NASD Telephone Hotline: Enhancements Could Help Investors Be Better
Informed About Brokers' Disciplinary Records (Letter Report, 08/19/96,
GAO/GGD-96-171).

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 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.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-96-171
     TITLE:  NASD Telephone Hotline: Enhancements Could Help Investors 
             Be Better Informed About Brokers' Disciplinary
             Records
      DATE:  08/19/96
   SUBJECT:  Brokerage industry
             Information dissemination operations
             Information disclosure
             Securities regulation
             Securities arbitration
             Securities fraud
             Stocks (securities)
             Consumer protection
             Self-regulatory organizations
             Ethical conduct
IDENTIFIER:  National Association of Securities Dealers Investor Hotline
             National Association of Securities Dealers Automated 
             Quotation System
             National Association of Securities Dealers Public 
             Disclosure Program
             National Association of Securities Dealers Central 
             Registration Depository
             Internet
             
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Cover
================================================================ COVER


Report to Congressional Requester

August 1996

NASD TELEPHONE HOTLINE -
ENHANCEMENTS COULD HELP INVESTORS
BE BETTER INFORMED ABOUT BROKERS'
DISCIPLINARY RECORDS

GAO/GGD-96-171

NASD Telephone Hotline

(233460)


Abbreviations
=============================================================== ABBREV

  CRD - Central Registration Depository
  NASAA - North American Securities Administrators Association
  NASD - National Association of Securities Dealers
  NIRF - NASD Information Request Form
  SEC - Securities and Exchange Commission
  SRO - Self-Regulatory Organization

Letter
=============================================================== LETTER


B-259990

August 19, 1996

The Honorable Edward J.  Markey
Ranking Minority Member
Subcommittee on Telecommunications
 and Finance
Committee on Commerce
House of Representatives

Dear Mr.  Markey: 

This report responds to your request that we review the effectiveness
of the National Association of Securities Dealer's (NASD) toll-free
telephone information service, called the NASD hotline.\1 You were
concerned about investors' access to the hotline and to the available
disciplinary information on their broker-dealer firms or individual
brokers.\2 You were particularly concerned that NASD does not
disclose information through the hotline on two types of actions: 
(1) arbitration cases that are settled before a decision is reached
and (2) civil lawsuits that allege sales practice violations by
brokers.  When investors do not have access to relevant information
about a broker's background, they may risk placing funds in the hands
of an unscrupulous broker.  This report addresses (1) the
accessibility of the NASD Regulation hotline to investors, including
how investors are informed about the hotline; (2) users' perceptions
about the usefulness and appropriateness of the types of information
provided by the hotline; and (3) whether the information provided
meets NASD Regulation's disclosure policies. 


--------------------
\1 After completion of our fieldwork, NASD reorganized creating two
primary subsidiaries:  Nasdaq and NASD Regulation.  Nasdaq, the
National Association of Securities Dealers Automated Quotation
system, now called the Nasdaq Stock Market, Inc., is the trading
market subsidiary of NASD.  NASD Regulation, Inc., is the regulatory
subsidiary with authority to regulate the broker-dealer profession. 
NASD Regulation is responsible for the activities discussed in this
report. 

\2 In this report the word broker, unless otherwise stated, is used
to refer to both broker-dealer firms and individual brokers employed
as their sales representatives. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The NASD Regulation hotline was established in October 1991.  As of
December 1995, over 300,000 callers have called the hotline to obtain
disciplinary histories on their brokers.  These investors represented
less than 1 percent of those who directly owned shares in a publicly
traded company or a mutual fund in 1992.  Hotline callers whom we
surveyed said that they became aware of the hotline service through
newspaper and magazine articles, brokers, securities regulators,
friends, relatives, or business associates.  NASD Regulation has also
publicized the hotline through investor protection brochures. 
However, these methods of publicizing the hotline may not reach all
investors.  The small percentage of investors who have used the
hotline indicates that many investors may be making
investment-related decisions without using this important source of
information on their brokers' backgrounds. 

Furthermore, our survey of 500 people who called the hotline during
December 1994 and January 1995, indicated that most callers were very
satisfied with the services provided and used the information NASD
Regulation disclosed to them to make investment-related decisions,
such as deciding whether to use a particular broker.  The survey also
showed that investors would find additional information useful in
making these decisions.  NASD Regulation currently does not disclose
information that many callers thought should be included, such as
whether their broker had been the subject of a settled civil case, a
pending or settled arbitration, or a pending customer complaint. 
NASD Regulation officials said that NASD Regulation does not disclose
this information because these cases involve unproven allegations. 
Nevertheless, most state securities regulators said they already
disclose this information to investors who request it, and it comes
from the same information system that NASD Regulation uses to answer
hotline calls.  Thus, the amount and type of information investors
receive depends on whether they call NASD Regulation or their state
securities regulator.  After completion of our fieldwork, NASD
Regulation and state securities regulators agreed to changes in
brokers' reporting of customer complaint, arbitration, and civil
litigation information to NASD Regulation.  These changes could lead
to disclosure of additional information by the NASD Regulation
hotline. 

Most of the information NASD Regulation provided to the callers we
surveyed met NASD Regulation's disclosure policies.  However, NASD
Regulation does not routinely supervise or test to determine that all
disclosable information was provided to hotline callers.  In a random
sample of 100 requests for information, we found that NASD Regulation
did not meet its disclosure policies in 13 cases.  These 13 cases had
42 instances in which NASD Regulation did not disclose all of the
disclosable information, and 2 instances in which it disclosed more
information than its policies allow.  Our survey showed that hotline
callers used the disciplinary history information to make
investment-related decisions.  Thus, in some cases, they may have
made such decisions without having all available disclosable
information. 


   BACKGROUND
------------------------------------------------------------ Letter :2

In 1988, NASD established a Public Disclosure Program to respond to
written inquiries about brokers' disciplinary histories.  Two years
later, in October 1990, Congress amended the Securities Exchange Act
of 1934, Section 15A(i), to require that NASD establish and maintain
a toll-free telephone number for the public to inquire about the
disciplinary backgrounds of NASD-member brokers and their associated
persons.\3 The act also requires that NASD promptly respond to such
inquiries in writing.  In October 1991, NASD established its hotline,
which is operated by NASD Regulation's Public Disclosure Program. 


