NASD's 2004: Investor Protection Efforts Worth Noting
he National Association of Securities Dealers (NASD) recently issued its own report card for 2004, and it graded itself very highly. NASD concluded that it had finished "another extremely productive year in 2004 protecting investors and instilling confidence through comprehensive enforcement actions, rule writing and investor education activities." That self-praise is well deserved. Let's overview five of the NASD's accomplishments.
First, NASD Dispute Resolution closed 9,000 arbitration cases, an all time record, and took in 8,100 new arbitration cases to be resolved. Additionally, NASD Dispute Resolution adopted procedures to expedite arbitration cases involving elderly or infirm investors. Moreover, NASD "increased its disciplinary focus" on the arbitration process. NASD cites the fact that it settled three cases in 2004 against brokerage firms that had failed to comply with discovery obligations, with record-setting fines of $750,000. NASD also settled a case against Sigma Financial for improperly suing customers in state court "as part of a campaign of harassment initiated after the customers won their arbitration case against them." Sigma was required to pay the arbitration award, $135,000 in fines and more than $100,000 in attorneys' fees.
Second, NASD continued to focus on mutual fund sales and trading issues, bringing more than 120 disciplinary actions. For example, together with the SEC, the NASD settled a case against First Command, a brokerage firm that "specialized in selling expensive systematic investment plans to military personnel", in a "misleading fashion." First Command has to pay $12 million, which will be used for investor restitution and investor education. Moreover, NASD and SEC settled charges against 15 brokerage firms, with fines totaling $21.5 million, for their failure to offer mutual fund breakpoint discounts.
Third, the NASD investigated "abuses related to the marketing and sale of variable annuities." The NASD barred and fined individuals in over 65 cases. In another case, the NASD has charged that Waddell & Reed made thousands of unsuitable recommendations when the firm recommended that customers "exchange" (replace) one variable annuity for another.
Fourth, there was a lot of activity regarding bonds. In the area of corporate bonds, Goldman Sachs, Deutsche Bank, Citibank and Miller Tabak each settled excessive bond price mark-up charges for $5 million each, as well as $2 million more for investor restitution. In the municipal bond area, the NASD fined Morgan Stanley $100,000 when it failed to disclose to customers that their bonds were "callable". Additionally, the NASD brought 17 cases against firms for failing to obtain fair prices for their clients when they sought to sell their municipal bonds.
Fifth, 2004 began a trend in sanctions which likely will continue. That is, the NASD "sought and obtained special disciplinary sanctions tailored to the nature of the violations." For example, the NASD brought 30 cases against brokerage firms for failing to timely file regulatory reports regarding their brokers. Of those 30 cases, three involved firms with "a history of regulatory problems in this area" - Morgan Stanley, Merrill Lynch, and Wachovia Securities. So, as against just those three firms, the NASD temporarily suspended them from registering new brokers. Likewise, in a mutual fund market timing case, the NASD barred National Securities from opening new mutual fund accounts for 30 days. And the NASD barred Salomon Smith Barney from allowing one of its stock research analysts to appear on research reports for 18 months because she had assisted analyst Jack Grubman.
Overall, 2004 was a good year for the NASD, and thus for investors. Let's hope that trend continues in 2005!
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James J. Eccleston is a securities attorney, representing customers as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat, Filipowski & Eccleston, and can be reached at 312-621-4400.
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