From the January 2007 issue of Investment Advisor • Subscribe!

A New SRO's in Town

Lots of endorsements, some dissent

The move to consolidate two broker/dealer self-regulatory organizations--NASD and the NYSE--and their corresponding and sometimes conflicting sets of rules into one unified SRO has picked up momentum and a number of endorsements while also sparking a certain amount of controversy.

Dissent is not always a bad thing, however, and in this instance can even be extremely useful, bringing focus to the differing points of view within the brokerage industry, discussion about how best to serve its many constituents, and ultimately hone the resulting super-SRO and rulebook so that it better serves all involved.

Talk with anyone at a B/D, industry association, or regulator, and they all have passionate views about how this ought to shake out. Generally the consensus is positive: a big step toward more efficient, cost-effective, coordinated regulation, looking forward to seeing the details, which, according to NASD Senior Executive VP Elisse Walter, should have been mailed to each member firm before the end of December. Once firms receive this proxy, they have 30 days to vote. The B/D executives this reporter has spoken with since the joint announcement in November have praised the choice of current NASD Chairman Mary Schapiro to lead the combined SRO; she is well known to many executives because of her work over the years with many NASD member firms.

The largest B/D industry trade organization, the Securities Industry and Financial Markets Association (SIFMA), endorsed the move to a unified SRO, as has the National Association for Independent Broker/Dealers (NAIBD). NAIBD President Lisa Roth said in a November 30 announcement that "a single regulator will result in streamlined regulations and greater efficiencies for firms of all sizes. In making our decision to endorse the proposal, however, we paid particular attention to the effect the proposal would have on small and independent firms. In this respect, we find that the proposal demonstrates awareness on the part of our regulators of the specialized needs of small and independent members."

The Financial Services Institute (FSI), the B/D association spunoff from the FPA, has endorsed the plan as well: "The FSI Board voted unanimously to endorse the transaction and to encourage its approval by NASD member firms," said FSI chairman John Poff in a December 13 statement. Poff, also CEO of Mutual Service Corp., said in that statement, "We believe the structure of the proposed organization will provide opportunities for broad and diverse industry involvement in the regulation of our industry, particularly at a time when some regulators and consumer advocates are calling for the elimination of self-regulation."

While it is pretty clear that the cost and efficiency benefits will help B/Ds that are members of both organizations, there was initially some concern on the part of smaller independent firms that are NASD, not NYSE, members, about representation and potentially tougher regulation. Longwood, Florida-based Financial Industry Association (FIA), a vocal opponent of NASD, has emphatically not endorsed the proposed unified SRO, and in fact has requested that its members sign over their irrevocable proxy--for a full year--to co-founder John Busacca, and Richard Goble. In a cover letter for FIA's proxy solicitation, Busacca called the $35,000 initial payment NASD has promised to all members if the transaction closes--recognizing "the incremental cash flows that will be produced by the consolidated transaction," according to the NASD--undervalued, and demanded payments of "$100,000 per NASD member" and the "immediate removal of the current Board of Governors for failure to act in a prudent, fair, diligent, and ethical manner when deciding the future and managing the affairs of over 5,000 member firms."

NASD countered with its own communication to firms, "Regulatory Consolidation--Assertions and Facts," addressing a number of members' concerns. The statement addresses the fear by some independent firms that they could be "subject to NYSE rules" after the consolidation. NASD says that's not the case and that the new SRO will consult with industry committees and "adopt a uniform set of rules flexible enough to accommodate the different business mixes and firm sizes in the industry."

To the concern that small firms won't have adequate representation, the NASD responds by noting that the new SRO board guarantees three seats to small firms, "the same amount as large firms and more than the small firms currently are guaranteed on the NASD board."

SIFMA's Small Firms Committee of 25 members sent a letter on December 12 to 280 small firms members endorsing the new SRO and urging members to vote for it. In a conference call that day, committee chairman William Pictor, president of Buffalo-based Trubee, Collins, said, "this is a good deal," and that the proposal garnered "very significant endorsement from the small firms committee--almost 100%." Responding to a question about the FIA's request for irrevocable proxies, he said that to give up an entire year of votes on the consolidation is a "very major give-up for a firm," and that it's "important enough for firms to take the time to cast their vote."

One aspect to merged SRO efficiencies is that the cost savings for independent firms will be both direct and indirect: most independent B/Ds clear through firms that are NYSE members, notes Brian Murphy, president of independent B/D Woodbury Financial. Murphy endorses the new SRO and, since Woodbury clears through Pershing, he says that because a unified SRO will reduce the "redundant cost and complexity" of being regulated by NYSE and NASD, the new SRO "will help Pershing, which indirectly helps us." Regulators are heading in the right direction, he says, but suggests they shouldn't stop at just NYSE/NASD; he envisions harmonization with the SEC and all 50 state regulators as well. Maybe this is just the first step.

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