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 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

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

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

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

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

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

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

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.

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

Source of Cases  External –Referrals from states, federal agencies, and criminal prosecutors –Customer complaints –News media –Anonymous tips

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

Investigative Process  Results of investigations –Informal action –Formal action  Settlements (AWCs) -Sanction guidelines  Complaints -Wells process  ODA must authorize complaints or settlements

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

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

Formal Complaints and AWCs Issued

Disciplinary Fines Collected *Includes single $20 Million Fine

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

Contact Information  For additional information, please contact: Steven Polansky NASD 1735 K Street, N.W. Washington, DC Tel.: Fax: