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From time to time I believe it important to discuss controversial industry issues that are the subject of heated debate.  In publishing such editorial pieces I use a special edition of the Securities Industry Commentator™ entitled Dispatches from the Frontline™.  The following article addresses a disturbing occurrence during the ongoing contested NASD Board of Governors election.
Bill Singer

NASD ELECTION UPROAR:
EVANESCENT E-MAIL LIST


NASD May 11th PRESS RELEASE

On Thursday, May 11, 2000, the National Association of Securities Dealers, Inc. (NASD) announced that it had extended the period for NASD members to vote on seven new board member vacancies by 15 days to May 30.According to the NASD’s press release, NASD Chief Legal Officer Edward S. Knight, confirmed that on Wednesday May 10th the organization “learned that some candidates had obtained an e-mail list of NASD members that was not accessible to other candidates. As a result, the SRO adjourned the originally scheduled meeting to allow those candidates deprived of access to the e-mail list 15 days (a period of time that purportedly “corresponds to the amount of time that e-mail addresses had been used by some of the candidates.”) Knight explained the NASD’s “role in the election process is to administer it fairly. When we learned that some candidates had obtained the email list, we moved quickly to inform all of the candidates and level the level the playing field for all. We believe that this accommodation makes sense and ensure a fair election process.” http://www.nasdaqnews.com/news/pr2000/ne_section00_115.html


Small Firm Committee for Responsible Governance

Sounds simple and straightforward, but in reality the NASD press release is troubling and ominous.As best we can determine, a group of four NASD Governors formed something called the Small Firm Committee for Responsible Governance (SFCommittee). Based upon press reports, the SFCommittee fielded a slate to specifically oppose nominees backed by NASD Governor Alan Davidson, who is also President of the Independent Broker-Dealer Association, Inc. (IBDA). In attempting to get their candidates elected, the SFCommittee apparently sent to the designated executive representative eligible to vote on behalf of the member firms e-mails and a ballot requesting support for their candidates.

The Problem:  Seems that someone forgot to advise the Davidson slate of the existence and availability of the NASD's members' e-mail. Surprisingly (or not), the Davidson slate apparently was denied access to the same list.

Responsible Governance Indeed!

The ability to communicate by e-mail during a contested election, when your opposition cannot, is a very clear advantage.The question that must be asked is if the e-mail list is the property of the NASD, how and why did only the SFCommittee get it? The next question: why didn't the Davidson slate get the list? And the most troubling question: did any NASD staff member provide the e-mail list to the SFCommittee with the intent of depriving the other candidates of similar access?


A Source of Friction

Governor Davidson had initially supported the NASD’s recently proposed demutualization and signed a joint communiqué to that effect with NASD Chairman Frank Zarb. Shortly thereafter, Governor Davidson apparently had misgivings about the proposal, abruptly renounced his earlier support, and spearheaded an effort to oppose the plan. However, nearly 80% of those NASD members voting on the measure supported the NASD's proposal. Governor Davidson then attempted to restrain the undertaking through unsuccessful court action. Press reports indicate that Governor Davidson’s relationship with NASD and with some Board members is stormy, at best, and often strained.

The NASD's Inappropriate Press Release

In announcing its demutualization victory, NASD placed a press release on its website detailing the winning vote and its significance. In a second press release describing Governor Davidson’s failed court action to restrain the process, Chief Legal Officer Knight initially commented on the legal issues and the court’s favorable ruling. Overall his comments were measured and proper. However, the balance of that press release consisted of comments by several NASD members personally critical of Governor Davidson and questioning his bona fides. This writer found the inclusion of such material on an official NASD website to be inappropriate, bordering on a mean spirited attempt to literally rub salt in a wound.

Is this the professional and mature manner with which the NASD deals with its most prominent dissident . . . the Governor who pulled off a dramatic upset election? Is this an example of NASD’s efforts to build bridges and mend old wounds? Should a membership organization be using its online resources to publish negative testimonials against a Governor who garnered more than 1,500 votes in an open election? Yes, criticize his positions; question the logic of his proposals; and hold him accountable for his demeanor. But don’t throw courtesy and class out the window. It’s never effective to criticize an individual’s behavior by using the same tactics you deem reprehensible, and it sure as hell doesn’t belong on a website funded by the members.