--------------------
\3 An associated person is any person--partner, officer, director,
salesperson, trader, manager, or employee--engaged in investment
banking or securities business who is directly or indirectly
controlling or controlled by an NASD member. 


      INFORMATION AVAILABLE
      THROUGH THE HOTLINE
---------------------------------------------------------- Letter :2.1

NASD initially provided hotline callers with information on final
disciplinary actions of self-regulatory organizations (SRO) and
federal and state securities regulators, as well as criminal
convictions.  In 1993, NASD expanded the types of information
provided, partly in response to a recommendation in our 1993 report
on penny stock regulation.\4 The NASD Regulation Public Disclosure
Program now is to provide callers with information on

  -- pending and final disciplinary actions taken by SROs or federal
     and state securities regulators that relate to securities or
     commodities transactions, including censures and fines, bars,
     revocations, expulsions, suspensions, orders of permanent
     injunction, orders of preliminary injunction, orders of
     prohibition, some special stipulation orders, cease and desist
     orders, and denial of registration orders;

  -- pending NASD Regulation and other SRO complaints and dismissed
     NASD Regulation complaints;

  -- securities arbitration decisions involving public customers and
     their brokers and Commodity Futures Trading Commission
     reparation orders;

  -- securities-related civil judgments; and

  -- criminal convictions and indictments. 

The information disclosed by the program is derived from the Central
Registration Depository (CRD).  CRD is a database, which NASD
Regulation maintains, that contains employment and disciplinary
histories of individual brokers as well as disciplinary actions taken
against member broker-dealer firms.  NASD and state securities
regulators established CRD as a centralized licensing and
registration system.  Brokers are required to report to CRD formal
disciplinary actions taken against them by the Securities and
Exchange Commission (SEC), state securities regulators, SROs, or
courts, including foreign entities, for violations related to the
securities business and certain customer complaint and arbitration
information.  In addition to providing information on formal
disciplinary actions, brokers are required to provide CRD with
written notice of employment terminations.  All required CRD
information is to be reported within 30 days of the action's
occurrence.  Federal and state securities regulators and SROs also
are to report disciplinary information to CRD and can use CRD
information to determine whether a broker has violated securities
laws or SRO rules.  State securities regulators also have programs
through which CRD information can be disclosed to the public upon
request. 


--------------------
\4 Penny Stocks:  Regulatory Actions to Reduce Potential for Fraud
and Abuse (GAO/GGD-93-59, Feb.  3, 1993). 


      HOW THE HOTLINE OPERATES
---------------------------------------------------------- Letter :2.2

The public can obtain information either by submitting a written
request on a NASD Information Request Form (NIRF) or by calling the
toll-free hotline at 1-800-289-9999.  The bulk of requests, over 90
percent as of November 1995, have been made through the hotline. 
NASD does not charge a fee when individuals request information to
assist them in their personal investments.  Business requests for
information, such as those from attorneys or banks, must include a
processing fee of $30.  The hotline currently operates from 8:00 a.m. 
to 6:00 p.m.  (eastern time).  NASD Regulation officials said that
they are considering extending the hotline's hours to 8:00 p.m. 
(eastern time) to better accommodate west coast callers. 

As of January 1996, one and one-half full-time equivalent staff are
dedicated to answer hotline calls.  However, if call volume
necessitates, 12 operators who normally answer calls to NASD's
general number are also available to answer hotline calls.  In
addition to the staff who answer calls, NASD Regulation's Public
Disclosure Program also employs specialist staff to research
disciplinary files and determine whether the information is either
disclosable or nondisclosable.  The specialists are to respond to
written requests for information, which the public makes by using a
NIRF.  They also are to prepare written summaries of the disclosable
information that is included in a computerized system called the NIRF
database.  As a result, the NIRF database contains disciplinary
histories from CRD records that the specialists have reviewed and
determined to be disclosable.  As of January 1996, NASD Regulation
officials said that they had two full-time specialists. 

When a call is made to the hotline, NASD Regulation staff are to ask
the caller for information to identify the subject of the inquiry
such as name, address, or registration number.  If the staff cannot
identify the subject, they are to tell the caller and terminate the
call.  When the staff identify the subject, an automated search of
the NIRF database determines if disclosable information exists.  The
staff are to send any disclosable information to the caller upon
request.  When the subject is identified in the NIRF database, but no
disclosable information exists, the staff are to tell the caller and
terminate the call.  In addition, if the caller requests, staff are
to send a letter stating that no disclosable information exists. 

If the subject is not identified in the NIRF database, an automated
search of CRD determines if a record exists on the subject.  When a
record exists, the staff are to tell the caller that the file has to
be reviewed to determine if disclosable information exists.  The
specialist staff are to review the file on the subject broker to
determine whether the information in the file is disclosable, create
a NIRF database file on the subject, and send a copy of any
disclosable information to the caller.  When disciplinary history
information is sent to a caller about individual brokers who are
employed with NASD member firms, NASD Regulation also is to send the
brokers a copy of this information, without the requesters' names. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

To obtain information on the accessibility of the NASD Regulation
hotline, we interviewed NASD Regulation officials; reviewed NASD
Regulation Public Disclosure Program policies and procedures, and
related documents; reviewed the results of calls to the hotline
requesting disciplinary information; and conducted surveys of hotline
callers and state securities regulators.  To obtain information on
users' perceptions of the hotline's accessibility and usefulness, we
surveyed a random sample of nearly 500 of the more than 7,100 callers
to the hotline during December 1994 and January 1995 to whom NASD
Regulation sent disciplinary information.  From this sample, we
randomly selected a subsample of 100 callers for further review to
determine whether the information NASD Regulation provided met its
disclosure policies.  We also surveyed securities regulators of all
50 states, the District of Columbia, and Puerto Rico to determine
what information those regulators disclosed to the public and how
they informed the public of the existence of their disclosure
programs.  For detailed technical information on our surveys, see
appendix I.  The questionnaires used and the results of our surveys
of NASD Regulation hotline callers and state securities regulators
are shown, respectively, in appendixes II and III.  We also discussed
with NASD Regulation officials the status of its CRD redesign effort. 

