as a whole who votes on what the proper penalty for the infraction. Usually the most severe penalty is a lifetime bar from the industry, but even that is usually reviewable after five years.

Because of the review process, it is easy to hand down very large fines, which can't be paid by the defendant, and thus he can have his case reviewed without the fine being satisfied. In the past, no particular attempt to collect the fines was made unless the defendant attempted to get back into the industry, but more recently, NASD has determined that these fines should be collected. This has caused some confusion in that it was always understood in the past as long as the defendant didn't stir up additional trouble, the NASD would not try to collect what was owed.

If it is determined that a crime has been committed, the NASD authorities as well as the brokerage firm involved in the action are required to make a report of the matter to a government enforcement agency, the Securities and Exchange Commission, the Federal Bureau of Investigation, The United States Attorney or the Attorney General. When the case is referred in this matter, the government has a fairly easy task in prosecuting the matter because of all the investigation that has proceeded their getting it.

But even with all of this, the process isn't over year. The defendant has the right to appeal his conviction to the national District Committee who is forced then, to rehear the matter. Their judgment usually doesn't vary much from the local districts usually, but there have been matters where it has.

Even after that, the door is still not totally closed, because, for example, if it can be shown that the NASD violated the respondent's civil rights, he may get one more bite at the apple in federal court. As with justice in general, the system does not move swiftly. Brokerage firms in the past have not been quick to accuse their employees of criminal behavior for fear of civil actions. They, of course could let the offending employee go, but were obligated to mark on the employ's record why the firm had taken the action This record is call a U-5. This would follow the person from job to job within the industry.

Firms have only been getting tougher on reporting infraction more recently under pressure from the NASD and the public. Recently, the NASD has brought in a team of tough enforcement minded individuals because of the bad public relations that occurred in recent cases brought against major brokerage houses for what would amount to excessive markups and price manipulation. This case was so pervasive that the NASD was forced to do something to show that they were attempting to protect the public.

Last changed: September 26, 1999