Personal Disclaimer

For two years I served as General Counsel to IBDA and worked closely with Governor Davidson. I presently serve as an appointee to the NASD Chairman’s Advisory Group and enjoy the closest professional relationship I have had with senior NASD management in nearly a decade of outspoken criticism. During the fourth quarter of 1998, I helped manage the dissident campaigns of four contested candidates: Alan Davidson, LaRae Bakerink, Dan Jamieson, and me (the Dissidents). I resigned from IBDA concurrently with Governor Davidson’s decision to reconsider his previously announced joint communiqué with Chairman Zarb. At present, my relationship with Governor Davidson is cool, almost to the point of frigid, and I have permanently severed any relationship with IBDA. Nonetheless, I have the ability to separate the messenger from the message, and for purposes of this article I believe that Governor Davidson deserves nearly all the credit for waging the first successful contested election in NASD history, for galvanizing the independent/regional broker-dealer community against heavy-handed regulation, and for forcefully advocating the positions of his constituents. What he may lack in style points he makes up in dedication and conviction.

So, that’s the canvass upon which the apparently innocuous May 11th NASD press release is painted on. Now let’s examine the deeper and more disturbing issues.

October 5th Letter to NASD

In my role as legal counsel to the Dissidents I sent a letter to the NASD dated October 5, 1998, wherein I advised the organization of the intentions of the Dissidents to run in a contested election. In that letter I reminded the NASD of two critical reports as follows:

The Report of the NASD Select Committee on Structure and Governance (“Rudman Report”) stated on September 15, 1995, that

The NASD has had only one contested election in recent years. In 1993, a member of the District 10 Committee (New York) challenged the District Nominating Committee’s candidate for the Board. The record of this investigation reveals the NASD was ill-prepared for the contest. It addressed issues that arose on an ad hoc basis, and generally handled the election contest inappropriately – particularly insofar as the NASD staff appeared to take sides in the matter. NASD officials have acknowledged that the election was mishandled.

In the Appendix to the Report Pursuant to Section 21(a) of the Securities and Exchange Act of 1934 Regarding the NASD and NASDAQ Market (“SEC Report”), the Securities and Exchange Commission (“SEC”) stated on August 8, 1996 under Section II(c)(3) entitled “The Contested Election Process” that

The gist of the Rudman Committee’s concerns arose out of two letters sent by the District 10 Nominating Committee, the first of which was on NASD letterhead, endorsing the candidacy of one person over the challenger. In addition, volunteers recruited by the NASD’s District Nominating Committee actively campaigned in support of the successful candidate.

The NASD’s By-Laws only specifically authorize the Nominating Committee to select the regular candidate. The NASD, its committees and its staff should not in any way exhibit favoritism or partiality in such elections.

I subsequently, noted in the October 5th letter that there was a “justified sense of distrust for your organization’s election process and its impartiality. Notwithstanding that new election procedures have been codified since the SEC’s reprimand in 1996 . . .Consequently, NASD is asked to candidly address the following concerns:. . .

5. Will NASD provide such a list inclusive of name, mailing address, telephone number, facsimile number, and e-mail, so that IBDA’s candidates can undertake a meaningful attempt to contact the Executive Representatives.

6 Will NASD certify that any deficiencies of the requested information in intem #5 are not the result of any redaction but constitute the exact same information available to the NASD.

NASD'S October 6th Letter

By letter dated October 6, 1998, NASD responded to my October 5th letter by indicating it was “in the process of preparing formal written responses to each one of the [9] questions asked, as requested in your letter.” In pertinent part, I was advised that the “NASD does not currently maintain the fax numbers and e-mail addresses of member firms.” The NASD does not currently maintain e-mail addresses of member firms! So, either in the ensuing 18 months NASD developed and maintained such an e-mail list, in which case one must wonder why the organization didn't disclose that to all the Board candidates --- or --- such a list is still not maintained (which raises the even more interesting question of how was such information compiled and how did it wind up in the hands of the SFCommittee?)

NASD'S October 16th Letter

By follow-up letter dated October 16, 1998, the NASD amplified its October 6th responses in pertinent part:

5.Q Will NASD provide such a list inclusive of name, mailing address, telephone number, facsimile number, and e-mail, so that IBDA’s candidates can undertake a meaningful attempt to contact the Executive Representatives.

