The National Association of Securities Dealers (NASD) played a pivotal role in shaping the landscape of the U.S. securities industry from its inception in 1939 until its merger with the New York Stock Exchange’s regulatory division in 2007. As a self-regulatory organization (SRO), the NASD focused on fostering market integrity and investor protection in a rapidly evolving marketplace.
The Founding of NASD
The NASD was established in 1939 under the provisions of the 1938 Maloney Act, which amended the Securities Exchange Act of 1934. This was a crucial period as the U.S. was recovering from the Great Depression and looking to restore confidence in its financial markets. The NASD was designed to create a regulatory framework for the securities industry and to oversee the ethical conduct of its members.
Key Functions of NASD
Market Oversight
The NASD was initially responsible for the operational regulation of over-the-counter (OTC) markets, as well as the emerging NASDAQ stock market, which it helped to create in 1971. By providing a regulatory framework for trading, the NASD ensured transparent practices in a market that had traditionally been less regulated compared to exchanges like the New York Stock Exchange.
Licensing and Examination
An important function of the NASD was the administration of qualification examinations for securities professionals. Among these was the Series 7 exam, which is required for individuals to obtain a license to trade securities. The examinations aimed to ensure that professionals were knowledgeable about the regulations and best practices within the industry.
Regulatory Compliance
The NASD was tasked with monitoring the conduct of its members and enforcing industry standards. This included investigations into member compliance with federal securities laws and the NASD's own rules. Within this framework, the NASD aimed to protect investors from fraud and malpractice.
Transition to FINRA
In July 2007, the NASD merged with the regulatory, enforcement, and arbitration arm of the NYSE to form the Financial Industry Regulatory Authority (FINRA). This transition marked a significant shift in the regulatory landscape as FINRA became the primary self-regulatory organization overseeing the entire U.S. securities industry.
What Changed with FINRA?
FINRA continued the legacy of the NASD but expanded its authority and resources. It is responsible for:
- Overseeing all brokerage firms and their registered representatives.
- Enforcing compliance with SEC regulations and industry standards.
- Providing educational resources and licensing for securities professionals.
- Maintaining the Central Registration Depository (CRD), which tracks the records of individuals and firms engaged in market activities.
- Arbitration services for resolving disputes in a cost-effective manner.
The Role of the SEC
Throughout its existence, the NASD operated under the oversight of the Securities and Exchange Commission (SEC), which granted the NASD the authority to regulate the securities industry while also ensuring that its rules aligned with federal laws. The SEC's role in reviewing NASD’s regulations reinforced the credibility of the organization and contributed to investor confidence in the marketplace.
Comparing NASD and FINRA
While both NASD and FINRA served as self-regulatory organizations, the transition to FINRA brought about more enhanced roles and capabilities to adapt to a more complex financial landscape. Under FINRA:
- Members are subject to more rigorous compliance programs and heightened scrutiny.
- The arbitration framework has been broadened to handle a wider range of disputes.
- A stronger focus on investor education has emerged, including a comprehensive set of resources for financial literacy.
Conclusion
The National Association of Securities Dealers was instrumental in establishing a framework for a fair and transparent securities market in the United States. Its mission to protect investors and maintain ethical trading practices paved the way for the formation of FINRA, which continues to uphold these principles today. As the markets evolve, the legacy of the NASD remains a significant part of the ongoing commitment to transparency and integrity in the financial sector.