Legal Definitions - National Association of Securities Dealers

The National Association of Securities Dealers (NASD) was a self-regulatory organization in the United States, authorized by the U.S. Securities and Exchange Commission (SEC). Its primary role was to oversee and regulate the activities of its member brokerage firms and individual brokers, particularly within the over-the-counter (OTC) securities market. NASD was responsible for creating and enforcing rules designed to protect investors, ensure market integrity, and promote ethical conduct among securities professionals.

Here are some examples illustrating the role and function of the National Association of Securities Dealers:

• Investigating Broker Misconduct: Imagine a situation where several clients accused a brokerage firm, which was a NASD member, of pushing them into high-risk investments that were unsuitable for their financial goals, primarily to generate higher commissions for the brokers. NASD would launch a thorough investigation into the firm's practices. As the empowered regulator for its members, NASD had the authority to examine the firm's trading records, interview employees, and ultimately impose sanctions, such as fines or suspensions, if violations of its rules regarding fair dealing and investor protection were found. This demonstrates NASD's role in enforcing ethical standards and protecting investors from unscrupulous practices within its member firms.

• Establishing Industry Standards: Consider a time when new, complex financial products were emerging in the market, posing potential risks to retail investors who might not fully understand them. NASD would develop and issue new guidelines for its member firms, requiring them to provide specific, clear disclosures about these products and to conduct enhanced suitability assessments to ensure that such investments were appropriate for a client's risk tolerance and financial situation. This illustrates NASD's function in proactively establishing and updating rules for the securities industry, ensuring that its member brokers and dealers handled new or complex products responsibly and transparently, thereby protecting investors from potential harm.

• Resolving Investor Disputes: Suppose an individual investor believed their broker, who worked for a NASD member firm, had executed trades in their investment account without proper authorization, leading to significant financial losses. The investor could file a formal complaint with NASD. NASD provided an arbitration forum, a structured process for resolving disputes between investors and its member firms or brokers outside of traditional court litigation. This highlights NASD's crucial role in offering a mechanism for investor recourse and ensuring accountability for its members' actions, reinforcing its mandate to protect the investing public.