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NASD, NYSE Agree to Merge Some Oversights
Supporters Foresee Streamlining In Market Regulation As Foes Fear Less Protection for Individuals
THE WALL STREET JOURNAL
By Randall Smith and Kara Scannell
November 29, 2006

IN A VICTORY for Wall Street, the two organizations that police brokerage firms unveiled, as expected, a plan to merge some of their operations -- the latest step in a deregulatory push in U.S. markets.

Securities and Exchange Commission Chairman Christopher Cox hailed the pact, saying it would streamline Wall Street regulation and raise the competitiveness of U.S. capital markets. Some investor advocates said the merger could weaken protections for individual investors by effectively removing cops from the beat. No immediate job cuts are planned, with the regulators saying any reductions would come through attrition.

The National Association of Securities Dealers and NYSE Group Inc.'s New York Stock Exchange plan to combine routine examinations, enforcement and rule-making for the securities industry. The plan, which must still be ratified by 5,100 current NASD members, follows a campaign waged intermittently since 2000 by Wall Street's lobbying group, recently renamed the Securities Industry and Financial Markets Association.

"In ushering in these changes, we'll be improving America's capital markets and making our nation more competitive," Mr. Cox said. He said the merger would eliminate "needless and often harmful duplication" of routine brokerage regulation, while leaving the NYSE free to police its own trading.

However, Jacob Zamansky, a lawyer who represents investors in disputes with Wall Street brokers, said: "I believe the merger is not in the interest of ordinary investors and is being done to promote the interests of Wall Street." He added, "When you have competition among regulators, they all try to do a better job. Generally in monopolies the service goes down."

The regulatory relief for Wall Street comes as both NYSE Group and Nasdaq Stock Market Inc. are bidding to acquire exchanges in Europe. Both exchanges must persuade non-U.S. investors and overseas issuers of securities that they won't suffer from the increase in U.S. regulation, notably the Sarbanes-Oxley law that was passed in 2002 after the collapse of Enron Corp. and other post-bubble scandals and added layers of regulation for public companies trading in the U.S.

The tentative pact appears to favor the NASD, whose chairman and chief executive officer, Mary Schapiro, 51 years old, will become CEO of the merged organization, as yet unnamed. A 23-member board will be split evenly between the NASD and the NYSE, with three members named jointly.

Richard G. Ketchum, 55, CEO of the NYSE's regulatory unit, will become nonexecutive chairman, while retaining his current post. He said 470 of the 700 NYSE regulatory employees will join the NASD staff of 2,400, with the rest continuing to police NYSE trading.

Although the NASD itself had to be bolstered after a stock-price bid-rigging scandal in the mid-1990s, since then the smaller NYSE self-regulatory effort has been viewed as the weaker of the two organizations. Indeed, in 2005, the SEC criticized the NYSE for lapses in overseeing stock trading on its own floor.

The NASD, which has faced dissent among its smaller members over the cost of regulation, is offering $35,000 per firm, or a total of $178.5 million for its 5,100 members, "in recognition of anticipated cost savings" if the merger wins the needed votes. The NASD is also cutting fees paid by smaller firms, and it estimates that 200 firms regulated as brokerages by both agencies could save tens of millions in annual compliance costs.

The NASD will also pay the NYSE itself $103 million, Ms. Schapiro said, aimed at ensuring the merger is "revenue neutral" to shareholders of NYSE Group, which went public earlier this year, based on "lost regulatory revenues" during a transition period. The NASD has assets of $2.6 billion based mainly on its past sales of stock of the Nasdaq stock trading system.

Combining the two industry self-regulators, which are overseen by the SEC, picked up steam over the past three years, after the stock market began to rebound and investor memories faded of losses they had suffered.

As they vie to acquire European trading platforms, the two main U.S. exchanges are under pressure to maintain their market share amid the growth of non-U.S. markets. But foreign regulators have criticized the U.S. system for being multilayered. Mr. Cox said the new regulator will be "more capable of working with other regulators around the world."

Over the summer, pressure on the two regulatory groups, which had clashed in the past over control, ramped up. SEC Commissioner Annette Nazareth, a former director of SEC market regulation, began working with them on a compromise. So did former NASD chief Frank Zarb. "This new organization is an idea whose time has come," Mr. Ketchum said.

In addition to the NASD member vote, needed for bylaw changes, the merger requires a public comment period and SEC approval. Officials say they expect the regulator to be up and running by mid-2007.

Some other investor advocates said they supported the move. They included Joseph Borg, president of the North American Securities Administrators Association, and Barbara Roper, director of investor protection at the Consumer Federation of America, with Ms. Roper saying she didn't think investors had been helped by the presence of both regulators.

Richard Herr, an analyst at Keefe, Bruyette & Woods, said the deal "takes some of the conflict out of the business model" of the NYSE, a reference to the fact that the Big Board has long sought trading business from the brokerage firms that it regulates. Mr. Herr spoke on a panel at a conference in Chicago sponsored by the Futures Industry Association.

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Aaron Lucchetti contributed to this article.
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Change for Stock Cops

Highlights of the planned marriage of regulators on Wall Street:

-- The new 'self-regulatory organization,' or SRO, will be responsible for all broker examination, enforcement, arbitration and mediation functions. It will handle 'market regulation by contract' for Nasdaq, the Amex, ISE, Chicago Climate Exchange and OTC Bulletin Board.

-- NYSE Regulation will continue to oversee the NYSE market.

-- A 23-person board of governors will oversee the new SRO's activities, with 11 seats held by public governors. Large firms, consisting of 500 or more brokers, and small firms (150 brokers or fewer), will each be guaranteed three seats on the board. Medium-size firms will be guaranteed one seat.

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