What Is the National Association of Securities Dealers?
The National Association of Securities Dealers (NASD) was a prominent self-regulatory organization (SRO) in the United States, responsible for overseeing the conduct of broker-dealer firms and their registered representatives in the securities industry. Operating under the ultimate supervision of the Securities and Exchange Commission (SEC), the NASD played a crucial role in maintaining fair and ethical practices within the market from its inception until its merger in 2007. Its functions included writing and enforcing rules, conducting examinations of member firms, and providing a forum for dispute resolution.
History and Origin
The National Association of Securities Dealers was established in 1939, a period when the U.S. financial markets were undergoing significant reform following the Stock market crash of 1929 and the Great Depression.22 Its creation was mandated by the Maloney Act amendments to the Securities Exchange Act of 1934, which authorized the SEC to register national associations of broker-dealers for self-regulation under government oversight.20, 21 The NASD was the only securities industry association formed under these amendments.19
For nearly seven decades, the NASD served as a primary regulator. A significant development in its history was the founding of the NASDAQ stock market in 1971, which revolutionized over-the-counter trading by providing an automated quotation system.18 The NASD operated and regulated NASDAQ until 2006, when NASDAQ became an independent entity.17
In 2007, to streamline the regulatory framework and reduce duplication, the NASD merged with the member regulation, enforcement, and arbitration operations of the New York Stock Exchange (NYSE) to form the Financial Industry Regulatory Authority (FINRA). This consolidation was approved by the SEC on July 26, 2007, and became effective on July 30, 2007, marking the end of the NASD's independent operation.15, 16 More details on FINRA's historical context can be found on its official website.14 The merger aimed to create a more efficient and effective regulator for U.S. securities firms.13
Key Takeaways
- The National Association of Securities Dealers (NASD) was a crucial self-regulatory organization (SRO) that oversaw the U.S. securities industry.
- Founded in 1939 under the Maloney Act, it aimed to ensure fair practices and investor protection after the Great Depression.
- The NASD was responsible for the operation and regulation of the NASDAQ stock market and the over-the-counter market.
- It administered licensing exams for securities professionals and enforced industry rules.
- In 2007, the NASD merged with the New York Stock Exchange's regulatory division to form FINRA.
Interpreting the National Association of Securities Dealers
The National Association of Securities Dealers (NASD) functioned as a frontline regulator, interpreting and applying rules to ensure the integrity and fairness of the securities markets. Its role involved active regulatory oversight of member firms and their activities. This included developing standards for business conduct, enforcing compliance through examinations and disciplinary actions, and setting qualification requirements for individuals working in the securities sector. The NASD's interpretations often guided firms on how to adhere to federal securities laws and ethical trading practices, contributing to market stability and public trust in the financial system.
Practical Applications
The NASD's regulatory activities had several practical applications within the financial industry. One key area was the licensing and qualification of investment professionals. The NASD developed and administered a series of examinations, such as the Series 7 exam, which were required for individuals to qualify for different roles within broker-dealer firms.12 These exams ensured a baseline level of knowledge and competency among those advising the public on securities.
Another significant application was market surveillance and regulation, particularly for the NASDAQ and over-the-counter market trades. The NASD continuously monitored trading activity to detect and prevent manipulative practices, ensuring orderly markets.11
Finally, the NASD provided dispute resolution services through arbitration and mediation for conflicts between investors and brokerage firms.10 This allowed for a more efficient and often less costly alternative to traditional litigation for resolving securities-related disputes.9 Information on current arbitration and mediation processes can be found on FINRA's website.8
Limitations and Criticisms
Despite its crucial role, the National Association of Securities Dealers, as a self-regulatory organization, faced certain limitations and criticisms. A primary concern centered on potential conflicts of interest, as an SRO is funded and governed by the very industry it regulates. While overseen by the SEC, questions could arise regarding the NASD's impartiality in enforcement actions against its own members, especially in complex or high-profile cases affecting the broader capital markets.
Another limitation was the regulatory overlap that existed prior to its merger. Both the NASD and the New York Stock Exchange's regulatory arm had their own sets of rules and enforcement mechanisms, leading to inefficiencies and potential inconsistencies for firms that were members of both.6, 7 This duplication of efforts was a significant driver behind the eventual consolidation into FINRA, aiming to create a more unified and streamlined system for investor protection and market oversight.4, 5
National Association of Securities Dealers vs. Financial Industry Regulatory Authority (FINRA)
The primary distinction between the National Association of Securities Dealers (NASD) and the Financial Industry Regulatory Authority (FINRA) lies in their historical relationship and scope. The NASD was a predecessor organization, operating as the main self-regulatory body for the U.S. securities industry from 1939 until 2007. FINRA, conversely, is the successor organization, formed in 2007 through the consolidation of the NASD and the regulatory functions of the New York Stock Exchange (NYSE) Regulation, Inc.3
FINRA assumed and expanded upon the regulatory responsibilities previously held by the NASD. While the NASD primarily oversaw NASDAQ and the over-the-counter market, FINRA's jurisdiction encompasses virtually all securities firms and registered representatives doing business with the public in the United States, irrespective of the exchange they primarily trade on. FINRA thus represents a modernization and streamlining of the regulatory framework that the NASD helped establish, aiming for greater efficiency and enhanced investor protection.2
FAQs
What was the primary role of the National Association of Securities Dealers?
The primary role of the National Association of Securities Dealers (NASD) was to regulate the U.S. securities industry by establishing and enforcing rules for its member broker-dealer firms and their associated persons. This included setting qualification standards for professionals, monitoring market activities, and resolving disputes.
When was the National Association of Securities Dealers replaced?
The National Association of Securities Dealers was replaced in 2007. Its regulatory functions merged with those of the New York Stock Exchange's regulatory division to form the Financial Industry Regulatory Authority (FINRA).
Who oversaw the National Association of Securities Dealers?
The National Association of Securities Dealers operated under the direct regulatory oversight of the Securities and Exchange Commission (SEC). The SEC had the authority to review and approve NASD rules and actions, ensuring compliance with federal securities laws.
What exams did the National Association of Securities Dealers administer?
The National Association of Securities Dealers administered various licensing examinations for investment professionals. These exams, such as the Series 7 (General Securities Representative Exam), ensured that individuals met minimum competency standards required to sell different types of securities products.1