(Courtesy FINRA )
Creating an SRO that encompassed an entire industry and the expansive OTC market was a daunting task. The SEC had considered decentralization and democracy to be essential for the success of such an SRO; the brokers themselves, reluctant to cede autonomy to a centralized organization, agreed. The result was a sprawling organization, with fourteen districts spanning the nation. General policy was set by a board of governors elected by the districts. Each district was administered by a district committee and headed by a chairman. Those fourteen chairmen constituted an advisory council that oversaw the work of a host of committees at the regional and national levels. Resources were scarce, so administration was done by officers and committee members serving without pay.51
If the NASD operated on something of a shoestring, it provided members with immediate benefits, chief among them financial rewards. The Maloney Act allowed members of a national securities association to deal on a wholesale basis; non-members had to pay retail prices. From the first, then, government-sanctioned cartelization of the industry was one of the chief benefits for the private sector part of this public/private self-regulatory partnership. At first, only broker-dealer firms could join the NASD. In order to extend the discipline of the NASD deeper into the industry, the SEC permitted registration of individual "registered representatives" in 1946. More than 20,000 partners, officers, salespersons and traders agreed to abide by the NASD Rules of Fair Practice.52
The NASD and the SEC slowly built up a body of administrative law. This process was sometimes cooperative, sometimes adversarial. For example, when the NASD imposed a minimum capital rule in 1942 to weed out less reputable firms; the SEC disallowed that rule on the grounds that it conflicted with the Maloney Act's mandate for industry inclusiveness. In its 1945 Public Service Company of Indiana decision, the SEC determined that the act gave the NASD no authority to enforce minimum price agreements.53
The NASD's disciplinary process and procedures evolved over time. The Maloney Act's criteria for registration gave the NASD access to member books and records, and required it to investigate misconduct and impose discipline through sanctions, including censures, fines, suspensions or expulsions. From the beginning, NASD district committees required reports from member firms. By 1947, NASD had sufficient staff to examine one-third of its member main offices every year, a level considered adequate by a relatively quiescent SEC. Not until 1962, when the SEC stiffened its oversight of SROs, did the NASD hire full-time examiners for all of the districts.54
Limitations to the diffuse and volunteer-based structure of the NASD had become evident. The 1963 SEC Special Study of the Securities Markets concluded that the NASD was too reliant on the committee system and suffered greatly from a lack of professional management. The NASD responded by expanding its budget and staff through an increase in the fees imposed on members. In 1964, broker Robert Haack became the NASD's first paid president.55
Slowly during the 1960s, and with SEC approval, the NASD began to change from a decentralized voluntary organization to a more centrally managed and professional one. In 1973 the NASD had 100 staff members in its Washington headquarters alone, and an additional 300 in the field. The Special Study not only had provided a spark to energize the NASD, but had also set the sluggish OTC market on the path toward becoming the industry's most innovative electronic exchange.56
(51.) August 1974 The NASD - Origins, Recent Developments and Future Goals, 15-16; January 23, 1940 NASD News - The Bulletin
(52.) August 1974 The NASD - Origins, Recent Developments and Future Goals, 17, 27; Mark Ingebretsen, NASDAQ: A History of the Market That Changed the World (Roseville, CA, 2002), 42; February 1946 NASD News
(53.) August 1945 NASD News, 5.
(54.) August 1974 The NASD - Origins, Recent Developments and Future Goals, 30.
(55.) 1963 SEC Special Study of the Securities Markets, 679-82; Seligman, The Transformation of Wall Street, 316.
(56.) Seligman, The Transformation of Wall Street, 323; Ingebretsen, NASDAQ, 71; August 1974 The NASD - Origins, Recent Developments and Future Goals, 59.
(Courtesy of Stuart Kaswell; made possible through a gift from the family of Milton H. Cohen)
