One Regulator to Rule Them All

Wall Street's leading regulators, NYSE Regulation and the NASD, are in talks to form a hybrid regulator that will oversee dual member firms. But skeptics question whether a joint regulator will result in the $100 million-a-year savings that the NASD is proposing.

Years of regulatory scrutiny have caused firms to increase compliance spending. Now, to reduce the burden on broker-dealers that are members of both the New York Stock Exchange and the National Association of Securities Dealers, Wall Street leaders are pushing the NYSE and the NASD - the industry's two leading self-regulatory organizations (SROs) - to combine their efforts.

The review of SROs comes at a time when the industry is undergoing dramatic changes in market structure as Regulation NMS forces market centers to automate trading. Additionally, with its merger with Archipelago, the NYSE is becoming a hybrid exchange and, at the same time, a for-profit entity - a move that has caused much debate about a for-profit company's ability to regulate its members. Meanwhile, the NYSE's rival, the Nasdaq Stock Market, is separating from its regulator. All this has prompted the Securities and Exchange Commission (SEC) to examine the inherent conflicts of interest in the industry's current self-regulatory structure.

Officials at the Securities Industry Association (SIA) - the brokerage industry's main trade group - as well as regional brokerage firms have been urging the NYSE and the NASD to reduce the redundancy in their rule books, examinations and reporting requirements. The issue affects more than 170 bulge-bracket and regional brokerage firms that are members of both the NYSE and the NASD. These firms "are subject to very duplicative rules and examination requirements," according to George Kramer, deputy general counsel at the SIA, which is pushing the concept of a single, hybrid SRO. "Rather than having two sets of regulators working hard to make sure they are coordinating, we think it would make more sense to have one regulator handling exams," Kramer says.

Under a hybrid SRO, a broad set of functions common to member firms of both the NYSE and the NASD would be moved into a centrally managed organization, but regulation of trading on the NYSE and Nasdaq stock markets would remain within each market's SRO. The hybrid SRO would deal with the day-to-day issues that affect every broker, such as sales practice and financial responsibility issues, explains Ira Hammerman, the SIA's general counsel.

The topic of combining regulatory functions surfaced in early November at the SIA's annual meeting, where NYSE CEO John Thain raised the idea of the SROs cooperating to reduce the duplication in their examinations. The NYSE, which owns its regulator, NYSE Regulation, revealed that it was exploring a joint venture with the NASD to reduce the duplication that exists in their procedures for examining broker-dealers that are members of both the NYSE and the NASD.

NYSE Regulation oversees the actions of 130 specialist firms, floor brokerages and registered traders that do not interact directly with investors, as well as some 250 member firms that do work directly with investors. Also, NYSE Regulation oversees 2,800 companies listed on the NYSE that are required to meet standards of financial and corporate accountability, and transparency. According to a spokesman for NYSE Regulation, Thain suggested there are three ways the SROs could work together: form a joint venture, alternate examinations every other year or divide up responsibility for examining firms.

At the SIA's annual meeting, Robert Glauber, CEO and chairman of the NASD, said he estimates that member firms could save $100 million with the move to a single, joint regulator. At a Nov. 17 Congressional hearing exploring SRO reform, Glauber asserted that having one regulation fee instead of two would save the industry about $50 million a year. In addition, by contending with one examination staff and one enforcement staff, Glauber testified that firms would lower their compliance costs by another $50 million a year.

According to an NASD spokesman, the estimate is based on the savings of firms that have chosen to be regulated by just the NASD. "The savings would largely come from member regulation fees that are duplicated," the spokesman explains, adding that brokers could benefit further from more uniformity across NYSE and NASD rules, and a single examiner for sales practice review examinations - an area in which dual members are examined by both SROs. Glauber was not available for an interview at press time.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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