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Industry Spotlight > Broker Dealers

Three-Part Harmony

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Get out your pitch pipe, and sing along as the SEC begins in the first quarter of 2007 to look at proposals for regulatory rules that have been “harmonized” in an attempt to, if not eliminate, then greatly reduce, conflicts, duplication, and confusion, in a new hybrid set of rules from NASD and NYSE and a new, merged self regulatory organization.

If what NYSE Regulation, Inc., CEO Richard Ketchum said at the International Symposium for Chief Regulatory Officers in Tokyo on November 6, and SEC Chairman Christopher Cox and NASD Chairman Mary Schapiro each spoke of at the Securities Industry and Financial Markets Association (SIFMA) conference in Boca Raton on November 9 and 10 comes to pass, the harmonious set of rules from the NASD and NYSE, and a unified self regulatory organization (SRO) for broker/dealers and exchanges may be well on its way. This must be music to the ears of broker/dealers who have seen the amount of time and money spent on compliance skyrocket since 2003, and been frustrated dealing with multiple sets of regulations.

“All of that hard work has essentially been completed–and the resulting recommendations are even now being reviewed internally at the NYSE and NASD. As a result, I expect that we will soon see proposed rule changes filed with the SEC for the purpose of harmonizing the NYSE and NASD rules,” Cox said in a speech to the newly-launched SIFMA, which combined the Securities Industry Association and the Bond Market Associations into one group.

The regulators spoke about the confluence of events that underscored the necessity for harmonized rules and led to this ambitious project: globalization of trade, transactions, and capital formation; more complex products including structured securities, derivatives, swaps, options, and futures that have become part of the fabric of the financial markets; and major securities exchanges going from non-profit to for-profit, public, and merging–in some cases with exchanges on other continents. They also spoke of changing demographics of populations in the U.S. and other countries, with the baby boom generation approaching, or in, pre-retirement and retirement, and the shift from corporate defined benefit pensions to defined contribution plans from which investors may be transferring very large sums of retirement money into brokerage accounts, and in which investors need more good guidance than ever before.

Emphasizing the need to protect the investing public while not crushing innovation in the securities markets, Cox said it is time to bring the rules of the two (SROs) into sync with the way that exchanges and broker/dealers operate now, and balance that with the needs of the investing public. He cited one of the catalysts for revamping the SROs is “the needless cost and inefficiency of multiple SROs that result from multiple rulebooks, duplicative inspection regimes, and redundant staff. It is investors who pay those extra costs in the form of both money and lost efficiency.”

Regulators acknowledged that new rules and any merged SRO will have to balance protecting the investing public with supporting the creativity and ingenuity of securities industry. Schapiro brought up “the alternative of prudential regulation,” but added that “invasive regulation” could again become the reality for the industry, “if the industry experiences future pernicious conduct of the nature that provoked the greater regulatory scrutiny of the recent past.” But she said that a lot of the rules review had been already accomplished: “We will begin to propose harmonizing rule amendments, on a rolling basis, beginning with our next Board meeting.”

In a separate speech on November 16 to the NASD Fall Conference in Los Angeles, Schapiro announced that in a consolidated SRO, “firms of all sizes will be represented on the Board of Governors,” adding that “small firms will be guaranteed more seats on the Board of this new entity than they currently are guaranteed at NASD.”

One of the challenges for SROs and the firms they regulate is oversight of sales practices, the NYSE’s Ketchum told his Tokyo audience, lauding a new commitment to compliance at “leading firms” and also maybe hinting of things to come from the unified rules. “The continued global growth in equity investing is absolutely dependent on the quality of those firms’ controls so that investors are placed in suitable investments and they fully understand the risks of their investment strategies.”

All of this is not without controversy. There are philosophical differences in running B/Ds. For instance, most NYSE firms’ registered representatives are employees, while the independent B/D model is representatives who are contractors, says Arthur Grant, president of Syracuse, New York-based Cadaret Grant. These are issues that must be reconciled for a merged SRO to work.

The impact on privately held independent B/Ds may be less than on public ones, says Mark Casady, chairman, CEO, and president of Linsco/Private Ledger Corp. (LPL) of Boston and San Diego. LPL is fully regulated by NASD, though there may be some overlap on the rules regarding sales practices and disclosure, he notes. Casady envisions that they “will eventually come together because it makes sense–it would be a good thing for the industry to have one body, so to speak.”


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