The list referenced in the answer to Question No. 4 contains all of the current information maintained by the NASD on its membership roster. The NASD does not currently maintain a listing of fax numbers or e-mail addresses of member firms or Executive Representatives.

December 4th and 10th Letters to SEC

By Letter dated December 4, 1998, I advised the Securities and Exchange Commission (SEC) of serious concerns by the Dissidents concerning the manner in which the 1998 Board elections were conducted. I reiterated the findings of the Rudman Committee’s Report and the SEC’s 21(a) Report and called for the SEC’s “intervention in this election and urge you to ensure that the balloting is conducted in a fair and impartial manner.” By follow-up letter dated December 10, 1998, the Dissidents formally requested that the SEC “maintain a file pertaining to the ongoing NASD Board of Governors election.”

The SEC’s December 23rd Facsimile Letter

By facsimile letter dated December 23, 1998 but inexplicably not faxed until December 28, 1998, the SEC belatedly addressed my correspondence dated December 4 and 10, 1998. Notably the SEC delayed responding until after the December 21, 1998 balloting. The SEC conceded that its "Division of Market Regulation is responsible for oversight of the operation of the securities markets, including their election procedures,” but, nonetheless, concluded that the NASD's Office of Internal Review "is best able to address your concerns fairly and expeditiously."

Amazingly, it took the SEC nearly three weeks to respond to complaints by candidates in the first contested Board of Governors’ election in NASD history – waiting until the election was conveniently over – and then the substance of the response was to let the accused deal with it. Sort of like the SEC suggesting that a complaining customer address his or her concerns to the penny-stock broker-dealer defrauding the investor, rather than to the SEC.

December 30th Letter to SEC

By letter dated December 30, 1998, I responded to the SEC’s December 28th facsimile letter. In my response to SEC Associate Director Belinda Blaine, I reiterated my disagreement with the SEC’s “lackadaisical response to the serious concerns raised” and noted that there was no request to overturn the election results, having successfully elected two of the Dissidents. Nonetheless, I urged “the Commission to conduct a meaningful investigation and to require enhanced safeguards for upcoming elections.“

Conclusion

So, here we are, some 17 months after the last contested election and the same shenanigans seem afoot. The NASD still demonstrates its inability to deal with critics. The NASD still seems to be mishandling its elections and addressing election problems on an ad hoc basis. And the SEC still seems content to watch the follies without meaningful, timely intervention.

The lessons? First, don’t taunt your enemies as if you were at recess in a school playground. Second, appoint an independent overseer for any contested elections. Third, appoint an independent investigator to determine what happened with the e-mail list. Fourth, take prompt disciplinary action if evidence shows that there was Staff or Governor misconduct involved. Finally, send out a candid press release to all members detailing the investigation and its findings.

The frustration? When I spoke with NASD management concerning my support for the proposed demutualization initiative, I suggested three reforms. First, I called for a hot-button link between members and their SRO in the form of a hyperlink on the NASDR’s website. I asked that the link provide for confidential communication. What I got was a non-confidential “Members Comment” button on the NASD website. Not what I proposed. Not where I proposed. Nothing more than a meaningless, cosmetic remedy.

Second, I called for the creation of an Office of the Members’ Advocate to zealously advocate on behalf of members and their issues. I also envisioned such a department providing a conduit between disgruntled members and their regulator. Nothing happened.

Finally, I called for the implementation of a Bill of Rights, which would clarify and codify the rights of members and associated persons during NASD examinations, investigations, and proceedings. In specific, I had hoped to develop mutually acceptable timeframes for document production and testimony, guidelines concerning acceptable and unacceptable practices and conduct, and clear-cut resolution of a number of historically divisive issues. This was not an effort to restrain enforcement activity but merely to clarify and codify practices that continue to vary within the NASD from district to district, from examiner to examiner, and from case to case. Nothing happened.

Now the NASD once again reaps the whirlwind. Instead of finally reaching accommodation with its critics it persists in stoking the fires . . . only to burn itself in the offing. Emboldened by its recent successes, forgetful of its recent dealings with the SEC and the Department of Justice, and seemingly assured of the SEC’s disinterest, the regulator ambles down an inevitable path of folly and likely doom. A study in contrast between high-minded aspirations and mean-spirited motives.





RRBDLAW.COM AND SECURITIES INDUSTRY COMMENTATOR™ © 2004 BILL SINGER

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