National Association of Securities Dealers (NASD)

Definition

The National Association of Securities Dealers (NASD) was a self-regulatory organization in the United States responsible for overseeing the operations of securities firms and brokers. Created in 1939, its primary goal was to maintain a fair and efficient market by enforcing ethical standards and rules governing the securities industry. In 2007, NASD merged with the New York Stock Exchange (NYSE) regulatory unit, forming the Financial Industry Regulatory Authority (FINRA).

Phonetic

The phonetics of the keyword “National Association of Securities Dealers (NASD)” are:- National: /ˈnæʃənəl/- Association: /əˌsoʊsiˈeɪʃən/- of: /ʌv/ or /əv/- Securities: /sɪˈkjʊrətiz/- Dealers: /ˈdiːlərz/- NASD: /ˈnæzd/

Key Takeaways

Self-regulatory organization: The NASD was a self-regulatory organization (SRO) that primarily dealt with maintaining the integrity and stability of the securities industry. Founded in 1939, it was responsible for implementing regulatory measures in the United States to ensure the fair and ethical practices of its broker-dealer members.
Creation of the NASDAQ: In 1971, NASD established the National Association of Securities Dealers Automated Quotations (NASDAQ), an electronic stock market, as a subsidiary to promote transparency and electronic trading of stocks. The NASDAQ evolved over time and eventually became a separate company, operating as one of the world’s leading stock exchanges.
Merging into FINRA: In 2007, NASD merged with the regulatory arm of the New York Stock Exchange, forming the Financial Industry Regulatory Authority (FINRA), which is now regarded as the largest non-governmental SRO for securities brokerage firms and their registered representatives in the United States. FINRA is responsible for the regulation, compliance, and enforcement of rules pertaining to securities firms and their associated persons.

Importance

The National Association of Securities Dealers (NASD) is an important term in business and finance because it was a self-regulatory organization responsible for overseeing and regulating the functioning of brokerage firms and exchange markets in the United States. Established in 1939, NASD played a critical role in maintaining fair and ethical practices within the securities industry, fostering transparency, and protecting the interests of investors. It ensured that its members adhered to set rules and regulations pertaining to training, licensing, and arbitration of disputes. In addition to other key functions, the NASD also established the NASDAQ stock market, which revolutionized the trading process. In 2007, NASD merged with the regulatory arm of the New York Stock Exchange, creating the Financial Industry Regulatory Authority (FINRA), which continues to play a vital role in safeguarding investors and maintaining the integrity of the financial markets.

Explanation

The National Association of Securities Dealers (NASD) was a self-regulatory organization that played a vital role in overseeing the operations and conduct of securities dealers, brokers, and other market participants in the United States from its inception in 1939 until its consolidation into the Financial Industry Regulatory Authority (FINRA) in 2007. The primary purpose of the NASD was to promote ethical and responsible corporate practices and behaviors among its member organizations and to ensure the stability and functioning of financial markets. The NASD developed and enforced rules that governed the securities industry, monitored compliance, investigated violations and set licensing standards to protect investors and maintain the integrity and confidence in the financial market system. An essential part of NASD’s responsibilities involved providing a comprehensive regulatory framework that encompassed a variety of business aspects, including but not limited to, trade reporting, dispute resolution, and surveillance of trading activities. The NASD also played a crucial role in establishing, maintaining and upgrading the NASDAQ – one of the largest electronic stock exchanges in the world – which still continues to operate under FINRA oversight. By actively monitoring the securities industry and implementing both preventative measures for potential misconduct and disciplinary actions for violations, the NASD, now succeeded by FINRA, ultimately served as a guardian of investor interests. In sum, while it may no longer exist as an independent entity, the NASD’s legacy remains central to the ongoing efforts in ensuring transparency, fairness and efficiency in the investment landscape of the United States.

Examples

1. NASD Regulation of Broker-Dealers: One real-world example of the National Association of Securities Dealers (NASD) is its regulation of broker-dealer firms. Broker-dealers are companies that trade securities on behalf of their clients and hold securities for their own accounts. NASD was responsible for overseeing and enforcing regulatory rules for these firms to ensure the fair and transparent functioning of the securities market and protect investors from fraudulent practices. 2. NASD-Administered Licensing Exams: Another example of NASD at work in the business/finance world is its administration of licensing exams for individuals working in the securities industry. The Series 7 (General Securities Representative) and Series 63 (Uniform Securities Agent State Law) examinations are two of several exams administered by NASD. These exams aimed to ensure that individuals working in the securities industry have adequate knowledge and competency to perform their roles. 3. The Creation of NASDAQ: The NASD played a significant role in the creation of the NASDAQ (National Association of Securities Dealers Automated Quotations) stock market in 1971. Originally, NASD developed NASDAQ as an electronic platform to provide more transparency and efficiency to the trading process, making it easier for investors to see and compare quotes from different market makers. It has since grown to be one of the largest stock markets globally, including technology giants such as Apple, Google, and Microsoft. Note: In 2007, NASD merged with the New York Stock Exchange (NYSE)’s regulation committee to become the Financial Industry Regulatory Authority (FINRA), which is now responsible for regulating broker-dealers, conducting licensing exams, and overseeing stock exchanges like NASDAQ.

Frequently Asked Questions(FAQ)

What is the National Association of Securities Dealers (NASD)?

The National Association of Securities Dealers (NASD) was a self-regulatory organization (SRO) responsible for overseeing and regulating the securities industry in the United States. Established in 1939, its primary role was to govern the conduct of its members and ensure that investors were protected from potential fraud or malpractice. In 2007, the NASD merged with the regulatory arm of the New York Stock Exchange, forming the Financial Industry Regulatory Authority (FINRA).

What were the functions of the NASD?

The NASD had several key functions, including:1. Enforcing rules and regulations for member firms.2. Examining and licensing security industry professionals.3. Supervising the formation and dissolution of brokerage firms.4. Monitoring trading activity to detect potential fraud or manipulation.5. Providing dispute resolution services through arbitration and mediation.

What is FINRA, and how is it connected to the NASD?

The Financial Industry Regulatory Authority (FINRA) is the successor of the NASD. Created in 2007, FINRA is a non-profit organization authorized by the U.S. government to regulate member brokerage firms and their registered representatives. It is responsible for writing and enforcing rules governing these firms, ensuring market integrity, and educating investors.

How do firms become members of FINRA?

Brokerage firms and securities dealers wishing to become FINRA members must submit an application and go through a rigorous review process, where their financial condition, operational capacity, management experience, and compliance system will be thoroughly assessed. Once approved, they are obligated to follow FINRA’s rules and regulations.

How does FINRA help protect investors?

FINRA actively works to protect investors by enforcing rules and regulations on its member firms, conducting periodic examinations, and handling disciplinary actions, including fines, sanctions, and suspensions. It also provides educational resources to help investors make informed decisions, and offers dispute resolution services, such as arbitration and mediation, to address any conflicts or issues with their brokerage firms.

Who oversees FINRA?

Although FINRA is a self-regulatory organization, it is overseen by the U.S. Securities and Exchange Commission (SEC), which ensures that FINRA’s rules and regulations are consistent with federal securities laws and the protection of investors.

Related Finance Terms

Financial Industry Regulatory Authority (FINRA)
Securities and Exchange Commission (SEC)
Series 7 License (General Securities Representative Exam)
Over-the-Counter (OTC) Market
NASD Rules and Regulations

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