Section Review

NASD data now a click away on the World Wide Web

This article appeared in the July 1999 issue of the Section Review.
© 1999 Massachusetts Bar Association
Edward R. Wiestis a Boston attorney specializing in business litigation and disputeresolution. He has served as a member of the National Association of SecuritiesDealers Panel of Arbitrators since 1991. Massachusetts' enactment of the Prudent Investor Act(1998 Acts and Resolves c. 398, codified at G.L. c. 203C, § § 1-11(approved Dec. 4, 1998)) gave trustees a welcome assurance that they had powerto flexibly manage the assets under their control as a single portfolio, ratherthan on an investment-by-investment basis, G.L. c. 203C, § 3. It did, not,of course, relieve fiduciaries of their duty to "exercise reasonablecare, skill and caution," G.L. c. 203C, § 3(a). Trustees'standard of care has changed with the evolution of information technologiesfrom the time modern financial accounting was developed to the present. Theavailability of instant data on both financial instruments and financialservice providers through the Internet can, and will, impose newresponsibilities on trustees — especially those non-institutionaltrustees who take direct responsibility for management of theirbeneficiaries' financial assets.

Newly-enacted G.L. c. 203C, § 10(a) expresslyauthorizes Massachusetts trustees to delegate investment and managementfunctions, provided they "exercise reasonable skill and cautionin," among other things, "selecting an agent." In many cases,lay trustees may choose to employ either a securities broker or a registered investmentadviser associated with a securities broker, to serve as both a custodian ofassets and an investment adviser. Fiduciaries always had the obligation toinvestigate the bona fides of brokers and advisers even before the PrudentInvestor Act expressly permitted their engagement. The development of bothcomputer databases and, more recently, the ability to access such databasesinteractively over the Internet, makes it far easier to conduct such a reviewtoday. The existence of such resources may mandate their use by trustees whenthey choose to employ the services of professional managers.
Since 1981, the National Association of Securities Dealers(one of the two principal self-regulatory organizations in the brokerageindustry) has operated (on behalf of state securities regulators), a CentralRegistration Depository. The CRD contains personnel and disciplinary recordsfor all individuals licensed as registered representative to sell securities inthe United States. Stockbrokers and their employers must report to CRD"promptly" after their occurrences:

  • finaldisciplinary actions (relating to securities or commodities businesses) thathave been taken by NASD Regulation and other self-regulatory organizations(e.g., the New York Stock Exchange), or by federal, state and foreignsecurities agencies
  • civiljudgments and arbitration decisions in securities and commodities disputesinvolving public customers
  • criminalconvictions, informations and indictments
  • settlementsof $10,000 or more among the parties to arbitrations, civil suits, and customercomplaints involving securities and commodities transactions
  • pendingindustry disciplinary actions that relate to securities or commodities business
  • pendingarbitrations and civil proceedings involving securities or commoditiestransactions
  • pendingwritten complaints alleging sales practice violations seeking damages of $5,000or more
  • employmentterminations after allegations were made involving violations ofinvestment-related statutes or rules, fraud, theft or (on the part of managers)failure to supervise investment-related activities
  • existenceof outstanding judgments and liens and whether an individual broker has soughtbankruptcy protection within the previous 10 years
CRD was inaugurated to provide state regulators with acentral data bank. However, investors and other members of the public are alsoeligible to receive information. The increasing ease of access to this materialimposes new duties on fiduciaries that either manage funds or delegate themanagement of funds to others.
Between 1987 and 1997, CRD data on a broker'sdisciplinary history was available only through written request, or, morerecently, a toll-free telephone line, (800) 289-9999, maintained by the NASD.Since 1997, however, the NASD has eased access to CRD information by making itavailable through the World Wide Web site of NASD Regulation Inc., thesubsidiary that currently operates CRD. Visitors to 1000asp. canlook up a broker's name and obtain information such as his or her currentand former employers and the states in which the broker is licensed to dobusiness. More importantly, the site will indicate whether or not thebroker's record contains reports of customer complaints or disciplinaryaction.
Detailed records are not yet available through the Web(pending resolution of privacy-related questions, including disclosure ofnon-securities related criminal convictions). Nonetheless, requests for fulldisclosure of such records (via either postal mail or e-mail) may betransmitted through the NASD Web site. The NASD does not charge individualinvestors for copies of such reports. Turnaround on such requests throughe-mail is now often less than one week.
Full records will identify the existence of customercomplaints (including complaints that were either withdrawn or settled),results of arbitration cases in which the broker was a party, and disciplinaryactions taken against the broker. The NASD report can then be used as a meansof obtaining copies of arbitration awards or disciplinary decisions availablein the public files of either the NASD or other self-regulatory organizations,the SEC, or state agencies. There is a nominal fee for copies of arbitrationdecisions; details of SEC and NASD actions against individual brokers can oftenbe found through the NASD Regulation and SEC ( World Wide Websites.
The availability of more information about those to whom atrustee may delegate investment responsibilities implicates a trustee'sduty "to exercise a sound discretion, and to be enlightened byobservance. . . ." Springfield Safe Dep. & Trust Co. v. FirstUnitarian Soc. 293 Mass. 480, 485, 200 N.E. 541, 545 (1936). The PrudentInvestor Act may make explicit a fiduciary's right to employ investmentprofessionals. The new law's direction that a trustee must employ"reasonable care, skill and caution" leaves little doubt that thefailure to review publicly available information concerning investmentprofessionals. The new law's direction that a trustee must employ"reasonable care, skill and caution" leaves little doubt that thefailure to review publicly available information concerning investmentprofessionals entrusted with trust assests may expose the trustee to personalliability in the event of defalcation or mismanagement. Cf. Barker v. Am. MobilPower Corp. 64 F3d 1397, 1403 (9th Cir. 1995) (ERISA trustee who fails toinvestigate apparent misconduct by plan administrator may be liable for breachof fiduciary duty under ERISA § 404, 29 U.S.C. § 1104). Trustees whoare not investment professionals — and the attorneys who advise them— must utilize Internet-based information on the background of theadvisors they propose to employ. The routine review of such information eitherhas become, or is about to become, a component of a prudent fiduciary'sduty of care to beneficiaries.
©2017 Massachusetts Bar Association