A New SRO's in Town

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.