We did our work in accordance with generally accepted government
auditing standards between November 1994 and April 1996.  We
performed our work in New York, NY; the Washington, D.C.,
metropolitan area; and at NASD Regulation's Public Disclosure Program
in Rockville, MD. 

We obtained written comments on a draft of this report from NASD
Regulation and oral comments from SEC, which are discussed and
evaluated at the end of this report.  NASD Regulation's written
comments appear in appendix IV. 


   THE NASD REGULATION HOTLINE HAS
   BEEN ACCESSIBLE TO MANY
   INVESTORS BUT MANY MORE MAY NOT
   KNOW IT EXISTS
------------------------------------------------------------ Letter :4

Since its inception in October 1991, many investors have called the
NASD Regulation hotline.  From year to year, the number of calls that
NASD Regulation hotline staff handle has increased.  Callers have
been informed about the hotline by newspaper and magazine articles,
brokers, securities regulators, friends, or business associates. 
However, these indirect methods of publicizing the hotline may not be
successful in reaching large numbers of investors and, as a result,
many investors may not know the hotline exists.  More direct methods,
such as including the hotline number on account documents, could help
ensure that more investors are informed of the hotline. 


      THE HOTLINE HAS BEEN
      ACCESSIBLE TO MANY CALLERS
---------------------------------------------------------- Letter :4.1

Most of our survey respondents found the NASD Regulation hotline
accessible--about 84 percent said they reached the hotline on the
first call.  Also, most of these callers, 71 percent, were not placed
on "hold" after reaching the hotline.  Of the callers that were
placed on "hold," 64 percent said they spoke to a representative
within 3 minutes.  Most of the callers that were placed on hold, 73
percent, did not consider the wait too lengthy or cause for hanging
up.  Few respondents, 2 percent, were disconnected after reaching the
hotline. 

According to NASD Regulation statistics, the number of calls to the
hotline has increased since the hotline began operations in October
1991.  Calls received by the hotline and those handled by NASD
Regulation staff have more than doubled.\5 The statistics show that
in 1992, the first full year of its operation, the hotline received
almost 40,000 calls, of which NASD Regulation hotline staff handled
about 35,000.  In 1995, the most recent full year of operation, the
hotline received about 103,000 calls, of which NASD Regulation
handled almost 100,000.  Figure 1 shows the number of NASD Regulation
hotline calls received and handled from January 1992 through December
1995. 

   Figure 1:  NASD Regulation
   Hotline Calls Received and
   Handled, 1992 through 1995

   (See figure in printed
   edition.)

Source:  GAO analysis of NASD Regulation hotline statistics. 


--------------------
\5 Handled refers to the number of telephone calls that NASD
Regulation staff answered.  The calls that were not handled were
abandoned by the callers, which means the caller hung up or did not
otherwise reach the NASD Regulation staff. 


      METHODS USED TO PUBLICIZE
      THE HOTLINE MAY NOT REACH
      ALL INVESTORS
---------------------------------------------------------- Letter :4.2

Information informing investors about the NASD Regulation hotline is
available to investors through several indirect sources.  According
to NASD Regulation officials, the hotline is publicized in two NASD
brochures on investor protection, newspaper and trade press articles,
and by public speaking engagements of NASD officials.  According to
these officials, calls to the hotline increase after it is
publicized.  For example, after a CNN program publicizing the July
1993 expansion of the public disclosure program, call volume
increased to more than 4 times the daily average, reaching a peak
volume of about 1,200 calls a day.  The officials said that NASD
Regulation plans to use the Internet to publicize its toll-free
number on an NASD home page and allow investors to submit requests
for information on brokers and firms on-line before the end of 1996. 

Our survey of hotline callers showed that most callers to the
hotline, about 80 percent, first became aware of the hotline either
from newspaper and magazine articles; brokers; SEC, NASD, or state
securities regulators; or friends, relatives, or business associates. 
Similarly, state securities regulators that we surveyed said that
they publicize the availability of disciplinary information through
public speaking engagements, agency brochures, press releases, and
public service announcements on radio, television, and in the print
media. 

The number of calls to the hotline indicates that efforts to
publicize it have been successful in reaching many investors. 
According to NASD Regulation statistics, about 307,000 callers,
including repeat inquiries, called the hotline from October 1991
through December 1995.  However, these callers constituted less than
1 percent of the estimated 41 million U.S.  investors who directly
owned shares in a publicly traded company or a mutual fund as of
1992.\6 All investors who know about the hotline may not necessarily
call it, but the small number of callers in relation to the number of
investors indicates that numerous investors still may not be aware of
the hotline's existence. 

The hotline provides information that could help investors avoid
dealing with brokers that have disciplinary histories unacceptable to
the investors.  Therefore, all investors, particularly those opening
new brokerage accounts, could use the information.  SEC recognized
this in its 1994 report on the hiring, retention, and supervisory
practices of large securities firms.  It recommended that SROs adopt
rules requiring member firms to disclose to investors opening new
accounts the availability of disciplinary information through the
NASD Regulation hotline.\7

One approach to ensure that larger numbers of investors are informed
of the hotline might be similar to that taken under SEC penny stock
rules.\8 These rules require that, before transactions are completed,
brokers must provide investors with a risk disclosure document that
includes the NASD Regulation hotline number.  Although a separate
disclosure document may not be necessary for routine securities
transactions, more investors could learn about the hotline if the
hotline number were included on account opening documents or account
statements that are sent to investors.  Another way to make
disciplinary information more accessible would be to provide it
directly to the public through some electronic communications media
such as the Internet, as has been suggested by the head of NASD
Regulation. 


--------------------
\6 The number of U.S.  investors is the latest available from the
Federal Reserve Board's Surveys of Consumer Finances conducted in
1992 and analyzed by the New York Stock Exchange for its publication,
Shareownership 1995. 

\7 The Large Firm Project:  A Review of Hiring, Retention, and
Supervisory Practices (U.S.  Securities and Exchange Commission, May
1994). 

\8 SEC Rule 15g-2. 


