WealthManagement Magazine

NASD Approves Immunity Proposal in Blitzkrieg Proceedings

One week after installing a new board of governors, and less than one month after ending comment on a controversial U-4 and U-5 immunity proposal, the NASD Board of Governors has approved enhanced immunity for statements member firms put on disclosure documents.The newly elected 27-member NASD board approved the measure Jan. 22, within a day after its approval by both the Nasdaq and the NASDR subsidiary

One week after installing a new board of governors, and less than one month after ending comment on a controversial U-4 and U-5 immunity proposal, the NASD Board of Governors has approved enhanced immunity for statements member firms put on disclosure documents.

The newly elected 27-member NASD board approved the measure Jan. 22, within a day after its approval by both the Nasdaq and the NASDR subsidiary boards, whose members also sit on the parent board.

But exactly what the boards approved is unclear. The proposal, according to an NASD spokesperson, is not yet in the form of a "final rule filing," and the staff is still "finalizing the words" for submission to the SEC.

When asked what the boards actually passed, the spokesperson replied: "What they passed is what will go to the SEC in the next few weeks."

The proposed rule released for comment last November would give firms a uniform standard of legal immunity from defamation for statements made on forms U-4 and U-5, as well as oral statements later included in those forms. The proposal requires a rep to prove with "clear and convincing" evidence that the statement was false and malicious. The evidence standard is seen by some attorneys as being tougher to prove than some existing state standards used in proving defamation claims.

In announcing its approval of a four-year pilot program to implement the new immunity standard in arbitration cases, the NASD says it intends to provide regulators with "more complete and accurate information when a registered representative leaves a brokerage firm."

The vote and approval of U-5 immunity so quickly after the comment period expired, Dec. 31, 1997, caught many by surprise. The speed with which the proposal was approved appears to be the result of the NASD's new streamlined process implemented last year by NASD Chairman, CEO and President Frank Zarb.

In an effort to speed up decision making, Zarb significantly reduced the size of the NASD subsidiary boards and made memberships in the Nasdaq, the NASDR and the NASD parent boards interlocking. That means subsidiary board members also serve on the parent board. Zarb also rescheduled board meetings so the subsidiary boards would meet within one day of the parent board.

In approving the immunity measure, the new process seems to have worked as designed: the NASDR board gave its consent in a meeting held Wednesday afternoon, Jan. 21. The following morning, Jan. 22, the Nasdaq board voted "yes." Hours later, the parent board convened for final approval.

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