Wall Street’s two main private regulatory arms said on Tuesday they have agreed to merge in a widely anticipated move aimed at reducing industry costs and streamlining oversight functions.
Industry self-regulatory units run by the NASD and NYSE Group Inc., which operates the New York Stock Exchange, will combine self-regulatory operations into a single watchdog overseeing all securities firms doing business with the public in the United States.
The new organization is expected to begin operations in the second quarter of 2007, and will consist of the current 2,400-person NASD organization and about 470 staff in NYSE Regulation’s member regulation, arbitration, and related enforcement units.
NASD Chairman and Chief Executive Mary Schapiro, who will serve as CEO of the combined organization, said savings would be “in the tens of millions of dollars” for regulated firms. She said the organizations had no plans to lay off any employees, but expected some attrition over time.
“They are consolidating the functions in a way that eliminates the process (where NYSE and NASD) were doing largely the same regulation and inspection of brokers,” said Fox-Pitt Kelton analyst Edward Ditmire. “But it maintains the idea that (NYSE) would have autonomy in regulating the trading at their exchange.”
The U.S. Securities and Exchange Commission, which oversees U.S. stock markets, said it welcomed the move.
“I’m firmly convinced that, done properly, this could make our self regulatory system more efficient and more robust from an investor protection standpoint,” SEC Chairman Christopher Cox said at a news conference.
Cox noted that NASD and the NYSE regulation unit have not yet reached a definitive agreement. “Some important details remain to be negotiated and of course, any such transaction will require public comment and approval of the Securities and Exchange Commission,” he said.
The merger has long been sought by the securities industry, whose members have complained the overlap of two major industry-sponsored regulators was too costly and time consuming.
“It’s one more positive that will help (NYSE) streamline cost structure,” said Fox-Pitt’s Ditmire, adding the Big Board would contribute people to the new organization but that it was unclear if they would technically remain as employees of the exchange.
“This important reform will make regulation more efficient and more effective,” Schapiro told reporters. “This new model will be better suited to protecting investors and ensuring market integrity.”
Richard Ketchum, now head of the NYSE regulation unit, will serve as the non-executive chairman of the new organization’s board of governors during a three-year transition period.
Currently, NASD regulates more than 5,100 U.S. securities firms, including nearly 200 firms that are also members of NYSE and regulated by its unit.
SEC regulators have expressed concern that the NYSE regulation unit faced thorny conflict-of-interest issues now that its parent has become a for-profit, public corporation.
