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. 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. 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. 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 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. 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. 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. 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. 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. 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. 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.