The Role of the NASD's Disciplinary Committees

Executive Summary

The cornerstone of the NASD's self-regulatory process is the nationwide committee system of securities industry representatives that conducts peer reviews, takes disciplinary action where appropriate, and imposes remedial sanctions when federal securities laws or NASD^® rules and regulation have been violated. When considering disciplinary matters, these key committees located in each of the NASD's 11 districts sit as District Business Conduct Committees (DBCC), the primary local enforcement arm of the NASD. The Market Surveillance Committee (MSC) performs a similar function, but acts as the central review body for cases involving possible violations of market-related NASD and SEC rules.

Background

Established by the 1938 Maloney Act Amendments to the Securities Exchange Act of 1934 (Act), the NASD is the nation's largest self-regulatory organization, and therefore is a key component of the federally supervised self-regulation of the securities industry.

As congressionally mandated, the NASD's chief duty is that of a regulator. The NASD fulfills its statutory responsibilities and protects the investing public through enforcement of federal securities laws as well as the broader ethical requirements of NASD rules, which are designed to prevent fraudulent and manipulative acts and practices, and to promote just and equitable principles of trade. The NASD exercises this statutory authority over members and their associated persons by administering qualification examinations, conducting compliance inspections, and taking appropriate disciplinary actions when necessary.

A principal means by which the NASD fulfills its regulatory responsibilities is through the NASD disciplinary process which seeks to determine whether a member firm or its associated persons have violated NASD rules and regulations, or the federal securities laws.

NASD disciplinary proceedings help to protect the public investor and promote member compliance by imposing a range of sanctions on those who fail to comply. Respondents are afforded an impartial hearing before their peers and have extensive rights of appeal. Members and persons associated with members involved in an NASD disciplinary action may be subject to sanctions that include fines, censure, suspensions, bars, expulsion, restitution, or any other fitting sanction.

The NASD provides a fair procedure for disciplining members and associated persons that is consistent with the due process standards established by the statute. NASD disciplinary proceedings are remedial actions conducted in a businessman's forum.

Though not subject to the same procedural standards as courts of law, the NASD ensures compliance with fundamental legal standards of fairness through an established process. For example, the statute specifies safeguards that at minimum require the NASD to: bring specific charges; give notice of such charges; provide an opportunity to defend; keep a record; and, specify in any adverse determination the act or practice that constituted a violation, the provision violated, the sanction imposed, and the accompanying reason for sanction.

NASD Disciplinary Bodies

The Board of Governors

The Board of Governors is the controlling body of the NASD and determines policy on a national scale. The Board consists of Governors elected by member firms from the 11 districts throughout the United States, and Governors-at-Large elected by the Board to represent investors, Nasdaq^®-listed companies, insurance company members, investment company underwriters, and the securities industry at large.

The National Business Conduct Committee (NBCC)

Consisting of first-year members of the Board of Governors, the NBCC's chief function is to ensure that disciplinary actions taken by the NASD's DBCCs and MSC are legally sufficient and consistent with NASD and federal policy.

The NBCC helps set regulatory policy, reviews all DBCC and MSC decisions, and hears cases appealed to the Board of Governors by respondents named in these actions. On its own motion, the NBCC may call any DBCC or MSC decision for review. All decisions of the NBCC are final unless called for review by a member of the Board of Governors.

District Committees And DBCCs

There are 11 geographical districts, each of which is governed by a District Committee composed of individuals elected locally in each region by NASD members. When considering disciplinary matters, a District Committee sits as a DBCC, the primary local enforcement arm of the NASD. These committees meet in each district, and enforce compliance by members in their geographical area with:

• NASD By-Laws and Rules of Fair Practice.
  
  
• Federal securities law.
  
  
• The Municipal Securities Rulemaking Board (MSRB) rules.
  
  
• Other applicable securities regulations.

Market Surveillance Committee (MSC)

The MSC is a national committee that acts as the central review body for investigations conducted by the Market Surveillance and Anti-Fraud Departments that involve possible violations of market-related NASD and SEC rules, including insider trading, market manipulation, and other egregious or fraudulent market conduct. As a disciplinary committee, the MSC's authority is identical to that of the DBCC.

NASD Disciplinary Process

Empowered by the Board of Governors, each DBCC and MSC review is the first step in the NASD's disciplinary process.

District examiners in the field report to the DBCC regarding member compliance with the aforementioned rules and regulations based on information collected through various examination and surveillance programs.

In fulfilling their enforcement responsibilities, the 11 DBCCs and the MSC:

• Review examination reports and other investigative summaries submitted by NASD staff in their respective districts or departments.
  
  
• Initiate or authorize complaints against firms or associated persons alleged to have violated NASD rules or other rules over which the NASD has jurisdiction.
  
  
• Conduct disciplinary proceedings in accordance with the NASD's Code of Procedure.
  
  
• Render decisions and impose sanctions, if appropriate.

