NASD: 2003 in Review
Washington, DC – NASD set a record in 2003 for both the number of new enforcement actions filed, 1,352, and the number of individuals barred or suspended, 830, from the securities industry as a result of violations of securities rules and laws. NASD also collected more than $32.5 million in disciplinary fines.
In addition to enforcement actions, NASD moved forward with a number of important investor-focused rule proposals that touch on nearly every aspect of the securities industry, including mutual fund sales practices and disclosure. NASD also announced in 2003 the formation of the NASD Investor Education Foundation with an initial grant of $10 million.
NASD Dispute Resolution had its third consecutive record year in 2003 with about 8,900 new cases filed in its arbitration forum, representing an increase of 1,196 cases or a 16 percent increase in the number of cases filed over 2002, and 29 percent over 2001. Parties filed an additional 200 cases directly in mediation, up from 173 in the previous year.
NASD dramatically increased transparency in the corporate debt market during 2003. It launched Phase II of its overall TRACE dissemination effort in March and April 2003 increasing the number of bonds eligible for dissemination from approximately 535 to 5000 issues. This increased visibility of bond trade prices to the public from 41 percent of the investment grade market in November of 2002 to 69 percent in November of 2003. Overall average daily volume in the corporate debt market increased to $19.5 billion in 2003 from an average of $17.8 billion in 2002.
Mutual Fund Sales
NASD brought more than 60 enforcement actions against securities firms in 2003 for violations in the area of sales of mutual funds. Violations in these cases ranged from suitability of the mutual fund share classes that brokers recommended, sales practices, improper disclosures and compensation arrangements between the funds and brokers.
The 60 mutual fund related actions bring to more than 200 the number of cases NASD has taken in the investment company area since 2000.
NASD also has proposed requiring disclosure of two types of cash compensation -- payments for "shelf space" by mutual fund advisers to brokerage firms that sell their funds, and differential compensation paid by a brokerage firm to its salesmen to sell the firm's proprietary funds. NASD also designed a regulation that would require disclosure of mutual fund expenses in advertisements and other sales material that promotes the fund's performance. It is critical that investors understand not only the costs involved in acquiring a fund and owning it over time, but also any conflicts that may rise through compensation arrangements.
NASD, through routine examinations in 2002 and 2003 found that in 1 out of 5 transactions in which investors were entitled to a breakpoint discount when purchasing mutual funds, a discount was not given. This resulted in hundreds of thousands of mutual fund investors being overcharged by at least $86 million in the last two years. NASD directed firms in 2003 to make refunds to customers and has initiated a number of enforcement actions against certain firms that have poor records of providing breakpoint discounts.
In the area of late trading and market timing, NASD in September sought information regarding these practices from 160 firms and has ongoing investigations into conduct at several dozen firms. NASD's review indicated that a number of firms clearly received and entered late trades, while others were not always able to tell with clarity whether or not they had entered trades late. NASD will continue to focus on this area in the coming year.
Mutual funds have also been an ongoing focus of NASD's investor education efforts. In 2003, NASD issued Investor Alerts on share classes, principal protected funds, breakpoint discounts and unveiled an innovative "Mutual Fund Expense Analyzer" on its Web Site that allows investors to compare expenses and fees of funds and fund classes along with highlighting when a breakpoint discounts may be due.
Initial Public Offerings and Investment Research
NASD continued its focus on the issues surrounding initial public offerings (IPOs) in 2003 by filing the first set of proposed IPO rules aimed at promoting fair allocation of IPOs with the Securities and Exchange Commission (SEC) in September. The proposals address the areas of conflicts of interest, illicit quid pro quo arrangements, spinning and other IPO allocation abuses - along with enhancing the process of the pricing of IPO shares. In November, following the recommendations of the IPO Advisory Committee convened by NASD and NYSE at the request of the SEC, NASD sought public comment on the second round of reform measures. The SEC approved a new rule that fosters a public distribution of IPO shares by prohibiting the purchase of IPOs by industry "insiders" and other persons who are in a position to direct futures business.
NASD brought several cases in the area of IPO practices. NASD censured and imposed fines of $27 million against Robertson Stephens and $6 million against J.P. Morgan for sharing in profits from IPOs. NASD also filed a Complaint against Invemed, alleging profit sharing activity. This case matter is pending before NASD' s Office of Hearing Officers.
After playing an important role in finalizing the $1.4 billion global research analyst settlement against 10 of the nation's largest investment banking firms, NASD also continued to investigate and take enforcement actions against individuals for conflicts of interest between research and investment banking, including a complaint against Phua Young, a former senior analyst at Merrill Lynch, for his research reports on Tyco, Inc. Also, in addition to developing spinning cases against CSFB and SSB in the global settlement, NASD filed an enforcement action against former CSFB investment banker Frank Quattrone alleging IPO spinning and supervisory research violations.
NASD Investor Education Foundation
NASD established the Investor Education Foundation, whose mission will be to provide investors with high-quality, easily accessible information and tools to better understand investing and the markets. The Foundation, which will have an initial endowment of $10 million, will be used solely to fund educational programs, materials and research aimed at segments of the investing public who could benefit from additional resources.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and member firms. For more information, please visit our Web site at www.nasd.com.
2003 Year End Statistics *
|New Disciplinary Actions Filed||1,352||1,271||1,257|
|Formal Actions Resolved||1,250||1,129||1,205|
|Firms Expelled From Membership||30||25||11|
|Individuals Barred From The Industry||480||440||466|
|Firms Suspended From Membership||2||2||6|
|Disciplinary Fines Collected (millions)||$32.6||$68.2||$13.2|
|Customer Complaints Received||4,871||4,495||5,155|
|Customer Complaints Resolved||5,554||4,611||5,123|
|Firm Examinations Initiated||2,645||2,662||2,623|
|Firm Examinations Completed||2,657||2,480||2,414|
|Terminations For Cause Initiated||6,376||4,438||4,027|
|Terminations For Cause Resolved||7,136||4,448||3,683|
|Examinations For Cause Initiated||3,511||2,100||1,841|
|Examinations For Cause Resolved||6,059||1,950||1,988|
|Advertisements and Sales
|Arbitration Claims Filed||8,900||7,704||6,915|
|Arbitration Cases Closed||7,200||5,957||5,582|
|Mediation Claims Filed||1,150||936||880|
|Mediation Cases Closed||1,800||1,360||1,262|
|BrokerCheck Searches and Reports||2,424,819||2,329,307||1,802,109|