IRVINE, Calif. - A battle is brewing among competing candidates for the NASD board of governors.
Candidates selected by NASD's nominating committee face a tough challenge from dissident candidates who got on to the association's ballot via a petition process.
Both sides are talking tough about fixing what is perceived as heavy-handedness by NASD examiners and enforcers.
"We want a return to sanity and reasonableness," said John Busacca, president of North American Clearing Inc. in Longwood, Fla. Richard Goble, his partner, is one of three petition candidates for the board.
Mr. Goble is the founder and principal shareholder of North American Clearing.
Mr. Busacca last year was a successful petition candidate for a spot on the NASD District 7 committee, based in Atlanta.
"There's a sense of being abused during the [examination] process," said John Simmers, El Segundo, Calif.-based chief executive of ING Advisors Network Inc. of Atlanta and a nominating committee candidate.
Four of the 18 board seats are up for election; three of them are being contested. The outcome will be determined Feb. 3 at Washington-based NASD's annual meeting.
Every broker-dealer, regardless of size, casts one vote for a candidate in each of the four spots.
Besides Mr. Simmers, the other nominating committee candidates are David DeMuro, head of compliance for Lehman Brothers Inc. in New York and Josh Weston, former chairman and chief executive of Automatic Data Processing Inc. in Roseland, N.J.
Opposing them are Mr. Goble; Brian Kovack, president at Kovack Securities Inc. in Fort Lauderdale, Fla.; and a public candidate, retired U.S. Navy Rear Adm. Tyler Dedman of Lake Mary, Fla.
Mr. Busacca said he and the dissidents are taking advantage of something of an uprising among small broker-dealers over what are seen as burdensome NASD exams and unreasonable fines.
"The NASD is too focused on technical [violations] that bring in money," such as unintentional late reporting of stock and bond trades, or failure to meet unreasonable demands for information in what are now routine sweep exams, he said.
"If a person forgets to report a bond trade within 15 minutes, that should not be a $15,000 fine for a $5,000 [net capital] broker-dealer," Mr. Busacca said.
"It's a money grab," he added. "Each year, they have more in fines."
Last year, NASD collected $125.4 million in fines, a record, up 84% from the amount in 2002 (InvestmentNews, Jan. 16).
The financial windfall caused NASD last year to rebate part of the assessments it charged members.
But the heavy-handedness has the broker-dealer community ready for change, Mr. Busacca said.
The petition candidates needed signatures from about 500 dealers to get on the ballot, which is not an easy task, he said.
"We got that in a little over a week or so," and signed petitions are still coming in, Mr. Busacca added.
The dissidents want an overhaul of NASD's exam process, including notification of potential violations before an enforcement action is proposed, lessened penalties for violations that involve no customer harm, easing restrictions on expanding a broker-dealer's business, reduction in requests for records and a "presumption of innocence at all times," according to the petition candidates' platform.
The opposing ticket, the nominating committee candidates, agrees that the exam process needs an overhaul and has its own "bill of rights" for NASD members and registered representatives.
"We went through 23 exams last year," Mr. Simmers told a recent meeting of broker-dealers, during which examiners often made "ungodly requests" for documents.
Mr. DeMuro told the same gathering that his firm has an "army" of compliance people to deal with regulatory requests, which "I'm not convinced is helping any clients."
Mr. Simmers and Mr. DeMuro said NASD should agree to give members an estimate of the time and scope of an exam, follow a consistent and coordinated approach, give members an opportunity to respond to findings, allow for legal representation and provide "fair notice" of new-rule interpretations.
Mr. Simmers said an emerging issue is NASD's "next generation" of exams that will be based on automated risk assessments. The exams will vary by firm.
The "construction of this black box is of tremendous concern," he said. Firms need to ensure that the data NASD is using is accurate and understand how the assessments are created.
The nominating committee candidates such as Mr. Simmers say they have more experience working with regulators.
"You need to have a discussion that's not just an angry voice sensationalizing issues," he said.
"We're not a group of bomb throwers," said Ronald Kovack, founder, and chairman of Kovack Securities, and Brian Kovack's father. "Any attempt to portray us as radical insurgents would be intellectually dishonest."
Usually underdogs, the current crop of petition candidates may have a leg up. Last year, they successfully ran a dissident slate for NASD's District 7 committee.
"These petition candidates may be ahead of the curve, because they've been through the process before in District 7," said Lisa Roth, a San Diego compliance consultant.
"So far, we have received no fewer than three communications from them, and none from the nominating committee candidates yet," Ms. Roth said.
"We're going to see if we can't play this [NASD District 7 win] in Peoria [Ill.]," said Ronald Kovack, one of the winning outside candidates for District 7. Mr. Simmers conceded that NASD's nominating committee candidates "are behind the eight ball." But they may be gaining ground. The nominating committee candidates have recently picked up the endorsement of the San Diego-based National Association of Independent Broker/Dealers Inc.
Mr. Simmers is also supported by the Financial Services Institute Inc. in Atlanta, which represents independent-contractor broker-dealers.