   DISCLOSURE OF ADDITIONAL
   INFORMATION COULD FURTHER
   ENHANCE HOTLINE USEFULNESS
------------------------------------------------------------ Letter :5

Our survey of NASD Regulation hotline callers showed that they were
mostly very satisfied with the broker disciplinary information they
received from NASD Regulation.  However, they also responded that
additional information, which NASD Regulation currently does not
disclose, would be useful in assisting them to decide whether they
wanted to do business with a particular broker.  This additional
information is already available to investors who contact most state
securities regulators.  NASD Regulation also does not inform hotline
callers of the types of information that are not disclosed, unless
the callers ask.  As a result, callers may think they have all the
relevant information on their brokers' history when they do not. 


      THE NASD REGULATION HOTLINE
      PROVIDES INVESTORS WITH
      USEFUL INFORMATION
---------------------------------------------------------- Letter :5.1

Our survey also showed that the NASD Regulation hotline has provided
individual investors with information that they used to make
investment-related decisions such as selecting a broker.  Our sample
of hotline callers to which NASD Regulation sent information
comprised mostly individual investors who called on their own
behalf--about 64 percent of the total respondents.  Other survey
respondents included family members or friends calling on behalf of
individual investors, about 6 percent of the total; businesses, about
19 percent; and other callers--primarily prospective employees
calling about a broker-dealer's background--about 11 percent.  Figure
2 shows the types of callers who used the hotline in our sample. 

   Figure 2:  Types of Hotline
   Callers as of August 1995

   (See figure in printed
   edition.)

Source:  GAO analysis of GAO Customer Satisfaction Survey data. 

Our survey showed that the primary reason respondents called the
hotline was to determine whether a broker had a history of improper
or illegal behavior.  Hotline callers said that the information they
received was a major factor affecting their decisions on authorizing
their broker to make a securities transaction, opening a new
brokerage account, deciding not to do business with a particular
broker, or changing their broker. 

Most hotline callers that we surveyed said they were very satisfied
with the services received, including the time it took to reach
hotline staff (about 67 percent), the ability of the staff to locate
the subject broker (72 percent), the courtesy and professionalism of
the staff (about 73 percent), the length of time it took to receive
NASD Regulation's written response (about 55 percent), and the hours
the hotline operated (about 62 percent).  Only about 5 percent of the
callers surveyed found our questions about the ability of the hotline
staff to assist non-English speaking and hearing impaired callers
applicable.  Most of these were satisfied with the staff's ability to
assist both types of callers.  A few callers, about 1 percent, hung
up because they thought that the staff were not helpful or were
discourteous. 

Just over half of hotline callers, about 54 percent, called only once
during a recent year, while almost half called 2 times or more during
the year to obtain disciplinary information.  Most hotline callers
responded that they rely primarily on the NASD Regulation hotline for
disciplinary information on their broker.  About 81 percent of
callers said they did not obtain disciplinary information from a
state securities regulator. 


      HOTLINE CALLERS WOULD FIND
      ADDITIONAL INFORMATION
      USEFUL
---------------------------------------------------------- Letter :5.2

The respondents to our survey said that additional information
available in CRD, but not disclosed by NASD Regulation, could also be
useful to help them make decisions about whether to do business with
a particular broker.  The types of nondisclosable information that at
least 70 percent of respondents said they thought would be either
very or somewhat useful included whether a broker was

  -- granted a license or registration with limitations,

  -- the subject of a settled civil court case,

  -- the subject of an SRO review to determine whether to continue or
     stop membership rights,

  -- the subject of a court decision involving a bankruptcy or lien,

  -- the subject of a pending arbitration case with a securities
     regulator,

  -- the subject of a settled arbitration case with a securities
     regulator,

  -- the subject of a settled customer complaint filed with a
     securities regulator,

  -- the subject of a pending customer complaint filed with a
     brokerage firm,

  -- the subject of a settled customer complaint filed with a
     brokerage firm, and

  -- the subject of a disciplinary action or termination by his or
     her employer. 

Fewer respondents thought that information on dismissed customer
complaints and withdrawn arbitration cases would be very or somewhat
useful--64 and 66 percent, respectively. 

As part of our review of the CRD and NIRF database files for 100
brokers that our survey respondents inquired about, we analyzed the
extent and types of nondisclosable information recorded in CRD.  We
found nondisclosable information in 46 files.  This information
primarily involved pending arbitration cases, customer complaints,
settled or withdrawn arbitration cases, or NASD Regulation fines of
$1,000 or less.  This is the same type of information that our survey
respondents indicated would be useful.  Unlike individual hotline
callers, NASD member broker-dealers have access to all of this
information for use in screening potential employees. 

Further, our survey of state securities regulators showed that, when
requested, almost all reported they already disclose the information
that NASD Regulation does not disclose.  These regulators are
electronically linked to CRD, and thus get the information they
disclose from the same database that NASD Regulation restricts. 
Table 2 shows the number of states that reported they disclosed
information that NASD Regulation currently does not disclose. 



                                Table 2
                
                  Many States Reported They Disclosed
                   Information Not Disclosed by NASD
                     Regulation as of December 1995

                                                 Number of states that
                                                          disclose the
Information not disclosed by NASD Regulation               information
----------------------------------------------  ----------------------
License or registration granted with                                47
 limitations.
Subject of a settled civil court case.                              47
Subject of a court decision involving a                             47
 bankruptcy or lien.
Subject of a pending arbitration case with a                        41
 securities regulator.
Subject of a settled arbitration case with a                        49
 securities regulator.
Subject of a withdrawn arbitration case with a                      43
 securities regulator.
Subject of a settled customer complaint filed                       45
 with a securities regulator.
Subject of a dismissed customer complaint                           39
 filed with a securities regulator.
Subject of a pending customer complaint filed                       40
 with a brokerage firm.
Subject of a settled customer complaint filed                       46
 with a brokerage firm.
Subject of a dismissed customer complaint                           40
 filed with a brokerage firm.
Registered representative subject to a                              46
 disciplinary action or termination by his or
 her employer.
----------------------------------------------------------------------
Source:  GAO's Survey of State Securities Regulators. 

Most of the state securities regulators said NASD Regulation should
provide investors with the information that it currently does not
disclose.  For example, 49 thought that NASD Regulation should
disclose whether a broker was the subject of a settled arbitration
case, and 40 thought that NASD Regulation should disclose pending
customer complaints.  The state regulators said that they disclose
the information because of their freedom of information laws and
policies about investor protection and education. 