Serving on a DBCC or MSC

Annually, the NASD conducts elections to replace those DBCC and MSC members whose three-year terms expire at year-end. NASD members are eligible to vote for those candidates seeking election to their respective district committees. If you are interested in serving on the DBCC in your district or have any questions about the DBCC process, please contact the appropriate District Director listed below.

NASD District Offices

District 1

525 Market Street, Suite 300
San Francisco, CA 94105-2711
(415) 882-1200
FAX: (415) 546-6991

Elisabeth P. Owens, Dir.

Northern California (the counties of Monterey, San Benito, Fresno, and Inyo, and the remainder of the state north or west of such counties), northern Nevada (the counties of Esmeralda and Nye, and the remainder of the state north or west of such counties), and Hawaii

District 2

300 South Grand Avenue
Suite 1600
Los Angeles, CA 90071
(213) 627-2122
FAX: (213) 617-3299
Daniel Stefek, Asst. Dir.
Lani Woltmann, Regional Counsel

Southern California (that part of the state south or east of the counties of Monterey, San Benito, Fresno, and Inyo) and southern Nevada (that part of the state south or east of the counties of Esmeralda and Nye)

District 3 (Denver)

1401 17th Street, Suite 700
Denver, CO 80202
(303) 298-7234
FAX: (303) 292-4272
Frank Birgfeld, Dir.
Arizona, Colorado, New Mexico, Utah, and Wyoming

District 3 (Seattle)

Two Union Square
601 Union Street, Suite 1616
Seattle, WA 98101
(206) 624-0790
FAX: (206) 624-0790
James G. Dawson, Assoc. Dir.

Alaska, Idaho, Montana, Oregon, and Washington

District 4

12 Wyandotte Plaza
120 West 12th Street
Suite 900
Kansas City, MO 64105
(816) 421-5700
FAX: (816) 421-5029
Jack Rosenfield, V.P. Dir.

Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota

District 5

1100 Poydras Street
Suite 850, Energy Centre
New Orleans, LA 70163
(504) 522-6527
FAX: (504) 581-3699
Warren A. Butler, Jr., Dir.

Alabama, Arkansas, Kentucky, Louisiana, Mississippi, Oklahoma, and Tennessee

District 6

1999 Bryan Street, Suite 1450
Olympia & York Tower
Dallas, TX 75201
(214) 969-7050
FAX: (214) 922-0079
Peter M. Walker, Dir.

Texas

District 7

One Securities Centre
Suite 500
3490 Piedmont Road, NE
Atlanta, GA 30305
(404) 239-6100
FAX: (404) 237-9290
Marilyn B. Davis, Dir.

Florida, Georgia, North Carolina, South Carolina, Puerto Rico, the Canal Zone, and the Virgin Islands

District 8 (Chicago)

10 S. LaSalle St., 20th Floor
Chicago, IL 60603-1002
(312) 899-4400
FAX: (312) 236-3025
E. Craig Dearborn, V.P., Dir.

Illinois, Indiana, Michigan, and Wisconsin

District 8 (Cleveland)

Renaissance on Playhouse Sq.
1350 Euclid Ave., Suite 900
Cleveland, OH 44115
(216) 694-4545
FAX: (216) 694-3048
William H. Jackson, Jr., Dir.

Ohio and part of upstate New York (the counties of Monroe, Livingston, and Steuben; and the remainder of the state west of such counties)

District 9 (Philadelphia)

1818 Market Street, 14th Floor
Philadelphia, PA 19103
(215) 665-1180
FAX: (215) 496-0434
John P. Nocella, V.P., Dir.

Delaware, Pennsylvania, West Virginia, and southern New Jersey (the counties of Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, Mercer, Ocean, and Salem)

District 9 (Washington, DC)

1735 K Street, NW
Washington, DC 20006-1500
(202) 728-8400
FAX: (202) 728-8890
Brian Hobbs, Assoc. Dir.

District of Columbia, Maryland, and Virginia

District 10

33 Whitehall Street
New York, NY 10004
(212) 858-4000
FAX: (212) 858-4189
Douglas Henderson, Sr. V.P., Dir.

The five boroughs of New York City and the adjacent counties in New York (the counties of Nassau, Orange, Putnam, Rockland, Suffolk, Westchester) and northern New Jersey (the state of New Jersey, except for the counties of Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, Mercer, Ocean, and Salem)

District 11

260 Franklin St.,
16th Floor Boston, MA 02110
(617) 261-0800
FAX: (617) 951-2337
Willis Riccio, V.P., Dir.

Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont, and New York (except for the counties of Nassau, Orange, Putnam, Rockland, Suffolk, and Westchester; the counties of Monroe, Livingston, and Steuben; the remainder of the state west of such counties; and the five boroughs of New York City)

If you are interested in serving on the Market Surveillance Committee please contact:

James J. Cangiano
Senior Vice President
Market Surveillance Department
9513 Key West Ave.
Rockville, MD 20850-3389
(301) 590-6424.