Examiners from District 10 in New York City were dispatched to five SOES firms described in a NASD memorandum as "potential SOES rules violators" to look for improper short-sale violations. Although the examinations did not uncover any breach of the SOES rules, the exam report discussed the trading habits of SOES firms.
In one instance, the NASD instituted an accelerated enforcement proceeding against a SOES firm. A senior NASD enforcement officer sent a congratulatory letter to the Market Surveillance Department staff members who worked on this proceeding which stated that:
there is no better service quality we could have provided to our market maker customers and the individual investor. (Emphasis added.)
This emergency remedial proceeding was only one of two such proceedings ever brought by the NASD. But even more importantly, how dare the NASD refer to the market makers as "our customers."
Professional Trading Accounts
The whole issue of professional trading accounts was ludicrous from its inception. The Market Surveillance Department did not have objectively defined benchmarks or guidelines with which to determine if an account was a professional trading account (PTA). In its release approving the amendment of the PTA rule, the SEC addressed the issue of the generality of the rule by stating that:
while the NASD will have discretion to determine exactly what is "excessive" and to determine based upon these factors which accounts are professional trading accounts, the NASD is required to act fairly and reasonably.
The facts uncovered in the SEC's investigation indicated that this discretion appears not to have been properly exercised.
The NASD made itself the sole judge of what constituted a professional account. It gave itself the power to declare you