NASD Regulation officials said that NASD Regulation does not disclose
all information, particularly that involving customer complaints,
because such complaints have not been fully investigated and may be
unfounded.  In 1994, we recommended that SEC and NASD develop
procedures to balance regulatory surveillance and public disclosure
interests pertaining to disclosure of customer complaint information
to regulators and investors.\9 At that time, those organizations
commented that release of unsubstantiated customer complaint
information would raise due process and privacy concerns.  NASD
Regulation officials added later that release of the complaint
information could damage a broker's reputation and result in
lawsuits.  NASD can be subject to lawsuits from hotline activities
although it has limited protection from liability if a "good faith"
error is made in a disclosure.\10 NASD Regulation officials pointed
out that the potential for lawsuits has not affected NASD
Regulation's policy decisions about whether to disclose information. 

Officials of the North American Securities Administrators Association
(NASAA), a lobbying group representing state securities regulators,
told us that no state has ever been sued for disclosing disciplinary
information.\11 They said that their greater concern is being the
subject of legal actions based on complaints by the public for not
disclosing the disciplinary information.  In an October 1995 public
address, the Chairman, SEC, suggested that consideration be given to
making unadjudicated customer complaints public for a limited time,
for example, 2 years; after which complaints that were either not
pursued by regulators or deemed without merit would be removed from
the reporting system. 

After our fieldwork was completed, NASAA, the states, NASD
Regulation, and securities industry representatives agreed to changes
in the reporting of disciplinary information to CRD which could lead
to disclosure of additional disciplinary information by the NASD
Regulation hotline.  To lessen brokers' concerns about disclosing
information that may involve unfounded allegations of wrongdoing, the
changes would place limits on brokers' reporting of customer
complaints and arbitration and civil case settlements.  Brokers would
be required to report to CRD information on (1) customer complaints
less than 2 years old that allege damages of $5,000 or more and (2)
arbitrations and civil suits settled for $10,000 or more.  Before
being implemented, the changes have to be approved by SEC.  Actual
public disclosure of this additional information by the NASD
Regulation hotline, which was approved by the NASD Board of Governors
in March 1996, would also require SEC approval. 


--------------------
\9 Securities Markets:  Actions Needed to Better Protect Investors
Against Unscrupulous Investors (GAO/GGD-94-208, Sept.  14, 1994). 

\10 15 U.S.C.  ï¿½ 78o-3(i). 

\11 State governments have sovereign immunity from lawsuits and can
only be sued in states where the law permits. 


      MOST HOTLINE CALLERS WERE
      NOT TOLD ABOUT
      NONDISCLOSABLE INFORMATION
---------------------------------------------------------- Letter :5.3

NASD Regulation policy limits the information disclosed to hotline
callers and includes no provision to routinely inform callers about
any nondisclosable information.  Hotline representatives'
instructions for responding to callers discuss only disclosable
information.  NASD Regulation's written responses to callers are to
include a list of the types of disclosable information but not the
types of nondisclosable information. 

Our survey showed that hotline representatives did not inform about
73 percent of callers about the types of nondisclosable information. 
About 23 percent said the hotline representatives provided this
information, and about 4 percent said they did not remember.  NASD
Regulation officials said that the 23 percent who were told about the
types of nondisclosable information probably had asked specifically
about it.  Thus, some callers were informed about the types of
nondisclosable information while others were not.  This inconsistency
may cause some callers to make investment-related decisions based on
the incorrect belief that they have been given all relevant
information.  More complete disclosure of relevant information could
help ensure that consistent information is provided to all hotline
callers. 


   INDEPENDENT REVIEW COULD HELP
   ENSURE DISCLOSURES MEET NASD
   REGULATION POLICIES
------------------------------------------------------------ Letter :6

The NASD Regulation hotline provides information to callers without
quality assurance checks, such as independent review and testing of
the information disclosed.  In most cases that we reviewed, the
information provided met NASD Regulation's disclosure policy. 
However, in 13 of the 100 cases, we found that either disclosable
information was not disclosed or nondisclosable information was
disclosed.  Having all relevant information can help investors make
more informed decisions about their broker.  Quality assurance checks
such as independent review and testing of the information could help
ensure that disclosures meet NASD Regulation policies. 


      HOTLINE DID NOT ALWAYS
      PROVIDE CALLERS WITH ALL
      DISCLOSABLE INFORMATION
---------------------------------------------------------- Letter :6.1

NASD Regulation disclosed information in accordance with its current
disclosure policies in 87 of the 100 cases we reviewed.\12

However, 13 cases contained a total of 47 discrepancies when compared
with information in CRD.  In 42 of the 47 discrepancies, information
considered disclosable was not sent to the caller.  In two
discrepancies, information considered nondisclosable under current
NASD Regulation disclosure policy was sent to the caller.  The other
three discrepancies involved data entry errors--two that had no
effect on information disclosed to the caller, and one that provided
the caller with the same disclosable information twice under two
different dates. 

We found 31 of the 47 discrepancies in one case involving a request
for information about a large national securities firm.  Twenty-six
of the 31 discrepancies were 1988 and 1989 arbitration cases that
were listed in CRD but were not entered into the NIRF database.  Four
discrepancies were disclosable disciplinary actions that were not
entered into the NIRF database, and one was the disclosable
information that was entered into the NIRF database twice.  The
remaining 16 discrepancies occurred in 12 cases involving information
requests about individuals or smaller securities firms.  Twelve of
these 16 discrepancies occurred in 8 cases when disclosable
disciplinary actions were not disclosed to the callers.  Two
discrepancies, one in each of two cases, occurred when nondisclosable
information was disclosed to callers.  The final two cases involved
data entry errors. 

Apart from a 1994 internal review of the Public Disclosure Program,
NASD Regulation officials told us that they do not perform routine
independent review and testing of the information disclosed to
callers.  We found that 17 discrepancies resulted from either
judgment errors of NASD Regulation staff in determining whether
information was disclosable or errors in entering data into CRD and
the NIRF database.  NASD Regulation staff corrected these errors
during our review.  For the other 30 discrepancies, including the 26
arbitration cases, NASD Regulation officials could not explain why
the information had not been included in the NIRF database.  However,
NASD Regulation staff corrected these discrepancies by adding the
information to the NIRF database.  The discrepancies we found that
NASD Regulation corrected show that independent review and testing of
the information derived from CRD could help reduce errors and help
ensure that all disclosable information is provided to callers. 

