SEC Approves One Watchdog For Brokers Big and Small [Correction 8/2/ 07]

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

The Securities and Exchange Commission's blessing came nearlyeight months after the deal was announced to fanfare from financialservices companies and advocates of regulatory overhaul. Officialssaid the merger would reduce duplicate and sometimes conflictingrules 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 bycompanies, though a plaintiff lawyer expressed concern that the dealwould result in less oversight of business practices.

The merger blends two different cultures. The NASD hasconcentrated much of its enforcement energy on improper salespractices of smaller brokerages and efforts to protect retailinvestors and senior citizens. At the same time, the NYSE unit hasfocused on the operations, financial health and firewalls betweendifferent units of much larger broker-dealers.

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

The new self-regulatory body, which is funded by the businessesit supervises, will be called the Financial Industry RegulatoryAuthority. No job cuts are expected among the 2,500 NASD enforcementemployees and 490 NYSE regulation workers, though attrition mayreduce personnel costs over time, NASD chairman and chief executiveMary L. Schapiro said. Schapiro also will serve as chief executiveof the new organization.

In an interview from her Washington office, Schapiro rejectedcritics' assertions that the merger would make tough-edgedenforcement a lower priority. "I think we go from fragmentation toconsolidation," she said. "We are very committed to being vigorousand robust regulators."

Leading trade groups including the Securities Industry andFinancial Markets Association have called on the enforcers tocombine since 2000. Reducing the number of regulators that businessmust obey has been a recurring theme as the Bush administrationseeks to weigh the costs of complying with many federal rulesagainst their benefits.

Treasury Secretary Henry M. Paulson Jr. recently established twocommissions to study regulatory reform and SEC Chairman ChristopherCox last month launched his own panel to examine financialreporting. Yesterday Cox called the agreement "an important steptoward making our self-regulatory system not only more efficient butmore effective in protecting investors."

To some analysts, the merger between the NYSE's regulatory armand the NASD enforcement unit is the first real test of the widerphilosophy.

"It basically creates more effective self-regulation at a lowercost," said Marc E. Lackritz, chief executive of the SecuritiesIndustry and Financial Markets Association. "It's what regulatoryarms around the world should think about doing."

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

Under the new regime, businesses will be visited by one set ofinspectors, not two. Enforcement cases will undergo multiple layersof review by officials within the organization before they are filedor settled. The long-standing NASD review process, which includes anopportunity for businesses to make a case that they should not besued, will survive, said Stephen Luparello, an executive vicepresident.

Susan L. Merrill, a NYSE executive who will lead the newenforcement unit, visited 15 district offices across the nation tomeet staff members.

Richard G. Ketchum, former chief of the NYSE regulation arm whowill become board chairman of the new group, said both organizationsare studying the rulebooks to ensure that small companies are notdisadvantaged by regulations established for the larger NYSEmembers.

"Any regulatory structure searches to gain the most investorprotection at the least cost," he said. "I am very comfortable thatwhat we have done is get rid of the underbrush of overregulationwithout in any way compromising investor protection."

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

Jacob Zamansky, a New York lawyer who represents investors incases against banks and brokerages, expressed concern that thecombination would reduce competition among regulators.

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