The New SRO

Plans for the NYSE/NASD regulatory consolidation are moving quickly toward a projected April 2 deadline. If approved by the SEC, the new single self-regulatory organization (SRO) would bring all broker/dealers under one regulatory umbrella. Chances are your firm is going to save some money under the new scheme. That's because the combination would reduce overlapping rules, particularly for the larger

Plans for the NYSE/NASD regulatory consolidation are moving quickly toward a projected April 2 deadline. If approved by the SEC, the new single self-regulatory organization (SRO) would bring all broker/dealers under one regulatory umbrella. Chances are your firm is going to save some money under the new scheme. That's because the combination would reduce overlapping rules, particularly for the larger dually listed firms (there are 180) — a welcome change in an industry that has been complaining loudly about their excessive regulatory burden for years. But some small b/ds don't like the plans, since it will also mean a complete overhaul of the board selection process: The one-firm, one-vote provision that ruled the industry's electoral process for 67 years will be axed, and instead of electing the entire board of governors, firms will be limited to voting on just seven. Ultimately, what all this means for b/ds really depends on whom you ask.

“I think everybody is a winner in this,” says Tom James, chairman and CEO of independent b/d Raymond James, which has more than 5,000 advisors. James estimates his firm alone will save hundreds of thousands of dollars a year. The new single SRO could also produce a more-talented staff and better policy, he says, because it will presumably capture the combined experience and expertise of the NASD and NYSE. Some executives say their firms will also benefit indirectly, because the back-office and outsourcing firms with which they work will also have a lighter regulatory load. “The firms that we rely on, such as Pershing, they had to navigate their way through both regimes and that created cost and complexity, which will come back to us in indirect ways,” says Brian Murphy, CEO of Woodbury Financial, a mid-sized b/d subsidiary of The Hartford.

Small-firm advocates are much less keen on the regulatory marriage. “The large firms will save a lot of money but the small firms will see very little benefit,” says Alan Davidson, president of Zeus Securities and the Independent Broker Dealer Association. Because so few of the small firms are members of both SROs, they weren't affected by duplicative rules in the first place — plus the elimination of the one-firm, one-vote rule means small firms, which are far greater in number than the large firms, would get less representation than they currently have.

Some small firms contend, further, that having fewer regulators and fewer rules will simply mean fewer enforcement actions against crooks. “Having fewer regulators has yet to be proven to work,” says John Busacca, president of North American Clearing in Longwood, Fla., and co-founder of the Financial Industry Association. Busacca has called the merger “a smokescreen” to veil the fact that small firms' rights are being taken away.

Executives at larger shops disagree. “I'm not sure that was a fair system to begin with, where if you are an independent b/d, you received the same vote as a Merrill Lynch or another firm,” Woodbury's Murphy says. “The complexities of running a bigger company are much different than running a small five-rep organization. I'd liken it to the House of Representatives, where a state such as California should have more representation.”

From Here On Out

There is one concern shared by executives from firms big and small: that the proposed governance structure for the consolidated regulator could change the nature of regulation in the industry for the worse. Essentially, that's because the firms will lose control over who is on the NASD's board of governors. The current board of the NASD has 16 members. Only six of these are industry people, all but two members are elected.

Under the proposed bylaws for the single SRO, a 23-person board would consist of three seats for large-firm representatives, three seats for small-firms reps, and one for mid-sized firms. Firms could nominate and vote only for candidates within their tier so, at most, they could vote for three board member candidates. Another three industry representatives would be appointed to the board, while two seats are guaranteed for NASD CEO Mary Schapiro and NYSE Regulation CEO Richard Ketchum. The remaining 11 seats would go to public and non-industry representatives.

On its Web site, the NASD states that the consolidation preserves industry representation in the SRO process and guarantees that firms of all sizes will have a significant voice in the governance of the new SRO. The NASD declined to comment further on the consolidation.

Busacca and other small-firm advocates campaigned against it so loudly in recent months that the NASD was forced to hit the campaign trail themselves to generate support for the merger. Leading up to the member vote, NASD was holding conference calls, called on former SEC Chairman William Donaldson and Harvey Pitt to write an op-ed in The Wall Street Journal, hired a proxy firm to solicit votes and even ran ads in financial publications, including this magazine, to persuade firms to vote in favor of the consolidation. Its lobbying efforts worked. Sixty-three percent of member firms voted in favor of changing the by-laws to set the merger in motion. But that still leaves a large minority who doesn't want the rules changed. With the deal still pending SEC approval, small-firm advocates may still have a few tricks up their sleeve.

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