Legal Definitions - NASD

The National Association of Securities Dealers (NASD) was a self-regulatory organization (SRO) responsible for overseeing the U.S. securities industry, particularly brokerage firms and their registered representatives. Its primary mission was to protect investors and ensure the integrity of the securities markets by establishing and enforcing rules of conduct, examining firms for compliance, and disciplining those who violated regulations. The NASD operated as the primary regulator for the over-the-counter (OTC) market and later merged with the New York Stock Exchange's regulation committee in 2007 to form the Financial Industry Regulatory Authority (FINRA).

• Example 1: Investor Complaint Resolution

  In the late 1990s, an individual investor discovered that their stockbroker had recommended several highly speculative investments that were unsuitable for their financial goals, leading to substantial losses. The investor decided to file a formal complaint.

  This situation illustrates the NASD's role because the investor would have submitted their complaint directly to the NASD. The NASD would then have investigated the broker and their firm, potentially initiating arbitration proceedings or disciplinary actions against the broker for violating suitability rules and ethical standards.

• Example 2: Brokerage Firm Compliance and Registration

  A group of financial professionals in the early 2000s decided to open a new brokerage firm specializing in online trading. Before they could begin operations and offer services to the public, they needed to ensure they met all regulatory requirements.

  This demonstrates the NASD's function as the new firm would have been required to register with the NASD. The NASD would have overseen the registration process, ensured the firm's principals and representatives passed necessary qualification exams (like the Series 7), and verified that the firm had policies and procedures in place to comply with all NASD rules regarding advertising, customer accounts, and financial reporting.

• Example 3: Disciplinary Action for Misconduct

  In 2005, a registered representative working for a large investment bank was found to have been engaging in "front-running," where they executed trades on their own account based on advance knowledge of their clients' large, pending orders, profiting from the anticipated price movement.

  This scenario highlights the NASD's enforcement power. Upon discovering such unethical and illegal conduct, the NASD would have conducted an investigation and, if the allegations were substantiated, initiated disciplinary proceedings. This could have resulted in severe penalties for the representative, such as significant fines, suspension from the securities industry, or even a permanent bar, to protect market integrity and deter similar misconduct.