WealthManagement Magazine

The NASD's $600 Million Man

Those who do business with the NASD are free to serve anywhere in the SRO's leadership and don't have to give up their business relationship while they serve. Bert Roberts Jr., chairman of MCI, is a long-standing example.As the head of a Nasdaq-listed company that brings in a significant amount of trading volume to Nasdaq, Roberts joined the NASD board of governors in 1992 and served there until the

Those who do business with the NASD are free to serve anywhere in the SRO's leadership and don't have to give up their business relationship while they serve. Bert Roberts Jr., chairman of MCI, is a long-standing example.

As the head of a Nasdaq-listed company that brings in a significant amount of trading volume to Nasdaq, Roberts joined the NASD board of governors in 1992 and served there until the spring of 1997 when his term expired (although an MCI spokesperson says the NASD asked him to stay on until the Jan. 15, 1998, election).

Roberts also serves on the NASD's National Nominating Committee charged with assembling candidates for 22 slots for the board of governors election. The new board positions were created by the NASD restructuring plan directed by Frank Zarb, NASD chairman, CEO and president.

Until 1992, MCI, AT&T and Sprint shared pieces of Nasdaq's communications infrastructure needs, according to John Hickey, Nasdaq executive vice president of technology services. Then MCI became the exclusive provider of the Intelligent Shared Network, the system used for Nasdaq Stock Market Broadcast services. At the end of 1993, Nasdaq decided to design an overall communications infrastructure for its electronic trading network.

"Many competitors" bid on the contract, Hickey says, resulting in "a dead heat" between MCI and AT&T. MCI won. The Enterprise Wide Network debuted in 1995.

But there was no such competition when Nasdaq announced last year it needed a more powerful network. AT&T didn't submit a bid. WorldCom Inc. was the sole competitor to MCI for the six-year, $600 million contract. But 10 days before Nasdaq's Nov. 20 announcement that MCI had won the contract, MCI announced a merger agreement--with WorldCom.

"How come others didn't bid?" asks Alan Davidson, head of Zeus Securities in Jericho, N.Y., and president of the Independent Broker-Dealer Association. "Maybe because they knew they didn't have a chance."

(Davidson, a long-time NASD critic, is spearheading an effort to boycott the upcoming NASD board of governors election.)

According to Scott Peterson, a Nasdaq spokesperson, "It was our impression when we awarded the contract that MCI would be swallowed up by British Telecom, and so would be delisting. If we had wanted to make an inside deal with one of our own, we would have chosen WorldCom, which had a Nasdaq listing at the time."

MCI spokesperson Debbie Caplan says: "Our most recent contract with the NASD was awarded after we told Nasdaq we were delisting in expectation of a merger with British Telecom. We had a relationship with the NASD before Bert Roberts joined the NASD board. Our situation is not one that would represent a conflict of interest, not necessarily contingent on a relationship to the NASD board."

Roberts himself declined comment.

Reid Walker, another Nasdaq spokesperson, says that Roberts was no longer on the NASD board when the MCI contract was decided. Yet Caplan reiterated to RR that the NASD asked Roberts to stay on the board until Jan. 15, 1998.

Walker adds that the NYSE also has board members who represent companies that are listed with them and/or have business contracts, Hewlett-Packard being one of them.

But Nasdaq's Enterprise Wide Network II contract represents MCI's largest commercial outsourcing contract ever, says a Nasdaq press release. The release goes on to say that MCI fully manages the network with MCI staff working in Nasdaq data centers in Trumbull, Conn., and Rockville, Md.

Furthermore, when the NASD created a discounted long-distance phone services program for member firms, it chose MCI. Recently, MCI also inked a deal with Charles Schwab to market its MCI Internet service to potential Schwab on-line brokerage customers.

Conflict-of-interest questions come up among others in NASD leadership. Michael Brown, retired CFO of Microsoft Corp., a key listing for Nasdaq, chairs Nasdaq's board of directors and its executive committee. He was among those chosen by the NASD's National Nominating Committee as a non-industry candidate for the new NASD board of governors and elected to the board Jan. 15. Hickey says Microsoft has never had any contracts with Nasdaq.

Meanwhile, Zarb has been criticized for his announcement of a plan to establish an academy to train NASD regulatory officials. The NASD is considering Hofstra University as the home for the academy, Zarb said at a November conference in San Francisco for financial journalists. Zarb earned both his bachelor's and master's degrees at the university and sits on its board of trustees. In 1994, Hofstra named its business school after Zarb.

According to press reports from the conference, Zarb said there would be "some form of open competition" to select the academy site and that "more schools may be considered." He wouldn't name any others, however.

The NASD's new conflict-of-interest rules that accompany the recent corporate governance rule changes appear to uphold the long-standing practice of allowing those who do business with the NASD to serve in its leadership.

The new Section 4(b) says that no contract or transaction with the NASD can be canceled solely because an NASD governor or officer is a director, officer or has a financial interest in the company that has the contract or transaction. For a contract or transaction to meet the rule's specifications it has to pass two tests: either 1) it's pre-authorized by the vote of a majority of disinterested governors who have been briefed on the "material facts" of the relationship; or 2) it's approved by the same process after the contract has been signed. The rules provide no definition of "disinterested governor."

Do conflicts of interest pose a problem for NASD leaders? "I've never seen any evidence at all of conflict of interest," says A.A. Sommer Jr., an attorney with Morgan Lewis & Bockius in Washington, D.C., and a former NASD governor and member of the Rudman committee, which in 1995 issued a report calling for major changes in the NASD's corporate governance structure. While Sommer admits "on the face of it," the potential for conflict exists, he sees no need to restrict those who serve in NASD leadership from doing business with the NASD.

"I served with Bert [Roberts]," for four and a half years, Sommer says. "He has been a very valuable leader, and his company has been a very valuable supplier of services to the NASD." During Sommer's tenure on the NASD board, he says he saw competitive bidding on all contracts.

Others disagree. "All contracts go to Nasdaq-listed companies," claims Joseph Mays, a former NASD examiner who now heads Securities Consulting Group in New York City. "If the NASD can't demonstrate that they do business with non-Nasdaq firms, there's a problem."

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