Correction to This Article
A photo with a July 27 Business article about the merger of the enforcement arms of the NASD and the New York Stock Exchange incorrectly identified Robert Glauber as the NASD's chairman and chief executive. Glauber is retired, and Mary L. Schapiro has held those titles since Aug. 31, 2006.

SEC Approves One Watchdog For Brokers Big and Small

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By Carrie Johnson
Washington Post Staff Writer
Friday, July 27, 2007

Securities regulators yesterday approved a merger between the enforcement arms of the New York Stock Exchange and the NASD, creating a single watchdog for brokers from Wall Street to Main Street.

The Securities and Exchange Commission's blessing came nearly eight months after the deal was announced to fanfare from financial services companies and advocates of regulatory overhaul. Officials said the merger would reduce duplicate and sometimes conflicting rules and save money, particularly for the 200 largest broker-dealers that had been subject to dual oversight for years.

Investors, too, could benefit from lower costs passed along by companies, though a plaintiff lawyer expressed concern that the deal would result in less oversight of business practices.

The merger blends two different cultures. The NASD has concentrated much of its enforcement energy on improper sales practices of smaller brokerages and efforts to protect retail investors and senior citizens. At the same time, the NYSE unit has focused on the operations, financial health and firewalls between different units of much larger broker-dealers.

In recent months, executives at both organizations have been engaged in an intense effort to merge their inspection teams, enforcement operations and lengthy rulebooks. Much of the heavy lifting is complete, officials said, although new board members from the industry and the public must be elected. Final changes to the rules are still about a year away and will require separate approval by overseers at the SEC.

The new self-regulatory body, which is funded by the businesses it supervises, will be called the Financial Industry Regulatory Authority. No job cuts are expected among the 2,500 NASD enforcement employees and 490 NYSE regulation workers, though attrition may reduce personnel costs over time, NASD chairman and chief executive Mary L. Schapiro said. Schapiro also will serve as chief executive of the new organization.

In an interview from her Washington office, Schapiro rejected critics' assertions that the merger would make tough-edged enforcement a lower priority. "I think we go from fragmentation to consolidation," she said. "We are very committed to being vigorous and robust regulators."

Leading trade groups including the Securities Industry and Financial Markets Association have called on the enforcers to combine since 2000. Reducing the number of regulators that business must obey has been a recurring theme as the Bush administration seeks to weigh the costs of complying with many federal rules against their benefits.

Treasury Secretary Henry M. Paulson Jr. recently established two commissions to study regulatory reform and SEC Chairman Christopher Cox last month launched his own panel to examine financial reporting. Yesterday Cox called the agreement "an important step toward making our self-regulatory system not only more efficient but more effective in protecting investors."

To some analysts, the merger between the NYSE's regulatory arm and the NASD enforcement unit is the first real test of the wider philosophy.

"It basically creates more effective self-regulation at a lower cost," said Marc E. Lackritz, chief executive of the Securities Industry and Financial Markets Association. "It's what regulatory arms around the world should think about doing."

Duke University professor James D. Cox, who tracks developments in securities law, said the combination could be "the first shoe of many to drop in ultimately moving to a single regulator" in the United States.

Under the new regime, businesses will be visited by one set of inspectors, not two. Enforcement cases will undergo multiple layers of review by officials within the organization before they are filed or settled. The long-standing NASD review process, which includes an opportunity for businesses to make a case that they should not be sued, will survive, said Stephen Luparello, an executive vice president.

Susan L. Merrill, a NYSE executive who will lead the new enforcement unit, visited 15 district offices across the nation to meet staff members.

Richard G. Ketchum, former chief of the NYSE regulation arm who will become board chairman of the new group, said both organizations are studying the rulebooks to ensure that small companies are not disadvantaged by regulations established for the larger NYSE members.

"Any regulatory structure searches to gain the most investor protection at the least cost," he said. "I am very comfortable that what we have done is get rid of the underbrush of overregulation without in any way compromising investor protection."

Investor advocates said they generally favor eliminating overlap, reasoning that a single regulator will be less confusing and expensive for financial institutions. But they cautioned that the SEC will need to step up its oversight of the new organization to ensure it is working as intended.

Jacob Zamansky, a New York lawyer who represents investors in cases against banks and brokerages, expressed concern that the combination would reduce competition among regulators.

"There will be fewer eyes on the wrongdoers," he said. "It's part of a diminishing enforcement of investor issues that starts at the top and works its way down. I think investors are fearful this is part of a trend we're seeing generally."


© 2007 The Washington Post Company

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