NASD Board Not in Compliance, Auditor Says

An independent auditor has criticized the NASD for failing to have enough public directors and committee members. Enhanced public representation was one of the key reforms ordered by the SEC in its 1996 settlement with the NASD.The criticisms were among several findings in a July report by special NASD auditor Fredrick Werblow, whose latest audit was the last in a series of examinations required as

An independent auditor has criticized the NASD for failing to have enough public directors and committee members. Enhanced public representation was one of the key reforms ordered by the SEC in its 1996 settlement with the NASD.

The criticisms were among several findings in a July report by special NASD auditor Fredrick Werblow, whose latest audit was the last in a series of examinations required as part of the SEC settlement.

Werblow's report recommends that individuals who serve as directors of brokerage firms should not be classified as public members on the NASD's board and committees. The NASD currently classifies outside directors of firms as public members, despite a 1997 SEC interpretation that said such individuals should be counted as industry members.

Although the report does not name names, several public NASD board and committee members sit on broker/dealer boards as well. Elaine Chao, a public NASD governor, joined the board of Raymond James Financial in November 1998. Alfred Osborne, a public member of the NASD's National Nominating Committee, is a director of New York-based Whitestone Capital Group, an investment banking firm.

Neither Chao nor Osborne responded to requests for comment.

Former U.S. President Gerald Ford was elected to the NASD board as a public member for a one-year term beginning in 1999. Since July 1998, Ford has been an honorary director of Citigroup and a regular director of Travelers since 1986.

An NASD spokesperson says Ford was not one of the public members Werblow was referring to because Ford is a non-voting honorary Travelers director. Nevertheless, Ford continues to receive 125,000 dollars a year from Travelers, according to the firm's proxy.

Ford was traveling and unavailable for comment.

The spokesperson could not confirm the other individuals Werblow was referring to, but says the auditor is wrong in his recommendation. "Our SEC-approved bylaws specifically state that individuals that are outside directors on a broker/dealer's board are defined as out-of-industry or nonindustry directors."

The NASD also says it received assurance from the SEC that its boards and committees were in compliance during 1999.

Werblow also reported that staff turnover continues to be a problem at the NASD in a number of departments. Werblow recommended that an independent party be retained to study working conditions, resources and compensation issues.

The SEC says Werblow and the NASD are working on implementation of all the recommendations made by the auditor.

NASD board member Alan Davidson is again rallying the small broker/dealer community to support independent candidates for this year's NASD board election.

Davidson, owner of Zeus Securities in Jericho, N.Y., in September sent a fax to NASD members asking for input and support for a slate of independent candidates. Important regulatory issues "necessitate a Board with ... sensitivity, common sense and compassion" for small firms, he wrote. The NASD has exhibited a "disturbing absence" of input from members, and he complained of an "increasing coordination and blur between the SEC and the NASD."

The NASD declined to comment on Davidson's statements.

Davidson's fax, titled "Remember Ralph Hinzman," recalled the case of the 87-year-old Hinzman, owner of a small broker/dealer in Weston, W.Va. The NASD fined Hinzman 5,000 dollars last year for failure to complete a Y2K readiness form, even though Hinzman had no computer at the time.

Last year, Davidson's Independent Broker-Dealer Association, in conjunction with the California Association of Independent Broker Dealers, ran four independent candidates for the NASD board. Two of the independents were elected--Davidson and LaRae Bakerink, head of compliance for Pacific American Securities in San Diego--edging out NASD-picked candidates. RR's editor in chief was an unsuccessful independent candidate.

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