NASD BUILDS A MAGINOT LINE

The NASD's Special Notice to Members 00-90 Seeks to Raise Obstacles and Barriers in the Path of Dissident Candidates Seeking Nomination to the Board of Governors.  Read Why the Proposals Should Be Rejected.

On the Thursday before Christmas, the NASD published Special Notice to Members 00-90 (the Special Notice), which  is innocuously subtitled: Mail Vote --- NASD Solicits Vote on Amendments to the NASD By-Laws On Selected Corporate Governance Issues; Last Voting Date: January 22, 2001. Did you miss the Special Notice? Seems that a lot of NASD members did. I wonder why . . . hmmm . . . could it have been because the SRO intentionally posted the communication just before the Christmas weekend . . . smack dab before the New Year’s holiday? Could the timing of the Special Notice and the membership vote have been accelerated to coincide with SEC Chairman Levitt’s departure and the hiatus prior to the installment of a new regime?   Well, hats off to NASD --- they seemed to have discovered a new form of stealth technology.  

The NASD’s Certificate of Incorporation proclaims under its “Objects or Purposes” that it will “promote through cooperative effort the investment banking and securities business . . . [and] provide a medium through which its membership may be enabled to confer, consult, and cooperate . . . [and] promote self-discipline among members, and to investigate and adjust grievances . . .” For the NASD to have the legitimacy necessary to ensure such objects and purposes are met, it must be viewed as above the fray. In the more than 60 year history of the NASD, there have been only two contested Board elections, during which the grand total of two dissident Governors were elected, one of whom resigned in mid-term. During both contested elections a number of complaints were filed concerning the NASD’s conduct of the election and its role; such complaints addressed issues of unfair practices and communications. 

However, the NASD is now seeking permission to permit its National Nominating Committee (NNC) to participate in contested Board of Governors elections: a role it is specifically prohibited from undertaking under current rules, along with NASD staff, officers, and committees.  Seems like a sensible rule.  After all, it was only a few years ago in 1996 that the SEC specifically chastised the NASD for its inappropriate involvement in a widely publicized contested District election. 

What is the core of the problem? There’s no simple answer. The first contested election, (in which I ran as an unsuccessful Industry candidate and served as legal counsel to the slate of dissidents, two of whom were elected) arose from a growing sense of frustration by the majority of the NASD’s membership that the organization had become the hostage of larger firms.  This was exacerbated by a sense that the SRO was becoming too adversarial in its dealings with its smaller members and was pursuing expansion policies at the risk of economic soundness. The flashpoint ignited because of a suspicion that the NNC was controlled by the vested interests at NASD and would refuse to nominate individuals representative of the majority of the membership. 

The Special Notice states that once the NNC nominates a candidate that it should be permitted to function beyond that nomination process. The Special Notice argues that the NASD’s present rules unfairly prohibit the NNC from 

taking a position in contested elections. As a result of this prohibition, in contested elections, the NNC has been unable to explain the reasons an NNC-nominated candidate is worthy of support, and has been unable to respond to statements made by other candidates or parties about the NNC nominees. The NNC’s current inability to support its candidates in contested elections is a deterrent to qualified individuals accepting nominations. 

Nonsense! First off, the NNC is limited by its own title to “Nominating,” and with good reason. What is the commonsense role of a nominating committee?: contact prospective nominees, vet them, and nominate them as the NASD’s official candidate. Once the hats are thrown into the ring it is properly the province of the nominees to advance their own candidacy. If a particular nominee cares enough about serving on the Board, he or she should take the time and expend the energy to explain what they believe and answer any critics. This shouldn’t be left to a proxy. Worse, the NASD as a regulator should not get dragged into some internecine warfare through the NNC.

Second, there’s no reason for the NNC to support its nominees through communications justifying its selections. The members should give --- and do give---extraordinary weight to the official imprimatur of an NNC nomination. If thiswere not the case, then why have only two dissidents ever won an election? However, the NASD is now attempting to gain further advantage for itshand-picked house candidates by permitting the NNC to get intothe ring and fight with whatever opposition apparently dares to question an official candidate. 

Finally, what idiot actually believes that the proposed expansion of NNC’s power is urgently needed because the absence of such has been a “deterrent to qualified individuals accepting nominations”?  And what fool allowed such a statement to see print? Does the NASD admit that it has not been nominating qualified candidates for 62 years? Does the NASD tar those sitting NNC nominated Governors with the admission that the SRO could have gotten more qualified individuals? Are there not thousands of principals at NASD member firms --- all eminently qualified to sit as a Governor --- who wouldn’t jump at the opportunity to accept an NNC nomination? 

In a different context, the Special Notice proposes that dissident Industry candidates be penalized for forming a “slate” during a contested election. This penalty would take the form of requiring any slate of contested candidates to obtain 10% of the membership’s votes to gain a nomination, where the current rule only calls for 3% per nominee. Consequently, given that it will be unlikely that more than 3 dissidents will seek to run as Industry candidates (given the rotating basis upon which seats become vacant), this proposal cleverly imposes a higher percentage threshold than required on a pro-rata basis. By way of example, a so-called two person slate would presently need a total of 6% membership nominations but under the amendment would require 10%; a three person slate 9% versus 10%). 

But you’ve got to give credit to those industrious staff members at NASD, because they took it even a step further. Whereas the current requirements do not limit the number of petitions a member can sign, the Special Notice now proposes “no member shall endorse more than one such nominee.” This subtle amendment, perhaps better termed subterfuge, is a double whammy. First, the NASD seeks to prevent dissidents from bonding together and finding common ground by imposing something akin to a marriage penalty.  Second, the NASD sets those candidates against each other by making them engage in a race to get as many nominations as they can --- before the other guy does. If the NASD truly represents its membership’s interest, it need not build castle walls and moats. In 61 of the last 62 years, the membership closed ranks and supported the NNC nominees. But if and when the NASD once again becomes politicized and loses its direction, then the membership must have the ability to nominate as many qualified candidates as possible.  

Which eventually brings me to the final point of this article. Why now? Under the recent leadership of Frank Zarb the NASD has enjoyed its greatest success. Frank is moving the organization, albeit at times kicking and screaming, into the global marketplace and into the 21^st Century. He did not create the practices that culminated in the SEC 1996 sanction of the NASD. However, he did inherit the dissension and distrust that emanated from the SRO’s improper conduct. The high tide of that dissatisfaction probably occurred with the 1999 election of dissident Governors Alan Davidson and LaRae Bakerink.  But that tide has receded. . . for now. Last year’s dissident slate went down in defeat. 

I fear that the same misguided counsel that pushed the NASD into its adversarial posture in the early and mid-90s may once again be rearing its ugly head. Maybe with the allegedly waning days of the Zarb administration those dark forces feel less restrained. Maybe with the accession of new NASD President Glauber there is some agenda that needs better explanation. Disagreement does not render the other person your enemy . . . friends may still disagree. In the final analysis, the NASD appears on the verge of returning to its former, ill-considered bunker mentality. I fully anticipate that these foolish amendments will pass. But the victory will prove illusory and a valuable safety valve allowing the members to periodically let off steam will be removed. An organization of the NASD’s stature should not resort to such measures.  The Maginot Line didn’t work; it only fostered a dangerous complacency.