The National Association of Securities Dealers is taking some heat for a new clause it quietly inserted in some broker/dealers' restriction agreements that limits a member's right to sue the SRO.

The wording, added to some new agreements this year, requires a member firm to agree that it can sue the NASD only in cases of "willful malfeasance" by the regulator.

"You'd really have to catch them with their hand in the cookie jar," says Alan Davidson, an NASD member who refused to sign the agreement. The willful malfeasance standard "is a very difficult point to prove legally," he says.

Davidson, president of Zeus Securities in Jericho, N.Y., and a vocal NASD critic, says he was handed a copy of the agreement earlier this year and was told to sign it during an NASD examination of his firm. "The timing was curious," he says.

His old membership agreement did not include any wording referring to the NASD's liability.

Ted Cohen, a securities attorney with Spolin & Silverman in Santa Monica, Calif., agrees that willful malfeasance is a difficult point of law to prove. "Willfulness is subjective," says Cohen. "So, you have to prove a certain state of mind. And it's not easy to prove a state-of-mind case."

NASD restriction agreements outline procedures a member firm agrees to follow, such as meeting net capital requirements; staying within the definition of its business plan; notifying the NASD of any changes in name clearing arrangements, branch offices, and personnel; and complying with federal and state regulations. Violations of the agreement can lead to closure of a firm.

The new section in Davidson's restriction agreement says: ... neither the National Association of Securities Dealers, Inc. ("NASD"), NASD Regulation, or The Nasdaq Stock Market ("Nasdaq") (collectively the "Corporations") nor any officer, employee, or member of the Boards or committees of the Corporations, shall be liable, except for willful malfeasance.

"At the very least, [the wording] should have been submitted to the membership for a vote," says Davidson.

The NASD did not return telephone calls seeking comment.

Davidson believes the inclusion of the new clause is in response to several lawsuits filed against the NASD in recent years. Davidson himself sued the NASD in 1996 over alleged mishandling of a 1993 New York district election for that district's representative on the NASD Board of Governors. Davidson was a dissident candidate in that race. The case was dismissed by a New York federal court last year, which found Davidson had no standing to sue the NASD.

Davidson does not think he is being singled out with the new restriction agreement--he claims other broker/ dealers also have been asked to sign new restriction agreements containing the new liability clause.