Are there too many redundant regulators crawling all over Wall Street brokerages? Or, put another way, are federal securities laws crafted in the 1930s still effective 70 years on? And, more important, is a privately owned, for-profit NYSE Group able to “self-regulate” itself without being mired in conflicts? And, as reps, should you care?
Certainly, those are hotly contested questions. And, those questions are officially opened for debate in Washington, D.C. Today, the Senate Committee on Banking, Housing and Urban Affairs took testimony from several experts—including NYSE Group CEO John Thain, NASD CEO Robert Glauber and others. Although Thain has in the past seemed open to a hybrid NYSE/NASD regulatory body, today he seemed to take a different tone. “We have heard that the concern that self-regulation within a for-profit company structure that includes an affiliated market is problematic because the for-profit goals of a marketplace are in direct conflict with the regulatory duties of that marketplace,” he told the committee. “The premise underlying this argument is false.”
Thain said that the new structure of the NYSE Group—NYSE Regulation being a separate, wholly-owned subsidiary that does not report to Thain but directly to the NYSE Regulation board—should be enough to allow it to operate independently. As for regulatory duplication, Thain said, “NYSE Regulation has pledged to the SEC that it will work to eliminate inconsistent rules, and to use its best efforts, in cooperation with the NASD to submit to the [SEC] within one year, proposed rule changes, reconciling inconsistent rules and a report setting forth those rules that have not been reconciled.”
In opening the committee meeting today, Senator Richard Shelby (R-Ala.), chairman of the committee, seemed to take a hardline approach, pointing to what he called the failures of self-regulatory organizations by naming the NYSE specialists front-running scandal that he said cost investors $155 million. “In 2004,” Shelby said, “the [SEC] called the obvious conflicts between an SRO’s regulatory functions and its shareholders the most controversial aspect of the current self-regulatory system.” But Thain and NASD CEO Robert Glauber agreed that self-regulation is key, although, yes, there is overlap that results in inefficiencies in the system. Currently, there are about 200 firms that are registered with both organizations.
Both organizations are now faced with the struggle to determine how to achieve a less repetitious regulatory structure. “We do want one set of rules for firms. The real question is ‘how do we get there.’ Neither system is foolproof,” Thain said.
Glauber, CEO of the NASD, more or less seemed to hold out the NASD’s new structure, as an independent entity from the Nasdaq stock market, as the model to follow. But he said that the solution “that makes sense is a partnership between the NYSE and NASD to jointly handle the regulation of the firms that are members of both organizations.” He called for those firms to be regulated “according to one rulebook instead of two. They would pay for one regulator instead of two, and they would have only one examination and enforcement staff to deal with, lowering compliance costs,” Glauber said. “These savings could then be passed on to investors, while the regulation of these firms would be more coherent, effective and efficient.”
New York Senator Chuck Schumer said he would work hard to fight any solution in which the NASD imposes its rules on the NYSE. “I don’t see any reason we should pick the NASD standards over the NYSE’s. I think there should be some kind of hybrid that combines both rules,” he said.
The Securities Industry Association says its primary concern is the conflict of interest surrounding a for-profit SRO that attempts “to wear two hats as both market operators and regulators.” Mark Lackritz, president of the SIA, says, “We support consolidation of the broker/dealer regulatory functions for firms that are regulated by both the NYSE and the NASD. This consolidated self-regulatory structure eliminates conflicts of interest and regulatory duplication.” The SIA says it hopes the committee and the SEC will lead the way to a solution that works for all parties.
“We know the SEC is listening today, and there is no question we will hear from them soon,” Senator Shelby concluded.
As far as reps are concerned: They should care, since the integrity of the stock exchanges is vital to their businesses.