If NASD Regulation proceeds as planned to change its disclosure
policy so that most of the disciplinary related information in CRD is
considered disclosable, the chances for judgment errors by NASD
Regulation staff in determining whether information is disclosable
would diminish.  Also, after the currently planned redesign of CRD is
implemented, NASD Regulation officials expect that reports of
disciplinary information will be prepared directly by querying CRD
for disclosable information, rather than relying on staff judgments
of whether CRD information is disclosable or nondisclosable. 


--------------------
\12 Our review consisted of 58 files of member broker-dealers and 42
files of registered sales representatives. 


   CRD REDESIGN IS INTENDED TO
   PROVIDE MORE TIMELY AND
   COMPLETE INFORMATION
------------------------------------------------------------ Letter :7

NASD Regulation's ability to provide hotline callers with timely and
complete information on brokers depends on how and when the
information is reported to CRD.  NASD Regulation officials said that
in the absence of a systematic means in the current CRD to monitor
timeliness of filings, they are concerned that it is possible that
disclosures by brokers are not as timely as they should be.  Also,
according to the officials, current reporting of disciplinary
information may not be as complete as it could be because all
regulators are not obligated to report their disciplinary actions to
CRD.  They said that most regulators report directly into CRD
electronically, or at least publish their disciplinary actions.  For
those regulators who publish their actions, NASD Regulation staff
first are to review the publications and then enter the disciplinary
information into CRD. 

During 1996 and 1997, NASD Regulation plans to implement a redesigned
CRD.  According to NASD Regulation officials, the new CRD will
contain many improvements that will make the system more useful to
member firms, regulators, and investors.  The redesigned CRD is to
feature fully electronic reporting by both broker-dealers and
regulators that is intended to provide more accurate and timely
disciplinary information, and database modifications to allow better
analytical capability.  For example, the officials anticipate that
NASD Regulation or SEC should be able to better select broker-dealers
for examination based upon analyses of sales representatives'
disciplinary records.  The redesigned CRD is also to allow NASD
Regulation to track the timeliness of disclosures by brokers.  The
NASD Regulation officials said that, as a result, the new CRD will
upgrade the efficiency of the registration process, ensure more
timely reporting of disciplinary information, and make the
information easier for the public to understand because of its
uniform reporting structure. 

NASD Regulation officials said CRD redesign is a large project that
is being done in three phases over the next 2 to 3 years and is
expected to cost about $57 million.  According to NASD Regulation
officials, broker-dealers will be on-line during 1996, and federal
and state securities regulators and SROs, beginning in 1997. 


   CONCLUSIONS
------------------------------------------------------------ Letter :8

Although the number of hotline callers has grown since it was
established in 1991, by 1995 the hotline was still used by only a
small percentage of individual U.S.  investors.  Because NASD
Regulation's methods for publicizing the hotline may not be
successful in informing large numbers of investors about the hotline,
many may be unaware of the hotline's existence or the valuable
information available to its callers.  Making more investors
knowledgeable about the hotline could allow them to have better
information on hand to assist them in making important
investment-related decisions and also reduce the likelihood that they
will become victims of unscrupulous brokers.  This possibly could be
done at relatively low cost by adding hotline information to already
required, account-opening documents or to account statements.  One
step an NASD Regulation official has suggested is to make broker
disciplinary information directly available to investors over the
Internet. 

The effectiveness of the NASD Regulation hotline greatly depends on
NASD Regulation's willingness to fully inform investors of their
brokers' disciplinary records.  By not disclosing information from
CRD that most state securities regulators said they already disclose,
NASD Regulation may be putting some of its hotline callers at a
disadvantage if they do not know that they can call state regulators
for the nondisclosable information.  Providing all
disciplinary-related information, including unproven pending
allegations, raises a risk of unfairly tarnishing brokers'
reputations.  While we recognize this risk and agree that proper risk
management controls are needed, we also believe that protecting
potential investors and the integrity of securities markets are
equally important goals.  Further, the CRD reporting changes that
NASD Regulation and state regulators have agreed to make are intended
to help protect brokers' reputations. 

Under NASD Regulation's current disclosure program, NASD Regulation
staff have to review disciplinary information and make judgments
about whether information is disclosable.  This and other problems
have resulted in instances when callers were not provided with all of
the disclosable information about their brokers or were provided with
information that should not have been disclosed.  Quality assurance
checks such as independent review and testing of the information
derived from CRD would help ensure that errors are corrected and all
disclosable information is provided to callers. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :9

To help ensure that all relevant information is made available to as
many investors as possible, we recommend that the Chairman, SEC,
encourage and support NASD Regulation efforts to

  -- explore other ways of publicizing the hotline 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. 

  -- 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. 

  -- 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 COMMENTS AND OUR
   EVALUATION
----------------------------------------------------------- Letter :10

We provided a draft of this report to NASD and SEC for review and
comment.  We obtained written comments from NASD Regulation (see app. 
IV).  We obtained oral comments from SEC's Division of Market
Regulation and Office of Compliance Inspections and Examinations in a
meeting on July 23, 1996. 

NASD Regulation was pleased that our review showed a high degree of
user satisfaction with the telephone hotline.  It generally agreed
with our findings and conclusions and said it had already begun, or
plans to begin, actions that would result in implementation of our
recommendations. 

In response to our recommendation to explore other ways of
publicizing the hotline to a wider audience of investors, NASD
Regulation noted actions that it is taking to further publicize the
hotline.  It stated that it plans to provide a means through the
Internet for investors to access electronically the data in the CRD
after full implementation of the redesigned CRD in 1998.  In
addition, NASD Regulation said it has established an Office of
Individual Investor Services that will actively promote and publicize
the availability of disciplinary information through its Public
Disclosure Program.  NASD Regulation also stated that its membership
committee plans to give full consideration to including the hotline
number on account-opening documents or account statements. 

In response to our recommendation to provide hotline callers with all
the relevant disciplinary related information available in CRD, NASD
Regulation said that the NASD Board of Governors has approved the
expansion of the Public Disclosure Program and will file the
appropriate amendments with SEC in August 1996. 

