Watch Out

Broker/dealers and RIAs alike should ready themselves for a number of initiatives being worked on by their regulators in the New Year. (See following page for a list of key lawmakers and some of the issues likely to be taken up by the new Democratically controlled Congress.) First, the merger of the regulatory arms of the NYSE and NASD will

hopefully be completed by the second quarter of this year, Robert Errico, executive VP at NASD, told a group of lawyers at ALI-ABA’s broker/dealer regulation event in Washington January 11. Errico said the new SRO will yield a “synergy that should have happened a long time ago,” and that the voting for changes in the bylaws has yet to be completed (the proxies likely will have been counted by the time you read this).

SEC Commissioner Annette Nazareth commented in a speech at the same event that the new SRO would be “responsible for member compliance for virtually all broker/dealer firms,” adding that the SRO will also have “enforcement and mediation functions, as well as rulewriting, professional training, and licensing areas.” Some NASD-only firms have expressed worries that NYSE-style regs will be imposed on them. However, Errico pledged that the combined SRO would be “issuing rules that take into consideration all firms.” The NYSE would continue to oversee the NYSE market through its own market surveillance, enforcement, and listed company compliance groups, Nazareth said. “Thus, member regulation would be separated from the NYSE market under this [SRO] proposal.”

Nazareth said the NASD/NYSE Regulation combination could “more effectively manage conflicts of interest” that are inherent in an SRO model, and an “NASD/NYSE Regulation combination potentially could achieve greater efficiencies and cost effectiveness than the current model.” This consolidation, she argued, “should eliminate costly overlapping regulation and establish uniform rule sets within a single regulatory organization. Further, a single rule set and enforcement of such rules should reduce complexity and eliminate potential conflicts arising from multiple SROs.”

Meanwhile, at the SEC . . .

What about the other regulator that oversees B/Ds and RIAs? Lourdes Gonzalez, assistant chief counsel in the SEC’s Division of Market Regulation, told attendees at the ALI-ABA event that the regulator’s study of broker and advisor regulation is underway, and that while a deadline for completing the study has never been formally stated, the SEC expects it to take about 18 months. The release announcing the study came out last September, so any results won’t likely be seen until 2008.

Andre Owens, a lawyer with Wilmer Cutler Pickering Hale and Dorr in Washington, who sat on a panel with Gonzalez, said that he still devotes a lot of time to trying to help clients define what financial planning means under the SEC’s broker/dealer exemption rule, also known as the Merrill rule. Hardy Calcott, a lawyer with Bingham McCutchen in San Francisco who moderated that same panel, commented that the “intersection between B/D and advisor regulation has gotten more difficult to navigate.”

Owens asked Gonzalez if the SEC planned to issue further guidance defining what constitutes financial planning. She responded that the industry must first ask the SEC for clarification. “We have to get the questions before we can provide interpretive guidance,” Gonzalez said.