Ruling Strengthens Power of Nasdaq Regulators

The National Assn. of Securities Dealers recently got a little more power.

A federal appeals panel has ruled that the NASD, the self-regulatory association that operates the Nasdaq market and polices broker-dealers, cannot be sued in state court for its enforcement actions.

The ruling by the U.S. 9th Circuit Court of Appeals expands the NASD’s immunity, already recognized in federal court, to the state courts and gives it more power when regulating companies that issue public securities.

In the case that gave rise to the ruling, Sparta Surgical Corp. vs. the NASD, the company sued for gross negligence and breach of contract after the NASD delisted the company’s shares without even 24 hours notice, just hours after Sparta had begun trading a new issue of convertible preferred stock. The Pleasanton, Calif.-based maker of surgical equipment essentially argued that the NASD should not be shielded from civil suits.

However, the panel ruled in favor of the NASD, with Judge Sidney Thomas finding that immunity applies even though the NASD may have acted “in a capricious . . . manner, which caused Sparta enormous damage.”

The ruling was hailed by lawyers for the NASD and the Nasdaq market.

“In the long run, it will allow the NASD to continue doing its regulatory job without fear of retaliatory lawsuits,” said Douglas R. Cox of Gibson, Dunn & Crutcher in Washington. “It really is a thorough exposition of the NASD’s position on both the jurisdiction issue and the immunity issue.”

Sparta executives, smarting from the decision, were debating whether to try to take the case to the U.S. Supreme Court.

“It’s very unfortunate. They just gave carte blanche to the NASD,” said Sparta founder and Chief Executive Thomas F. Reiner. “The NASD committed some major, major blunders. And basically they are saying that the NASD can do whatever it wants, no matter what their behavior is. Everyone should be held accountable.”

Thinking Small: Regulation was a key theme at the NASD’s fall securities conference earlier this month in San Francisco.

Mary L. Schapiro, president of NASD regulation, told broker-dealers and others at the conference that one of the agency’s priorities is beefing up its regulation of the micro-cap market, the publicly traded stocks of the smallest companies.

“We have had large concerns with the micro-cap end of the market over the past two years,” Schapiro said, “stemming in large part from the rapid increase in investor participation, especially by first-time investors, and the use of the Internet to aggressively promote--and sadly, often misrepresent--the prospects of some micro-cap issuers.”

The NASD has proposed several rules now before the Securities and Exchange Commission. The proposals would:

* Permit only those companies that report their current financial information to the SEC, banking or insurance regulators to be quoted on the OTC Bulletin Board.

* Require brokerage firms to review current financial statements before they recommend a transaction on any over-the-counter security.

* Require brokerage firms to give investors written disclosure of the differences between OTC securities and those that trade on a listed market.

Schapiro said she is hopeful for SEC approval sometime next year.

New Supervisors: The Los Angeles office of the NASD has added three new supervisors, Denise Evans, Han Nguyen and Lusana Gee, to replace three of the five supervisors who have left the office in the past six months. The former examiners replace Tim Miller, who was promoted to assistant director in San Francisco; Jon Blizzard, who transferred to the New York office; and Mark Mooney, now with Los Angeles brokerage firm J.B. Oxford, according to the NASD. There is a staff of 50 in the Los Angeles office, 35 of them examiners.

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Debora Vrana covers investment banking and the securities industry for The Times. She can be reached by e-mail at [email protected].