NASD Announces Audit Report Findings of Independent Consultant
Washington, D.C.-- The Audit Committee of the National Association of Securities Dealers, Inc. (NASDâ) Board of Governors today announced that Frederick M. Werblow, the Independent Consultant appointed in connection with the NASD’s settlement last year with the Securities and Exchange Commission (SEC), in a report forwarded to the SEC, stated that the NASD has made substantial improvement of its enforcement, surveillance, examinations and internal audit functions.
Werblow submitted his report to the NASD Audit Committee, which in turn submitted it to the Chairman of the NASD Board of Governors
and the SEC.
The NASD, according to Werblow, has made "substantial improvements" by building an independent internal audit staff reporting directly to the Audit Committee; improving surveillance and examination for compliance with the order handling rules; improving trade reporting through enhanced surveillance, examination, and enforcement procedures; upgrading the ability to enforce the firm-quote rule by developing a process to address backing away complaints during the trading day; and addressing improper actions by Market Makers. In addition, the report discloses that the NASD has developed new technology to support the regulation of trade reporting, firm quote and
Market Maker competitiveness requirements.
Werblow noted that while an Office of Hearing Officers has already been established and staffed, the NASD is awaiting SEC approval of its proposed changes to the Code of Procedure before its professional hearing officers can preside over NASD disciplinary proceedings. Code of Procedure changes also would transfer to staff the authority to authorize cases and process applications for membership. A rule proposal is also pending at the SEC which sets out clear procedures and criteria for admission to membership in the NASD.
The report also states that the NASD has established NASD Regulation, Inc., as an independent regulator responsible for day-to-day market regulation, surveillance, examination, and disciplinary oversight for all member brokerage firms and brokers; developed and implemented rules prohibiting pricing collusion and retaliation by Market Makers; and modified its excess spread rule.
Werblow observed that the NASD has completed much of the design of the Order Audit Trail System (OATS), pending approval by the SEC of its rule filing. The system is not required to be completed until August 1998.
The report makes a number of general and undertaking-specific recommendations to the NASD in order to further enhance its regulatory and internal audit programs. In particular, the Independent Consultant recommends that the NASD provide additional surveillance, examination, and legal resources; implement a case-tracking system for the Market Regulation Department to ensure that cases are identified and followed; and institute a report card system to apprise Market Makers of their level of compliance with existing and newly created trading rules. Responsive changes addressing each of these recommendations will be implemented.
"The NASD has made substantial improvements in surveillance, examination and enforcement of order handling, trade and quote reporting rules," Werblow said. "The findings disclosed in the report indicate the NASD has made compliance with these undertakings a top priority."
"On behalf of the NASD, I am pleased to accept the findings of this report. When we look back, I believe that the NASD’s settlement with the SEC was a critical turning point in our efforts to make Nasdaq the fairest, most efficient and most technologically advanced stock market in the world. The NASD has enhanced its regulatory oversight program in the last year through a major commitment in both technological and staff resources. We are pleased that the Independent Consultant recognized those actions and we are absolutely committed to taking whatever steps we find necessary to be the most effective and efficient self-regulatory organization in the world. In the last year alone, the NASD has implemented an array of regulatory and market initiatives to better serve the investing public. We will continue to deploy resources wherever necessary to assure the integrity of the markets," said Frank G. Zarb, NASD Chairman, Chief Executive Officer, and President.
Werblow, a retired partner of Price Waterhouse LLP, has more than three decades of experience in the financial and securities industry. The National Association of Securities Dealers is the largest securities-industry self-regulatory organization in the United States. Through its subsidiaries, NASD Regulation, Inc., and The Nasdaq Stock Market, Inc., the NASD develops rules and regulations, provides a dispute resolution forum, conducts regulatory reviews of members activities and designs, operates and regulates securities markets all for the benefit and protection of the investor.