Fight Club

Scrappy independent b/d's are swinging back against an NASD regime that they say has beaten them down and largely ignored their concerns

An insurgency of small brokerage firms has mounted an all-out assault against the NASD over an allegedly biased election process. And its latest Molotov cocktail is being served up in the coming weeks, one that could potentially drive a wedge between member firms.

The Financial Industry Association, an upstart advocacy group of an estimated 1,000 small independent broker/dealers that seeks sweeping industry reforms, is attempting to block the NASD's nominations for seats on its district committees on grounds that the candidates are not representative of its constituents. Small firms feel that the NASD, a self-regulatory organization, favors its big wirehouse members, like Merrill Lynch and Smith Barney, while ignoring the little guys who represent roughly 80 percent of the industry. (Sixty-five percent of the NASD member firms have 10 employees or less, and another 15 percent have less than 150 personnel.) The district committees serve as sounding boards for members to voice concerns and get feedback on various rules.

Originally slated for Sept. 1, the confirmation of NASD committee nominees has been postponed — in light of FIA's efforts — to allow voting members to consider alternative candidates. The FIA has circulated a petition with a list of its own nominees that it believes better reflects the voice of the majority. The deadline for mail-in petitions to be submitted is Oct. 2, according to one NASD official. The campaign period will run from Oct. 11 until Oct. 31. NASD members each have one electoral vote, regardless of the size of the firm.

This isn't the first time the FIA has wielded its influence to put the kibosh on an election. In February, it successfully contested the nominations for the NASD National Board of Governors, winning two seats on the board, including Brian Kovack, president of Kovack Securities in Ft. Lauderdale, Fla., a shop that has 31 employees and $1.7 billion in assets, and Admiral Tyler Dedman, a retired Navy officer from Lake Mary, Fla.

The FIA's moves to contest elections is really part of a larger effort by the group to stamp out what it sees as heavy-handed rulemaking, hefty fines for minor infractions, favoritism toward large firms and inadequate representation for small member firms. “The NASD has really spiraled out of control in the last five years,” says John Busacca, president of North American Clearing, an independent b/d in Longwood, Fla., and one of the founders of the FIA as well as a so-called “dissident” member of the NASD's District 7 committee. “The use of regulation to put small firms out of business has got to end.”

Busacca and his band of brothers complain that the NASD often imposes fines instead of offering guidance or issuing warnings on minor infractions, even when they have no customer impact. They would like to see more transparent compliance examinations, looser advertising restrictions, fewer Rule 8210 requests (the NASD's broad requests for information) and a more reliable arbitration system under which reps who are in good standing can be exonerated without having their reputation permanently sullied. Busacca particularly abhors the NASD's use of sweep exams, because they invariably ensnare a few otherwise good firms — along with the bad — that haven't met some minor reporting requirement, he says.

In fact, the FIA says recent regulatory changes have severely impaired the profitability of small firms and, in some cases, forced them to fold up their tents. For example, reporting requirements, such as the Order Audit Trail System (OATS) and the Trade Reporting and Compliance Engine (TRACE), result in high archiving, staffing and legal costs that are a nightmare for small firms, but easily absorbed by large firms.

Indeed, according to the NASD, the number of member firms has decreased by 161 firms, to 5,111 in 2005 from 5,272 in 2003. Meanwhile, during the same period, the total number of branches grew by 13,994, up to 106,855 in 2005 from 92,861 branches — the big firms are the only ones that operate within a branch system.

Of course, not everyone agrees with the FIA's aggressive approach. Kenneth Cherrier, chief compliance officer at Fintegra, an independent b/d in Minneapolis, with about 150 reps, fears that the FIA's “unprofessional tone” and “disrespect” for regulators will result in a schism in the brokerage industry. Others say it could even put the voice of small firms in jeopardy. “By polarizing the small firms that we have, we're diluting our power base,” says Bill Alsover, chairman of Centennial Securities Company, an independent b/d with 35 reps headquartered in Grand Rapids, Mich., and head of the NASD Small Firm Advisory Board (SFAB). “We could lose representation on the board.” He points to the New York Stock Exchange (NYSE), where members have no representation on its board, as an example.

But making incendiary remarks and stirring the pot by opposing elections is the only way the FIA believes it can truly bring about meaningful change. “You've got to hit the NASD over the head with a 2 × 4 to get their attention,” says Jed Bandes, a certified financial planner and president of Mutual Trust Company of America Securities in Clearwater, Fla., a b/d with roughly 50 employees. So don't expect the saber rattling to let up any time soon.

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