NASD to Sharply Increase Public Representation Adopts Principles of Rudman Committee Report The Nasdaq Stock Market, NASD Regulation of Brokers, Firms Under Separate, Independent Units
Washington, D.C.--The Board of Governors for the National Association of Securities Dealers, Inc. (NASD), acting on the Report of the Select Committee on Structure and Governance headed by former U.S. Senator Warren B. Rudman, said today it has adopted the Principles of Effective Governance recommended by the Committee including a recommendation that the NASD Board be composed of a majority of public representatives.
The change would set a new standard for public representation among the securities markets. No governing board of a major securities market in the U. S. has a majority of public members. It also would separate oversight and operation of Nasdaq from regulation of the broker/dealer profession, creating a sister organization, NASD Regulation.
"By adopting these principles, the Board would set a new standard for public representation, provide new focus and resources for Nasdaq and NASD Regulation through a new structure, and improve NASD's enforcement and disciplinary operations," Joseph R. Hardiman, NASD President said.
Recommended in a far-reaching, 400-page report developed over nine months, the proposed changes were compiled by a seven member committee composed of individuals who have had significant experience in the securities industry or are former members or senior staff of the Securities and Exchange Commission (SEC).
To achieve greater separation between the regulation of the more than 5,400 member securities firms and the operation of the Nasdaq market, the Report said the NASD should be reorganized to become a parent corporation with two autonomous and strong operating subsidiaries, The Nasdaq Stock Market, Inc., and NASD Regulation, Inc.
Under the Report's principles, the parent NASD organization would have majority public representation on its Board. The Nasdaq and NASD Regulation would each have 50 percent public representation on their governing boards. The NASD Board currently has about 20 percent public representation. The Nasdaq Board has one-third public representation.
While determining that the NASD overall had carried out its self-regulatory responsibilities "professionally and reasonably," the Rudman Committee Report said that its governance structure "has failed to keep pace with the significant growth and continuing evolution of the Nasdaq market," and the "expansion of NASD's regulatory responsibilities."
"The Rudman Committee Report has broad implications for the securities industry and the investing public," said Joseph R. Hardiman. "For the NASD it recognizes the need for new structure and resources to manage today's explosive growth of the Nasdaq market and the continuously expanding regulatory responsibilities of the NASD. For the investor and for the companies whose shares they own, the recommendations provide a dramatic increase in public representation and participation."
In addition to regulating Nasdaq today, the Report noted, the NASD oversees the activities of 5,400 securities firms, more than 57,000 branch offices, and some 500,000 registered representatives doing business with investors, making it by far the largest self- regulatory organization in the securities industry.
The Nasdaq market, said the Report, had volume in 1994 of 74.3 billion shares (more than twice 1990 levels) with a value of $1.45 trillion (three times 1990 levels). In 1995, Nasdaq share volume is up 26 percent over 1994's record levels, and is greater in one week's trading than in Nasdaq's entire first year of operation.
After approving the Principles of Effective Governance recommended by the Rudman Committee, the NASD Board instructed the staff to develop an analysis and implementation plan for presentation at its November meeting. The staff is also preparing specific implementation procedures on the Report's recommendations on NASD enforcement and disciplinary operations. The Board asked Senator Rudman and members of the Committee staff to continue serving in a monitoring and advisory role during implementation. Mr. Hardiman said the Senator had agreed to do so.
In recommending much expanded public representation at the Boards of the NASD parent and the two subsidiaries that would emerge, the Rudman Committee said:
"Not only would a full measure of public representation befit the NASD's current stature and importance, it should also bolster confidence in the NASD's policies. It would not be inconsistent with self-regulation, because NASD members would still be fairly represented in the association's affairs and have ample opportunity to bring their expertise and viewpoint to bear."
The Committee found that while "the core of NASD's disciplinary process is sound," that "disciplinary proceedings have become more contentious, complex and consequential than the existing system was designed to accommodate."
The Rudman Committee recommended a greater allocation of financial and human resources to the NASD's significant enforcement task as well as a greater focus on handling of customer complaints throughout the NASD's district network and its Office of Internal Review. "The NASD Board, at its meeting, directed that swift action be taken to insure full compliance with our policy on customer complaints," Mr. Hardiman said.
The Rudman Committee was formed, in consultation with SEC Chairman Arthur Levitt, to evaluate certain issues facing the NASD.
The Rudman Committee Report is based on interviews with nearly 200 individuals representing a wide range of views on the NASD and Nasdaq operations, including ardent supporters and fierce critics, first-hand examination of enforcement and disciplinary procedures, some going back five to 10 years, surveys of and discussions with federal and state regulators, and extensive documentation on the operations of the NASD.
Other recommendations included:
Placement of enforcement and disciplinary operations in the new NASD regulatory subsidiary. This would mean that while Nasdaq would operate under its own market surveillance and rules of operation, disciplinary and enforcement matters arising from a breach of those rules would be referred to NASD Regulation for action.
Establishment of an Office of Professional Hearing Officers and revised disciplinary procedures within the NASD regulatory subsidiary. Professional hearing officers would sit, along with two industry representatives, in any NASD disciplinary proceeding in which either the respondent or NASD Regulation elects.
Expansion of the Office of Internal Review in the NASD parent organization to "conduct regular internal audits and reviews of the NASD's and its subsidiaries' operations, including the districts." The NASD's broker/dealer regulatory programs are carried out through a nationwide network of 14 district offices.
The Report said the Internal Review office would serve as an "ombudsman" to address complaints from any source about NASD regulatory or Nasdaq market operations.
Endorsement of NASD plans to create an office dedicated to representing the interests of individual investors. The NASD plans to establish an Investor Services unit and will house it in the Nasdaq subsidiary. This unit would represent the interests of investors in rulemaking and decision-making, coordinate the broad range of investor programs across the organization and generally provide a mechanism through which investor concerns are identified and addressed.
Committee Chairman Warren Rudman served two terms as U.S. Senator from New Hampshire. In 1985, he co-authored the Gramm-Rudman Hollings deficit reduction law, which brought new discipline and accountability to the federal budget process. He is a partner in the international law firm, Paul, Weiss, Rifkind, Wharton and Garrison.
Other members are Jean W. Gleason, partner in the law firm of Fulbright & Jaworski L.L.P. and former staff member at the SEC; Stephen L. Hammerman, Vice Chairman of Merrill Lynch & Co., and former New York Regional Administrator of the SEC; Peter S. Lynch, member of the Board of Trustees of the Fidelity Group of Funds and former portfolio manager of the Fidelity Magellan Fund; Robert H. Mundheim, General Counsel for legal and compliance affairs at Salomon Brothers, Inc., and former Dean of the University of Pennsylvania Law School; Irving R. Pollack, former SEC Commissioner and Director of the Divisions of Enforcement and Market Regulation.; and A. A. Sommer, Jr., former SEC Commissioner and presently Counsel to Morgan, Lewis & Bockius in Washington, a visiting professor at the University of Michigan Law School, and Vice Chairman of the NASD Board of Governors.
Chief Counsel to the Committee is Mark A. Belnick, a partner of Paul, Weiss, Rifkind, Wharton & Garrison.