The New York Stock Exchange (NYSE) and the NASD announced yesterday that they have agreed to combine their member regulation functions in a move that is likely to come as a relief to securities firms and their compliance officers in the US.
The NYSE and NASD plan to create a new self-regulatory organization (SRO) to oversee all public broker-dealers operating in the US. It will merge existing operations at each group that in many cases duplicate regulatory scrutiny of many large firms.
The new SRO is expected to start work in the second quarter of 2007 and will fold together the NASD, formerly known as the National Association of Securities Dealers, and 470 of NYSE Regulation's regulation, arbitration and enforcement staff.
Announcing the plan, which is subject to SEC review, Commission chairman Christopher Cox said: "Eliminating overlapping regulation, establishing a uniform set of rules placing oversight responsibility in a single organization will enhance investor protection while increasing competitiveness in our markets."
Richard Ketchum hailed the merger as the first major reform of the US self-regulatory system in its 70-year history. He will continue as chief executive of NYSE Regulation while also serving as non-executive chairman of the new body during a three-year transition period.
NYSE Regulation will continue to head up market surveillance and compliance for companies listed on the NYSE and NYSE Arca exchanges. NASD chair and chief executive Mary Schapiro will be chief executive of the new SRO.
The announcement had been widely anticipated for more than a year. It is likely to be welcomed by large-broker dealers, which stand to save time and money currently spent on duplicated inspections and oversight requirements. At the moment almost 200 broker-dealers are regulated by both the NYSE and NASD.
Lawyers who advise broker-dealers have also expressed support for regulatory consolidation along the lines outlined in the NYSE-NASD plan. Despite the fact that it will potentially reduce their work levels for individual clients, they argue that it will improve the efficiency of oversight.
The NYSE and NASD have increasingly cooperated on regulatory issues over recent years, particularly since the appointment of Ketchum as the NYSE's first chief regulatory officer in January 2004. The groups have begun to conduct joint examinations, avoid looking at the same members for the same issues at any given time and have tried to develop rules that are compatible with each other's regime.
The merger comes at a time when there is a broader debate over the role of SROs in the US. Critics say the SRO model creates conflicts of interest where the NYSE, for example, both runs a market and polices its members.
It was partly in response to such criticism that the NYSE created NYSE Regulation as a separate, not-for-profit organization within the NYSE Group when it merged with Archipelago earlier this year. The NASD had earlier been created as a separate regulatory function from Nasdaq.
Both the NYSE and Nasdaq have lodged bids to merge with European stock exchanges and a combined regulatory function could play an important role in discussions over how any future cross-border securities exchanges will be regulated.