What it means
A self-regulatory organisation is an industry body that writes and enforces rules for its own members under the supervision of a government regulator. The NASD was established in 1939 following legislation passed to bring order to the over-the-counter market, where securities are traded directly between dealers rather than on a formal exchange.
Its work covered several areas. It licensed brokers by setting qualification exams, required firms to follow standards of fair dealing, inspected member firms and disciplined those that broke the rules.
It also ran an arbitration forum where investors and brokers could resolve disputes without going to court, which was usually faster and cheaper. The NASD also played a major role in creating Nasdaq.
In 1971 it launched an automated quotation system for over-the-counter shares, which became the Nasdaq market. Over time Nasdaq grew into a full stock exchange and was separated from the NASD.
In 2007, the NASD combined with the member regulation, enforcement and arbitration functions of the New York Stock Exchange to form the Financial Industry Regulatory Authority, or FINRA. Today FINRA carries on the work, and older documents, exam names and rules that mention the NASD are part of that history, which is why the name still appears in legal text.
You may still see the NASD name in legacy contracts, old broker disclosures and the history of securities rules. For a non-specialist, the useful point is that the body overseeing US brokers today is FINRA, whose roots go back to the NASD.
The NASD's rules were also the foundation for many conduct standards that brokers still follow, such as the duty to recommend suitable investments and to deal fairly with customers. Those principles carried into FINRA's rulebook, so understanding the NASD helps explain why brokers behave as they do.
In practice
Real-world examples.
Example
A compliance officer reviewing a decades-old brokerage agreement sees a clause referring to NASD arbitration. She checks with legal counsel and learns that the clause now points to FINRA's dispute forum. She adds the finding to a register of documents that need updating. The register is reviewed by the legal team every quarter.
Example
A securities lawyer writes a history of the Nasdaq market for a client presentation. She explains that the NASD created the automated quotation system in 1971 and later separated from it. The client uses the history to explain why Nasdaq is a company and not a regulator. The slide is reused in later staff training on market structure.
Example
A finance student reading about the 2007 merger of regulators learns that the NASD's functions were combined with those of the NYSE's regulatory arm. He realises that the exams he is studying were originally set by the NASD. His study guide still lists some old exam names that include the letters NASD.
Case study
Seen in the real world.
Halyard Securities is an illustrative, fictional brokerage that opened in the 1990s. Its old customer agreements named the NASD as the body that would hear any disputes between the firm and its clients.
When an investor complained about a trade in a recent year, the firm's new compliance officer found the old reference and had to confirm which forum applied. Counsel advised that the forum had been taken over by FINRA after the 2007 merger, and that the old wording could be corrected without needing client consent.
In this illustrative story, Halyard updated its template agreements and reviewed all its legacy documents, including old marketing material and training manuals. The case shows why outdated references to a body that no longer exists can create avoidable confusion. The firm also learned that a simple annual review of template wording would have caught the issue years earlier.
Watch out
Common mistakes.
- Thinking the NASD still exists as a separate regulator, when it merged into FINRA in 2007.
- Confusing the NASD with Nasdaq, when Nasdaq is the market and the NASD was the regulator that created it and later stepped back from running it.
- Assuming the NASD was a government agency, when it was a self-regulatory organisation overseen by the SEC and funded largely by its member firms through fees and fines.
Questions
People also ask.
What replaced the NASD?
FINRA, which combined the NASD with the regulation functions of the New York Stock Exchange. FINRA is itself a self-regulatory organisation overseen by the Securities and Exchange Commission.
What did the NASD regulate?
Brokers and dealers who traded securities, especially in the over-the-counter market. It also oversaw the qualification exams that sales staff had to pass.
Is Nasdaq related to the NASD?
Yes, the NASD created the Nasdaq system in 1971, and Nasdaq later became an independent company. The two names look similar, which is why they are so often confused.
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