H.R. 957, The Broker Accountability through Enhanced Transparency Act of 2003

Written Statement of the North American Securities Administrators Association
To the Capital Markets, Insurance and Government Sponsored Enterprises Subcommittee, House Committee on Financial Services

March 6, 2003

This statement is submitted on behalf of the North American Securities Administrators Association (NASAA)*. NASAA appreciates this opportunity to provide information to the Subcommittee. We have a close working relationship with the NASD in a number of areas. Besides being a partner with NASD in development and maintenance of the Central Registration Depository (CRD), NASAA – along with the SEC – relies on NASD as the vendor to operate the parallel Investment Adviser Registration Depository (IARD).

On December 23, 2002, NASAA announced its legislative agenda for the 108th Congress, and listed enhanced investor access to information regarding industry professionals as a priority issue. NASAA has supported for many years a legislative change to provide legal protections to NASD as carries out is public information functions.

Our initial review of H.R. 957 has raised a few questions regarding the language. Because NASAA and the NASD share management decisions regarding the CRD, we have come to agreement with the NASD on two minor technical changes to the bill, as specified below. NASAA is pleased to support H.R. 957, the Broker Accountability Through Enhanced Transparency Act of 2003, with inclusio n of those recommendations.

Today, investors can search online for information about their stockbrokers and financial advisers but they may have to wait days to find out, for example, if a broker has a disciplinary history. The NASD maintains the CRD, which contains information about the nation’s approximately 800,000 broker agents and investment adviser representatives, and 6,000 brokerage firms. Information on 14,000 investment adviser firms is separately maintained in the IARD. While the NASD has explicit liability protection for releasing this information to consumers over the phone or via fax, it believes it is not protected should investors directly access information online from the CRD database. Liability protection for the NASD for online disclosure of CRD records would make it easier for investors to do their homework. While investors can obtain information from their state securities administrators, we support initiatives to reduce the burdens on availability of
all facts that might impact on informed investment decisions. During the last session of Congress, NASAA supported language to address this issue that was included in HR 1408, the Financial Services Antifraud Network Act of 2001, which was passed overwhelmingly by the House, but was never considered by the Senate. The NASD needs this liability protection so investors can receive real-time answers to their questions about their broker.

Technical Suggestions for H.R. 957
NASAA fully supports giving the NASD the needed liability protection to offer broker information to investors on the Internet. In order to provide full disclosure about firms and their brokers, NASAA recommends the following two technical amendments to the legislation.

1. Subsection (1)(B)(ii) – replace existing language with the following to be consistent in the reference to the information to be disclosed:

“(ii) registration information, including disciplinary actions, on the members and their associated persons of any registered national securities exchange that has chosen to use the system described in subsection (1)(A) for the registration of its members and their associated persons; and”

2. Subsection 3 – replace “reported” with “provided in response to inquiries” to make clear that the process for disputed information applies to the information made public through the NASD Public Disclosure Program and not to the information available to regulators through the CRD system, which is subject to different federal and state legal issues.

As a matter of background, the state securities regulators, through NASAA, have been working with the NASD since 1980 to develop a system that would collect license information for broker-dealers and their agents to be stored in a single place, the CRD, and be available to all securities regulators. Making pertinent information available to the public and urging customers to check the CRD before investing with a broker is a cornerstone of NASAA’s investor education program.

NASAA and the NASD have worked diligently to take advantage of technological advances to improve CRD as a licensing and enforcement tool. In 1999, for instance, NASAA and the NASD as joint owners, launched Web CRD, a thoroughly redesigned system that is easier for industry representatives to use, yet provides regulators with the ability to keep even closer track of potentially problematic firms and individuals. Thanks to Web CRD, a regulator can access this licensing and disciplinary information from anywhere in real time. For example, a state securities regulator performing an exam on a broker-dealer in Kansas can use a laptop to log onto Web CRD and discover an action taken against that broker-dealer by the NASD that same morning.

Web CRD also allows regulators to proactively search the database and generate reports highlighting bad brokers and troubling trends. The CRD system contains records on more than 800,000 individuals and over 6,000 firms. Disciplinary information is captured from a number of sources, including state securities regulators, the SEC, the NASD, the NYSE and AMEX, from FBI rap sheets returned from fingerprint submissions, as well as from individual registrants and the firms.

Summary
State securities regulators have a long history of providing their residents with investment industry information. NASAA supports H.R. 957 with the above-mentioned technical changes and looks forward to working with the Subcommittee as you move forward with this bill and others focused on investor protection.

For the Committee’s full information, we are submitting a list of our full legislative agenda, as well as a comment letter we sent to NASD in January regarding its initiative to enhance the public availability of information.

We thank the Committee for its interests in these issues and for the opportunity to comment on this legislation.

Endnotes:
*The oldest international organization devoted to investor protection, the North American Securities Administrators Association, Inc., was organized in 1919. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Canada, Mexico and Puerto Rico. NASAA is the
voice of securities agencies responsible for grass-roots investor protection and efficient capital formation.

March 6, 2003

Issues & Advocacy, Legislative Activity, Testimony