Fight Club
An insurgency of small brokerage firms has mounted an all-out assault against the NASD over an allegedly biased election process. And its latest Molotov cocktail is being served up in the coming weeks, one that could potentially drive a wedge between member firms.
The Financial Industry Association, an upstart advocacy group of an estimated 1,000 small independent broker/dealers that seeks sweeping industry reforms, is attempting to block the NASD's nominations for seats on its district committees on grounds that the candidates are not representative of its constituents. Small firms feel that the NASD, a self-regulatory organization, favors its big wirehouse members, like Merrill Lynch and Smith Barney, while ignoring the little guys who represent roughly 80 percent of the industry. (Sixty-five percent of the NASD member firms have 10 employees or less, and another 15 percent have less than 150 personnel.) The district committees serve as sounding boards for members to voice concerns and get feedback on various rules.
Originally slated for Sept. 1, the confirmation of NASD committee nominees has been postponed — in light of FIA's efforts — to allow voting members to consider alternative candidates. The FIA has circulated a petition with a list of its own nominees that it believes better reflects the voice of the majority. The deadline for mail-in petitions to be submitted is Oct. 2, according to one NASD official. The campaign period will run from Oct. 11 until Oct. 31. NASD members each have one electoral vote, regardless of the size of the firm.
This isn't the first time the FIA has wielded its influence to put the kibosh on an election. In February, it successfully contested the nominations for the NASD National Board of Governors, winning two seats on the board, including Brian Kovack, president of Kovack Securities in Ft. Lauderdale, Fla., a shop that has 31 employees and $1.7 billion in assets, and Admiral Tyler Dedman, a retired Navy officer from Lake Mary, Fla.
The FIA's moves to contest elections is really part of a larger effort by the group to stamp out what it sees as heavy-handed rulemaking, hefty fines for minor infractions, favoritism toward large firms and inadequate representation for small member firms. “The NASD has really spiraled out of control in the last five years,” says John Busacca, president of North American Clearing, an independent b/d in Longwood, Fla., and one of the founders of the FIA as well as a so-called “dissident” member of the NASD's District 7 committee. “The use of regulation to put small firms out of business has got to end.”
Busacca and his band of brothers complain that the NASD often imposes fines instead of offering guidance or issuing warnings on minor infractions, even when they have no customer impact. They would like to see more transparent compliance examinations, looser advertising restrictions, fewer Rule 8210 requests (the NASD's broad requests for information) and a more reliable arbitration system under which reps who are in good standing can be exonerated without having their reputation permanently sullied. Busacca particularly abhors the NASD's use of sweep exams, because they invariably ensnare a few otherwise good firms — along with the bad — that haven't met some minor reporting requirement, he says.
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