RRBDLAW.COM

INDEX PAGE ONLINE BIOGRAPHY EMAIL RRBDLAW.COM



NASD Press Releases:
The Bigger They Are The Softer They Fall
  --- or --- 
Are There No Human Beings Running National Broker-Dealers?

by Bill Singer, 
bsinger@rrbdlaw.com

Sometimes an article writes itself.  Sometimes you can't exactly put your finger on a problem --- or if you can, you're not totally sure as to why something just doesn't seem right.  Is what's bothering you by design or just coincidence?  This column will present one such conundrum.  

THE 3 PERCENT SOLUTION?

FACT:
 
NASD consists of some 5,500 member firms, which employ some 650,000 plus registered persons.

 

HOWEVER:
 
Only about 154 (less than 3% of the membership) of NASD member firms hold elected seats on the various District Committees and District Nominating Committees.  There are only 9 member firms represented on the Board of Governors.  Of those 154 firms, 17 have multiple representations.  Registered persons have no vote for such candidates; ballots are solely offered to member firms.

for supporting data please use this link

NASD has 5,500 member firms, each of which has many talented individuals capable of bringing their experience on Wall Street to bear.  I fervently believe that the more  individuals who participate in the process, the greater likelihood of infusing the SRO with new ideas and preventing ineffective policies from becoming too deeply rooted.  Of course, that's the basic principle behind democracy, but that it would always work.  Nonetheless, if NASD is a "membership" organization, it must encourage full participation by its members.  Imagine if the Senate only consisted of representatives from 3% of the States --- one and one-half Senators?  Similarly, it appears that some individuals repeatedly serve in District or Board positions.  Accordingly,  certain member firms repeatedly have more than one representative at such levels.   

Can NASD operate effectively if it has 5,500 Board and District seats for its members?  Of course not.  But it can take steps to ensure easier access for greater participation.  Here are a few simple starters:

  • restrict any one individual from succeeding himself or herself for consecutive terms.  
  • restrict any one member firm from having a representative sit for consecutive terms.  
  • restrict the number of multiple seats any given member firm may occupy at both District and national (including Board) levels of NASD.  

But a foolish consistency is the hobgoblin of small minds, so,  let me clearly applaud those industry individuals who actively volunteer their time to participate in NASD.    Those men and women who selflessly give of their time are not the issue.  What bothers me about the raw data is that I tend to see many of the same member firms and the same individuals rotated through the system, year after year.  It has its benefits, but there needs to be a heightened sensitivity when less than 3% of an organization's membership serve in elected capacities.  Clearly, and unabashedly, I am a big believer in term limits.  

Some 700,000 registered persons populate the NASD's member firms, but can't vote on any proposal nor cast a ballot for individuals who serve on the Board and District committees, from which the pool of hearing panelists (and National Adjudicatory Council) are selected.  In the United States we were brought up on the theory of "taxation without representation is tyranny."  Last I looked, NASD registered persons were paying registration fees. 

SRO personnel have an unfortunate tendency to see themselves as separate and distinct from the industry they regulate --- as higher-minded, more ethical . . . better.  I DON'T BUY IT!  We on Wall Street are all in this together; inextricably tied.   And when an NASD Regulation spokesperson says that giving the vote to registered persons on regulatory matters would "certainly block or delay any effort to enact meaningful reforms" and would "water down industry oversight," I don't find that comment simply shocking; I find it disheartening. (Read about this comment at this link)

Why such concern about the elected representatives at the NASD's District and national levels?  Because as a former NASD Regional Attorney I fully understand the power that such individuals and their firms yield.  Clearly, such service is not without its benefits.  You get to develop closer relationships with Staff.  You are often privy to new developments or investigations before outsiders.  You have insight into some of the conduct of your competitors --- be it regulatory problems or proposed business expansion.  And god forbid you or your firm ever gets in trouble --- hey, you know me, I'm a good guy, this was just a mistake, can't we just make it go away?  

Rhyme or Reason in NASD Press Releases?

FACT:   
During 2001 and 2002 (through 8/16/2002) NASD published 34 dedicated press releases specifically disclosing the filing of charges, settlements, decisions, and the dismissal of charges. 

