National Association of Securities Dealers (NASD) – Definition

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National Association of Securities Dealers Definition

The National Association of Securities Dealers (NASD) was an independent organization assisting the Securities and Exchange Commission in regulating the financial market, particularly the NASDAQ stock market and over-the-counter markets.

It was founded in 1939 by a group of over-the-counter brokers and dealers to regulate the OTC market and to establish the legal and ethical standards of conduct for its members. Untill 2007, the NASD played a crucial role in managing and monitoring the stock trading the U.S market.

A Little More on What is the NASD

The NASD was an independent body operated under the overall supervision of the Securities and Exchange Commission. The NASD was also responsible for administering the examinations for the investment professionals. It took a leading part in conceptualizing and founding the NASDAQ stock market and managing its stock operations.

In 2007, the National Association of Securities Dealers merged with the New York Stock Exchange’s regulatory committee to form the Financial Industry Regulatory Authority (FINRA).

The FINRA, like its predecessor, is also self-regulatory body working under the supervision of the Securities and Exchange Commission and oversees the stock market operations in the United States.

FINRA is sanctioned to implement the rules and regulations of the SEC. It monitors the individuals and firms engages in the security market and makes sure they comply with the rules and regulations. The FINRA also provides licensing of securities representatives involved in the market.

FINRA is responsible for managing the market’s Central Registration Depository that records all the securities activities of individuals and funds. FINRA arbitration panels deal with all the financial market trading disputes. It facilitates the process of the arbitration and is responsible for issuing a final ruling on arbitration cases. The proceeding of arbitration is similar to the court proceeding but the cost is low. FINRA also collaborates with the North American Securities Administrators Association for overseeing the security market proceedings.

References for National Association of Securities Dealers

Academic Research on the National Association of Securities Dealers (NASD)

NASD Rule¬†2711 and changes in analysts’ independence in making stock recommendations, Chen, C. Y., & Chen, P. F. (2009). The Accounting Review,¬†84(4), 1041-1071. Evidence of changes in low analyst is provided by this study. This analyst generated stock recommendations after the approval of the SEC of NASD Rule in May 2002, and it introduced governing reforms to improve the independence of analyst‚Äôs research. The relations of the analyst‚Äôs stock recommendation is investigated with intrinsic value estimates. This is based on the analyst‚Äôs earnings forecast that is stock price relative, V/P. This also relates to investment-banking related issues of interest from the 1994-2005 period.

Broker-Dealer Obligations to Customers–The¬†NASD¬†Suitability¬†Rule, Fishman, G. L. (1966).¬†Minn. L. Rev.,¬†51, 233.

The Suitability Rule and Economic Theory, Cohen, S. B. (1970). Yale LJ, 80, 1604.

Private Enforcement in the Over-the-Counter Securities Markets Implied Liabilities Based on NASD Rules, Lowenfels, L. D. (1965). Cornell LQ, 51, 633.

Brokers’ Liability for Violation of Exchange and¬†NASD¬†Rules, MacLean, H. N. (1970). Denv. LJ,¬†47, 63.

ISDA, NASD, CFMA, and SDNY: the four horsemen of derivatives regulation?, Partnoy, F. (2002). Brookings-Wharton Papers on Financial Services, 2002(1), 213-252. Predicting future regulation is difficult for derivative markets, especially because current parameters are not known. For example, markets of derivative include: (1) exchange-traded options, over-the-counter (OTC), forwards and combinations of each, with a range in in complexity; (2) a great array of underlying indices and instruments, which includes foreign exchange, interest rates, commodities and securities; (3) both individual  and institutional participants, who has diverse sophistication; (4) different  regulators, both self-regulatory  and governmental, mostly with overlapping jurisdiction; and (5) several purposes for transactions, which includes hedging, speculation, arbitrage, and regulatory arbitrage.

A Stock Broker’s Implied Liability to Its Customer for Violation of a¬†Rule¬†of a Registered Stock Exchange, Hoblin Jr, P. J. (1970). Fordham L. Rev.,¬†39, 253.

Analyst conflicts of interests: Are the NASD and NYSE rules enough, Contoudis, K. (2003). Fordham J. Corp. & Fin. L., 8, 123.

NASD rule 2110 and the VA Linux IPO, Loughran, T. (2005). Journal of business ethics, 62(2), 141-146. Shares were issued on On December 9, 1999, by VA Linux to the public. This left over $900 million on the table for investors. The investment bank Credit Suisse First Boston (CSFB) said a 7% gross spread would be received for compensation for underwriting the shares. After obtaining the IPO shares, the SEC alleges some investors, paid huge commissions to CSFB and had an economic interest in the form of a kick-back immediately. CSFB, therefore, had an economic interest in the IPO and no full shares distribution.

NASD Disciplinary Proceedings: Practice and Procedure, Pickard, L. A., & Djinis, A. W. (1981). Bus. Law., 37, 1213.

The Impact of NASD Rule 2711 and NYSE Rule 472 on Analyst Behavior: The Strategic Timing of Recommendations Issued on Weekends, Dong, Y., & Hu, N. (2016). Journal of Business Finance & Accounting, 43(7-8), 950-975. The enactment in May 2002 of the Amendments to NASD Rule 2711 and NYSE Rule 472 mandated sell-side analyst discloses the spread of the recommendation of their security by the category of hold, sell, and buy. The transparency of analyst information is enhanced by this regulation and also mitigates the biasness of the long-recognized optimist in their recommendation. Although, the analysis is more likely to state recommendations to sell or downgrade revisions on weekends at times where there is limited attention by investors after the change of these rules. For the prestigious analyst, this pattern is more pronounced.

NASD¬†Expands Fairness Opinion Disclosure, Gould, J., & Ahmedni, Z. (2005).¬†Int’l Fin. L. Rev.,¬†24, 26.

 

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