AN OPEN LETTER TO THE NASD

Specific measures the SRO can undertake to help member firms and their associated person recover from the economic and psychological devastation of the WTC tragedy.

To Whom It May Concern:

Just a few scant days ago on September 11, 2001, life as we knew it came to an end.  In addition to the human toll of more than 6,000 innocent victims, Wall Street, which had already been reeling from a weak economy, is staggering from this crisis. We arrive at this frightening moment in time as a result of many causes.  Market-makers found their profits evaporating with the advent of "pennies."  Investment Bankers could not generate any interest in their deals.  Retail BDs were experiencing a drought in trading volume.  And the liquidity that day-trading brought to the marketplace was dramatically reduced with the recent implementation of a $25,000 day-trading account minimum.  And then the hijacked planes hit.

What is desperately needed now is leadership and cooperation.  The NASD must not fail on either account.  First, senior management must develop creative, constructive policies --- even if only ad hoc, and even if only for the duration of this emergency --- to stabilize the financial impact on the NASD's membership.  Second, the SRO must work with its members and undertake substantive measures to deal with this crisis.  NASD Chairman/CEO Robert Glauber began his administration with promising commitments to a more equitable relationship between the members and the SRO.  His challenge is now to put those promises into practice.  I would like to further this process with some suggestions.

Allow the Payment of Referral Fees to Non-Members

Among the most troubling NASD prohibitions is that which prevents member firms from paying referral fees or so-called transaction-related compensation to any non-member.  I have never understood the reason for this restriction and remain convinced it is nothing more than an effort to restrain trade and inhibit competition (although legally permissive given the NASD's antitrust exemption). Nonetheless, I find this provision pernicious in today's environment and best suited for the scrap heap.

BDs are frequently contacted by individuals and entities seeking to introduce a wide array of opportunities.  Some of the introductions fall within the ambit of "deals," i.e., companies seeking to raise money through private placements or public offerings. Other situations involve the sale of customer accounts or leads concerning the availability of lucrative branch offices or BDs.  As such, members are routinely contacted by non-members seeking to offer corporate finance deals, production, or customer accounts --- but usually these inquiries come with a price: the caller wants a referral fee or a percentage of the benefit bestowed.

For some reason you can pay referral or transaction-related fees to foreign entities but not to those in the U.S.  Further, given today's economy and markets, many BDs would be more than willing to pay a referrer a percentage of whatever business is referred, be that a corporate finance fee or a portion of public customers' commissions. This is capitalization distilled to its essence --- the profit incentive.  

It is not my intent to turn this letter into a treatise, so I will not reference legal citations to statutes, rules and cases.  Quite frankly, that's not what this communication is about --- it's about helping the membership in plain English, in a quick and effective manner.  So, to whomever at the NASD is listening, let's take a hard look at overhauling the entire system of referrals.  The members need customers and deals --- and salespersons to handle both.  Provided any payments are fully disclosed, I do not see what harm occurs.  To the contrary, the profit incentive will likely spur outside consultants and professionals to leverage whatever opportunities they can.  

Expedite BD Mergers and Start-ups

Next, it is likely to become a more recurrent theme that weaker firms will attempt to merge in order to obtain  economies of scale.  The NASD's membership process has never been particularly expeditious in the handling of such applications.  I would urge the SRO to give priority to the requests by its members for expansion of their market-making capacity, number of branches, and number of associated persons.  I see no reason why such requests --- particularly given the pressing nature of such developments in these recent days --- should require more than 2 to 4 weeks of staff review,  assuming the member firms timely cooperate and provide the necessary documentation for their proposed venture. 

Quite frankly I'm tired of hearing that NASD Staff designated to handle so-called membership matters have too large a docket or must engage in a time-consuming "exhaustive" review.  Millions of dollars in member fees and charges are collected by the NASD each year.  That money must be better utilized in light of our ecomoic crisis.  If more Staff is needed to get membership-related applications processed within more aggressive timeframes, then hire the additional bodies or reassign employees from other areas.  Additionally, with so many BDs failing or on the verge, the few that are looking to make more markets (and thus increase the fragile liquidity) or actively seeking to hire the growing number of unemployed associated persons must be given priority treatment.  Bureaucracies always make excuses as to why things can't get done quickly --- Wall Street simply cannot afford unnecessary administrative delays.

As such, I urge the NASD to carefully monitor the handling of the membership docket and to actively implement time-saving measures.  Yes, when we return to normal you can take your three months --- of course, I'll still scream like a banshee --- but now, today, we must move quicker and together.  No one is suggesting that you should open the floodgates for fraud. I'm confident that the NASD will find a way to balance antifraud concerns with the legitimate business needs of its membership.  But you need to develop the regulatory equivalent of a rapid deployment force to respond to any faint embers of membership growth and expansion.  I'm asking nothing more --- or less --- than what you do when you draw up a "hit list" of firms and individuals to target for antifraud purposes.  Within the ambit of self-regulation it is just as valid to support the membership's legitimate business needs as it is to protect the public from industry fraud. 

More Appropriate Regulation

On any given day, during good times and bad, the NASD has an important regulatory role to police the industry.  At its most basic level, this function requires the SRO to ensure that the public is not defrauded by criminal elements on Wall Street.  On another level, the SRO has a mandate to ensure that member firms and their associated persons observe a host of record-keeping rules and regulations involving a spectrum of matters encompassing Net Capital, Books and Records, timely order entry, account-opening procedures, and supervision.  

In recent years we have fallen into a somewhat delusional comfort that effective regulation is discharged by monetarily fining members and their employees. Dispensation for one's securities industry violations is purchased for $5,000 here or $20,000 there.  For the larger firms such sanctions are frequently a pittance, hardly worth the effort to write the check.  However, for smaller firms and individuals, these penalties may result in the cessation of business.  

This morning I received a dunning notice apparently intended for a former client (mistakenly sent by Dun & Bradstreet to my law offices).  The communication seeks collection of a six-figure NASDR fine imposed on a defunct member firm.  In years past when a member firm closed its doors the SRO did not undertake punitive collection efforts.  I would hope that there will be a prompt return to the prior practice.  

We are in a devastated industry, awash with falling revenues, evaporating profits and massive layoffs.  It would be a shame if any member was forced to close its doors in order to pay fines for violations of books and records, order entry, or similar non-fraud lapses.  Worse, this is not the time for the NASD to finance its operations off the carcasses of failed BDs.  If the member wants to reopen, fine, make the entry price the payment of the fine --- but let's not add insult to injury.  

I would urge that the sanction guidelines referenced for the overwhelming majority of technical, non-fraudulent violations be re-examined in light of the current political and economic crises.  I remain mindful of recent improvements in the handling of so-called minor rule violations and the attendant sanctions, but we need even more relief.  This is a time to emphasize corrective action and education, rather than punitive measures meted out in so many dollars and cents.

Sincerely,

Bill Singer

212-809-8550 ext. 223
bsinger@singerfru.com