HOWEVER:  
It seems that smaller firms and their associated persons are more apt to be the subject of a dedicated press release and apparently subjected to harsher sanctions.

for supporting data please use this link

An NASD press release is a potent device.  If it discusses a filed case, it may prejudice the public against the member firm or individual.  If it discusses a resolved matter, the NASD gets to put its self-serving spin on the issue.  Depending on how the wind of public opinion is blowing, these NASD missives give the regulator a chance to look tough and present the appearance that it is cracking down on misconduct.  Which if it's true is fine.  However, if there's some politics behind what and who get published in a press release (and what and who doesn't), then there's both a danger and unfairness.  

One thing to keep in mind: although prosecutors may issue press releases, courts do not.  Judges do not routinely send out press releases about cases before them or heralding their rulings.  Consequently, when an organization acts as judge, jury, and prosecutor --- which NASD does --- it should be careful about issuing press releases concerning disciplinary matters.  Press releases about the mere act of issuing charges would seem unfair (assuming that the SRO still accepts the presumption of innocence).  Ultimately, the actual Hearing Panel decision serves as the best indication of what was alleged, what was defended, and what was ruled.  

Keep in mind that the focus of this article are those releases that are trumpeted on NASD's website --- not the more mundane monthly regulatory disclosure of enforcement actions.  And that's the point.  There's apparently something so special about the topics of each of these 34 releases that NASD sought fit to individually disclose them and post them on the SRO's website.  And let me underscore that point.  The NASD issues a routine monthly press release about charges, settlements, and contested hearing decisions.  However, everyone gets mentioned equally in that jumble, and, quite frankly, few but the most inveterate souls will plow through the data.  I'm examining what I call "dedicated" press releases, i.e., those that highlight a specific enforcement action.

I've set out for your consideration all 34 of the last two year's regulatory press releases.    Please keep in mind that there were many more charges filed;  that there were many more matters settled; that there were many more matters contested before a Hearing Panel.  The question is what made these dedicated press release so compelling?  Why were these matters highlighted and not others?  Further, it's interesting to wonder how much influence flows from having one of those 154 precious elected industry seats.  I urge you to read the data and draw your own conclusions.  

Finally, these 34 releases highlight some historic concerns I've had about how entities (member firms) are treated versus individuals (registered persons).  They also underscore some suspicions that national firms seem afforded different (I think better) considerations than smaller firms.  Again, I urge you to remember that we are not simply dealing with the first-hand account of the Hearing Panel's Decisions; we are examining press releases that NASD felt compelled to issue.  Let me note some comments on the releases as follows:

1.  Why did it take NASD eight months to separately name two CSFB supervisors?  Given the NASD's own explanation of the severity of the misconduct at issue (See #12 and #13), do these sanctions seem comparable to those imposed upon similarly situated supervisors at smaller firms or in lesser cases?  

2.    Why did NASD issue a dedicated press release about the dismissal of a case against Morgan Stanley Dean Witter?  In the last two years I find no other dedicated press release about any other dismissals.  Shouldn't dismissals be routinely noted in a dedicated press release in order to undo any reputational harm done to a member firm or individual by way of the filing of charges?  Having had its day in court  --- it's own court at that --- why should NASD continue to breathe life into a lost cause?  Is this a case of having to get the last word?  Would a smaller member firm receive the same consideration?  

3., 5., 22., 23.    Why did NASD issue a dedicated press release about a mere filing of charges?  Certainly, the SRO files many charges during the year.  Why was it so critical to name these firms?  Should the NASD be weighting the scales in favor of its own prosecutorial staff?  Does the NASD consistently issue dedicated press releases about the mere filing of charges against larger member firms?

10.  Why weren't any individuals named in this matter with a $250,000 fine?  Doesn't it seem odd that a firm could engage in a quarter of a million dollars in misconduct but no human being was responsible?

12. and 13.  Why did the NASD announce a "record" $100 Million in fines against CSFB but no individuals were named at this time? In fact, NASD issued two separate releases on this case!  Note CSFB enjoys multiple seats.  Also, see #1 above, which was issued 8 months later.