In response to our recommendation to develop and implement cost-
effective quality assurance checks, NASD Regulation said that it has
introduced a revised process to ensure the accuracy of disclosure
reports.  It said that all new disclosures are reviewed by a second
staff person and that a statistical quality control process will be
instituted to measure systematically the accuracy of the program.  In
addition, NASD Regulation said that the program will be subject to
periodic independent audits by its Internal Review group. 

SEC generally agreed with our findings and conclusions and expressed
support for the types of changes that we recommend.  SEC suggested
several technical changes that have been made where appropriate. 


--------------------------------------------------------- Letter :10.1

As agreed with you, unless you publicly release its contents earlier,
we plan no further distribution of this report until 5 days from its
issue date.  At that time we will provide copies to the Chairman,
House Committee on Commerce; the Chairman, Subcommittee on
Telecommunications and Finance; the Ranking Minority Member,
Committee on Commerce; other interested committees and subcommittees;
SEC; NASD; and other interested parties.  We will also make copies
available to others upon request. 

Major contributors to this report are listed in appendix V.  Please
contact me on (202) 512-8678 if you have any questions about this
report. 

Sincerely yours,

James L.  Bothwell
Director, Financial Institutions
 and Markets Issues


TECHNICAL APPENDIX
=========================================================== Appendix I

To answer questions about the accessibility and usefulness of the
NASD hotline, we surveyed a sample of hotline callers who inquired
about brokers and were mailed disciplinary history information from
the disclosable portion of CRD records.  To review the completeness
of the information disclosed, we compared the CRD records of a
subsample of 100 of the subjects of these inquiries to the
information NASD disclosed to the hotline callers.  In addition, we
surveyed all state securities administrators to help document the
differences in disclosure policies and to determine the states'
publicity efforts.  The NASD hotline customer satisfaction survey and
the survey of state securities regulators and their results are shown
in appendixes II and III, respectively. 


   HOTLINE CUSTOMER SATISFACTION
   SURVEY
--------------------------------------------------------- Appendix I:1


      SURVEY SAMPLE
------------------------------------------------------- Appendix I:1.1

To obtain representative and precise estimates of the levels of
customer satisfaction, completeness of disclosure, and accuracy of
hotline information, we first needed to draw random samples of
callers and the subjects they asked about from a complete listing of
all callers and subjects, without duplications, omissions, or
ineligible entries. 

We first drew an initial unstratified random sample of 552 of all
7,176 response letters produced by NASD in answer to investor
inquiries, as recorded in the NIRF database from December 1, 1994,
through January 31, 1995.  We chose this period, the most recent
possible, because we wanted to measure caller opinions with the
minimum possible memory loss.  After examining the characteristics of
the information requests made in this period, and consulting with
NASD, we determined that these inquiries were typical of recent NASD
hotline activity. 

The sample frame, and our initial sample, contained some responses to
requests that we deemed ineligible for our study.  We removed from
our initial sample any requests for information identified by the
NIRF database record to have been made by firms--banks, law firms,
broker-dealers--and other requesters acting as agents for private
firms.  For the caller survey, it was our aim to learn about the
experiences of the individual public investor.  Unfortunately, we
could only remove those callers who clearly identified themselves to
hotline personnel as private sector callers and were recorded in the
NIRF database as firms.  Approximately 11 percent of the elements in
our initial sample were identified as private-sector requests.  An
undetermined number of callers self-identified themselves as public
requesters, yet may have represented firms in some capacity. 

In addition, we attempted to remove all inquiries made by the
subjects themselves--registered representatives calling to request a
copy of their own disciplinary history--because they would not be
typical of the individual public investor.  For the caller survey, we
also removed multiple inquiries made by the same caller about
different subjects.  Finally, we removed from the caller survey
sample any requests that were made in writing, rather than in a phone
call to the toll-free hotline. 

After removing these ineligible cases from our first sample of 552,
we were left with an adjusted sample size of 448 NASD responses to
caller inquiries.  Then, we drew a supplemental sample of 58 from the
initial 7,176 response letters, of which 40 remained after removing
ineligible elements.  This left us with an adjusted sample size of
488.  Furthermore, while collecting data from this sample, we
discovered that an additional 5 were also ineligible for some of the
reasons mentioned above, leaving us with a final sample size of 483
eligible sampled elements.  See table I.1 for a more complete
description of the dispositions of the mail survey sample. 



                               Table I.1
                
                  Disposition of Hotline Caller Survey
                                 Sample

                                                                Number
                                                                    of
Disposition                                                   elements
------------------------------------------------------------  --------
Initial sample selected before adjustments
----------------------------------------------------------------------
Number of elements in first sample                                 552
Number of elements in supplemental sample                           58
======================================================================
Total initial sample before adjustments                            610

Initial sample elements found to be outside stud population
----------------------------------------------------------------------
Requests made by firm and nonpublic requesters                      66
Requests submitted in writing                                       20
Multiple requests made by requester already in sample               20
Requests made by registered representatives                         12
Requests initiated by NASD personnel, foreign addresses              4
Other ineligible elements found during survey period                 5
======================================================================
Total ineligible elements                                          127

Final disposition of eligible sample elements
----------------------------------------------------------------------
Eligible elements (total initial sample minus total                483
 ineligibles)
Usable mail questionnaires completed                               294
Undeliverable (No valid address)                                    11
Returned incomplete or unusable                                      2
Attempted telephone contact for follow-up interview                171
Telephone interviews completed                                      96
Unable to contact by telephone after five attempts                  48
Refused telephone interview                                         27

Overall survey responses
----------------------------------------------------------------------
Completed mail questionnaires and telephone interviews             390
Overall response rate                                               81
                                                              (percent
                                                                     )
----------------------------------------------------------------------
Source:  GAO analysis. 


      HOTLINE CALLER SURVEY DESIGN
      AND ADMINISTRATION
------------------------------------------------------- Appendix I:1.2

For the survey of hotline callers, we developed a mail questionnaire
(shown in app.  II) to measure callers' satisfaction with their
contact with hotline personnel and the information they received by
mail from NASD.  We also included questions to collect background
information on the callers, their reasons for calling the hotline,
and how they learned of the hotline.  To ensure that the survey would
collect the intended data, the questionnaire was pretested with
actual investors from New York and Virginia, whom we identified from
our listing of the hotline-caller population. 

