NASD Telephone Hotline:

Enhancements Could Help Investors Be Better Informed About Brokers' Disciplinary Records

GGD-96-171: Published: Aug 19, 1996. Publicly Released: Aug 22, 1996.

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Pursuant to a congressional request, GAO reviewed the effectiveness of the National Association of Securities Dealers (NASD) hotline, focusing on: (1) investors' accessibility to the hotline; and (2) whether the information provided by the hotline meets NASD disclosure policies.

GAO found that: (1) over 300,000 investors have used the NASD Regulation hotline to obtain background information and disciplinary histories on their brokers; (2) less than 1 percent of the investors using the hotline own shares in publicly traded companies or a mutual fund; (3) most investors make investment-related decisions without using the NASD hotline; (4) the hotline does not disclose information related to a broker's involvement in civil cases, arbitration, or customer complaints; (5) these allegations are not disclosed until they are proven; (6) most state securities regulators disclose brokers' disciplinary histories to those investors that request background information; (7) the amount and type of information an investor receives depends on who the investor calls; (8) most of the disclosed information meets NASD disclosure policies; (9) NASD does not routinely verify whether an investor receives all of the information it requested; (10) NASD did not comply with disclosure polices in 13 cases; (11) there were 42 instances in which NASD failed to disclose complete background or all of the disclosable information, and 2 instances in which it disclosed more information than necessary; and (12) NASD Regulation is redesigning its central registration depository (CRD) to provide more accurate and timely disciplinary information.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: NASD submitted a rule change to SEC that would implement the intent of this recommendation. SEC has received comments and returned the rule submission to NASD for changes in response to the comments. After these changes are made, NASD will submit the rule to SEC for final approval.

    Recommendation: To help ensure that all relevant information is made available to as many investors as possible, the Chairman, Securities and Exchange Commission (SEC), should encourage and support NASD Regulation efforts to explore other ways of publicizing the hotline number to a wider audience of investors, such as including the hotline number on account-opening documents or account statements, and making disciplinary related information directly available to investors through the Internet.

    Agency Affected: United States Securities and Exchange Commission

  2. Status: Closed - Implemented

    Comments: SEC has encouraged NASD Regulation efforts on this matter and NASD is taking steps ensure necessary data available to investors.

    Recommendation: To help ensure that all relevant information is made available to as many investors as possible, the Chairman, SEC, should encourage and support NASD Regulation efforts to provide hotline callers with all the relevant disciplinary-related information available in CRD, such as whether a broker is the subject of a customer complaint, a settled arbitration, or a settled civil case; if NASD Regulation does not disclose this additional information, it should at least inform callers that the information is available from most state regulators.

    Agency Affected: United States Securities and Exchange Commission

  3. Status: Closed - Implemented

    Comments: NASD Regulation has implemented the recommendation.

    Recommendation: To help ensure that all relevant information is made available to as many investors as possible, the Chairman, SEC, should encourage and support NASD Regulation efforts to develop and implement cost-effective quality assurance checks, such as independent review and testing of information derived from CRD, to ensure that information provided to hotline callers is disclosable and complete.

    Agency Affected: United States Securities and Exchange Commission

 

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