16.  Why did NASD issue a release about $1.5 million in fines against Knight Securities but no individuals were named?  Note that Knight had a Board member during 2001.  Given that the press release was dated January 8, 2002, it would seem that the investigation likely started in 2001, if not earlier.  Why does this case and that of CSFB (#12 and #13) seem to have been handled similarly in terms of press release characterizations?

20.  Why did NASD issue a dedicated press release naming 7 member firms with $120,000 in fines but no individuals named?  Note the seats held by some of the firms named.  If the cases weren't brought under one caption (joined), why weren't 7 separate releases issued?  Is this a serious industry-wide problem?  If these were member firms involved in penny-stock violations or day-trading, would the releases have treated the respondents the same?

24.  Why did NASD issue a dedicated press release naming 10 member firms with $473,000 in fines but no individuals named?  Note the elected seats held by some of the firms named.  If the cases weren't brought under one caption (joined), why weren't 10 separate releases issued? Is this a serious industry-wide problem?   If these were member firms involved in penny-stock violations or day-trading, would the releases have treated the respondents the same?

26.  Why did NASD issue a dedicated press release naming 11 member firms with $355,000 in fines but no individuals named?  Note the seats held by some of the firms named.  If the cases weren't brought under one caption (joined), why weren't 11 separate releases issued? Is this a serious industry-wide problem?   If these were member firms involved in penny-stock violations or day-trading, would the releases have treated the respondents the same?

27.  Assuming  NASD named the member firm and six individuals in this dedicated press release when the fine was only a  total of $380,000, how does one explain  item #16 for Knight, a $1.5 million fine with no individuals named?  Also examine item #31 for Banc One Capital Markets, $1.8 million. 

     Given that Harvey Houtkin (the member firm's CEO and Chairman) was an outspoken critic of NASD and a cooperator with the Dept of Justice's Antitrust case against NASDAQ, was it really appropriate for NASD to reference him in its main headline as "Houtkin"?  I find no other reference by the last name only to any individual during the two years under scrutiny.  It is virtually unheard of to name any individual in an NASD release's headline.  I find only one other instance, that of an individual expelled and a firm barred in item #34.  Further, courtesy would seem to compel that the senior executive of a member firm be addressed with some propriety, such as CEO Doe or President Smith.  Would NASD issue a press release referencing Chairman Glauber as "Glauber"?  I've already checked --- the answer is no.

31.  Why did the NASD name member firm Banc One Capital Markets in a dedicated press release relating a $1.8 million fine but no individuals?

32.  Why did NASD name 6 member firms in this dedicated press release but failed to break-down the fines paid by each firm?  The release only gave a range of fines.  If the cases weren't brought under one caption (joined), why weren't 7 separate releases issued?  Is this a serious industry-wide problem?  If these were member firms involved in penny-stock violations or day-trading, would the releases have treated the respondents the same?

CONCLUSION

Try as I might, I can't seem to break the NASD's code.  I don't understand what warrants a dedicated press release and what doesn't.  I don't understand why some firms get named (but not their responsible individuals) and other firms get named with their registered persons and supervisors.  One would think the size of the fine might have some role, but the data doesn't support that inference.  Some of the largest fines levied were done so against the entity only.  However, in item #6 an individual was named with only a $7,500 fine.  What I see, and you may not, is a pattern in which smaller firms and their employees (not just the firm) are typically highlighted in NASD regulatory press releases, but larger firms seem locked in at the entity-only level.  Even with the case of the most recent release involving CSFB, the press releases concerning the member firm and its subsequently named supervisors were separated by eight months.  To those who might wonder, I'm not suggesting that NASD come down harder on larger firms in order to balance what I perceive as the inequities of sanctions  --- I'm merely urging what I've advocated for years:  

  • financial sanctions should be related to a member's revenues.  A $25,000 fine imposed on a national BD does not have the same impact as that sum imposed on a smaller, regional member.

  • suspensions should be imposed even-handedly.  Supervisors at  large national BDs should not be shielded from comparable suspensions meted out against smaller BDs. 