In late April 1995, we mailed questionnaires to all 483 investors in
our final sample of callers.  In the third week of May 1995, we
mailed replacement questionnaires to the sampled callers who had not
yet responded.  After an additional 6 weeks, we began to make
follow-up telephone calls to almost all (171) of the hotline callers
in our sample who had not yet responded.  In these contacts with
nonrespondents, we used a telephone questionnaire to collect answers
to some of the more important survey questions from the mail
questionnaire.  We made up to five attempts to reach the
nonrespondents by telephone.  See table I.1 for the final
dispositions of the 171 nonresponse follow-up cases.  In August 1995,
we closed out the telephone follow-up effort, having received an
additional 96 usable responses, for a total of 390 usable responses. 
This represents an overall response rate of 81 percent. 


      SURVEY ERROR AND DATA
      QUALITY
------------------------------------------------------- Appendix I:1.3

Because we surveyed only one of a large number of possible samples of
caller inquiries to develop the statistics in this report, each of
the population estimates made from this sample has a sampling error,
which is a measure of the precision with which the estimate
approximates the population value.  The sampling error is the maximum
amount by which estimates derived from our sample could differ from
estimates from any other sample of the same size and design, and is
stated at a confidence level, in this case of 95 percent.  This means
that if all possible samples were selected, the interval defined by
their sampling errors would include the true population value 95
percent of the time. 

In addition to the reported sampling errors, the practical
difficulties of conducting any survey may introduce other types of
errors, commonly referred to as nonsampling errors.  For example,
differences in how a particular question is interpreted, in the
sources of information that are available to respondents, or in the
types of people who do not respond can introduce unwanted variability
into the survey results.  We included steps in both the data
collection and data analysis stages for the purpose of minimizing
such nonsampling errors. 


      VERIFICATION OF DISCIPLINARY
      HISTORY DISCLOSED BY THE
      NASD HOTLINE
------------------------------------------------------- Appendix I:1.4

To make the comparison of information available in the NIRF database
to the full CRD, we drew a random subsample of 100 of the registered
representatives and broker-dealers who were the inquiry subjects from
our first sample of 552 hotline callers (see table I.1).  After
removing seven duplicate inquiry subjects (in which the same broker
dealer was the subject of more than one sampled inquiry), and drawing
another seven replacement subjects, we proceeded to collect CRD data
on a total of 100 eligible subjects. 

For each of the subjects, we completed a data collection instrument
summarizing the subject's recent disclosable and nondisclosable
disciplinary history.  Our goal was to determine whether hotline
callers received the correct and complete information in accordance
with NASD's disclosure policies.  For the comparison sample, our data
collection instrument covered disciplinary actions found on CRD from
January 1, 1990, through January 31, 1995.  For information we found
on CRD that was not disclosable, we documented the type of action,
the allegation, and if applicable, the dollar amounts being
contested. 

We did not validate the accuracy of any of the information found in
the CRD.  Because we reviewed only one possible sample of CRD subject
records, our estimates for the body of NIRF database records as a
whole is subject to the same sampling and nonsampling errors as
described above for the Hotline Customer Satisfaction Survey. 


   SURVEY OF STATE SECURITIES
   REGULATORS
--------------------------------------------------------- Appendix I:2

For the survey of state securities regulators, we obtained a list of
state securities administrators in all 50 states, Puerto Rico, and
the District of Columbia.  This list was produced by the North
American Securities Administrators Association and was dated February
6, 1995. 

We mailed out 52 questionnaires in early May 1995.  When the survey
was closed out in September of 1995, we had received a total of 51
completed surveys.  Because the survey of state securities regulators
covered all elements of this population, this component of our
research is not subject to sampling errors as described above. 
Nonsampling errors, however, can affect any survey. 




(See figure in printed edition.)Appendix II
NASD HOTLINE CUSTOMER SATISFACTION
SURVEY
=========================================================== Appendix I



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)




(See figure in printed edition.)Appendix III
SURVEY OF STATE SECURITIES
REGULATORS
=========================================================== Appendix I



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)




(See figure in printed edition.)Appendix IV
COMMENTS FROM NASD
=========================================================== Appendix I



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on NASD's July 16, 1996, letter. 

GAO COMMENTS

1.  NASD said that we should rephrase our recommendation to urge SEC
to approve its proposed rule as soon as it is filed with SEC.  Our
recommendation meets our intent to ensure that investors get the
information they need to make informed investment decisions.  It
would be premature to make the recommendation as specific as NASD
suggests until its rule amendments are filed with SEC. 

2.  NASD said that we should emphasize the extent to which users
reported high levels of satisfaction with the service they receive
when they use the hotline.  Text was modified to include the
percentage range of those who responded very satisfied. 

3.  Text was added to note the 1988 establishment of the NASD Public
Disclosure Program. 

4.  Caption and text were modified to state that the methods used to
publicize the hotline may not reach all investors. 

5.  NASD noted variations on the handling of formal complaints and
customer complaints and suggested that were clarify what is meant by
dismissed customer complaints.  To eliminate the confusion about the
definition of dismissed customer complaints, we have changed the
example to pending customer complaints. 

6.  Text was revised to include NASD's recommended language regarding
the absence of a systematic means in the current CRD to monitor the
timeliness of filings. 

7.  NASD recommended that we distinguish firms from individuals
throughout the report rather than use the term "broker" as explained
in a footnote on page 1.  We have carefully reviewed every instance
in which we use the term "broker" to refer to both broker-dealers and
their individual associated persons.  In every case, the term broker
refers to both.  We distinguish between the two only when we refer to
either one or the other. 

8.  NASD asked that we use NASD Regulation throughout the report to
refer to the entity responsible for the hotline.  We added a footnote
explaining the restructuring of NASD and refer to NASD Regulation
where appropriate. 


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

Michael A.  Burnett, Assistant Director
David P.  Tarosky, Evaluator-in-Charge
Joan M.  Conway, Evaluator
Larry E.  Hodges, Operations Research Analyst
Stuart M.  Kaufman, Social Science Analyst
Carl M.  Ramirez, Social Science Analyst

NEW YORK REGIONAL OFFICE

Bernard D.  Rashes, Assistant Director
John D.  Carrera, Senior Evaluator
Despina Hatzelis, Evaluator


*** End of document. ***