  • there shouldn't be any dedicated press release about the mere filing of charges, absent compelling circumstances.

  • there should be a consistent policy concerning the issuance of a dedicated press release involving an enforcement action, with particular focus on whether there is any disparity in the treatment of smaller and larger member firms.

The Wall Street Journalreported on August 28,2002, that the SEC rebuffed a settlement proposed by Global Crossing in its pending fraud case because " it would have applied generally to the company and not against specific individuals. SEC officials are pushing to name company officers and executives in any settlement reached, people close to the matter said." Curiously, the NASD's press releases seem to convey the sense that large, national firms are run by computers.  Amazingly, no human beings ever seem to be at fault at the largest firms --- or at least NASD doesn't seem to name them in its dedicated press release.  The SRO doesn't seem to have similar compunctions when it comes to smaller firms and their associated persons.  The NASD's recent CSFB release appears to be nothing more than the exception that proves the rule.

Further, the recently announced $5 million fine against Salomon Smith Barney confirms several trends.  First, the BD itself was permitted to settle separate and apart from Jack Grubman and Christine Gochuico.  Veteran industry regulatory professionals will certainly confirm that NASD often insists upon an all-parties-or-nothing settlements.  Second, although  individuals Grubman and Gochuico are named parties to be charged in the dedicated press release, once again no senior staff nor supervisory staff was charged or included in the settlement.  One need only compare this press release to the May 7, 2002, Hornblower & Weeks release (#8) to understand the point of this article.  I challenge anyone to explain the substantial discrepancy in sanctions.  Third, lest anyone be impressed, the $5 million fine apparently is earmarked for the NASD's coffers and is hardly a dent in SSB's treasury --- compare the percentage of this sanction to revenues at SSB and then do the same analysis for the other reported fines against smaller firms.   

I have long argued that larger, national firms receive different treatment from NASD than smaller firms.  I'm not certain that this analysis of dedicated press releases conclusively settles the debate, but I do think it raises uncomfortable, if not troubling, questions.  I've set forth the data.  You decide.





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

THIS WEBSITE MAY BE DEEMED AN ATTORNEY ADVERTISEMENT OR SOLICITATION IN SOME JURISDICTIONS. AS SUCH, PLEASE NOTE THAT THE HIRING OF AN ATTORNEY IS AN IMPORTANT DECISION THAT SHOULD NOT BE BASED SOLELY UPON ADVERTISEMENTS. MOREOVER, PRIOR RESULTS DO NOT GUARANTEE A SIMILAR OUTCOME. NEITHER THE TRANSMISSION NOR YOUR RECEIPT OF ANY CONTENT ON THIS WEBSITE WILL CREATE AN ATTORNEY-CLIENT RELATIONSHIP BETWEEN THE SENDER AND RECEIVER. WEBSITE SUBSCRIBERS AND ONLINE READERS SHOULD NOT TAKE, OR REFRAIN FROM TAKING, ANY ACTION BASED UPON CONTENT ON THIS WEBSITE. THE CONTENT PUBLISHED ON THIS WEBSITE REPRESENTS THE PERSONAL VIEWS OF THE AUTHOR AND NOT NECESSARILY THE VIEWS OF ANY LAW FIRM OR ORGANIZATION WITH WHICH HE MAY BE AFFILIATED. ALL CONTENT IS PROVIDED AS GENERAL INFORMATION ONLY AND MUST NOT BE RELIED UPON AS LEGAL ADVICE. CONTENT ON THIS WEBSITE MAY BE INCORRECT FOR YOUR JURISDICTION AND THE UNDERLYING RULES, REGULATIONS AND/OR DECISIONS MAY NO LONGER BE CONTROLLING OR PERSUASIVE AS A MATTER OF LAW OR INTERPRETATION.


Telephone: 917-520-2836
Fax at 720-559-2800
E-mail to bsinger@rrbdlaw.com

FOR DETAILS ABOUT MR. SINGER, PLEASE READ HIS
ONLINE BIOGRAPHY
PAGE TOP