NASD Board of Governors Overwhelmingly Approves By-Law Changes Necessary for Consolidation with NYSE

New York — NASD today announced that its Board of Governors overwhelmingly approved by-law amendments that would implement governance changes to enable the recently announced consolidation of the member regulation units of NASD and NYSE Regulation into a new, independent self-regulatory organization (SRO). The by-law amendments will be voted on by the full membership of NASD before taking effect.

"The vote today by the NASD Board recognizes the importance to the securities industry and investors of creating this single SRO," said Richard Brueckner, NASD's Presiding Governor and CEO of Pershing, LLC. "The greatly increased efficiency and cost savings brought about by this consolidation will benefit firms of all sizes. We are confident that after firms have a chance to study the details of the plan, they will support it."

Brueckner said a proxy card and a detailed information package will be mailed to NASD member firms next week. Firms will be given 30 days to vote on the by-law changes. "Firms will have a detailed description of the deal, especially of a governance structure that ensures significant and broad-based industry participation in the new SRO," Brueckner said.

The plan to form the new SRO was announced November 28 at the Securities and Exchange Commission. The new SRO would be responsible for all member examination, enforcement, arbitration and mediation functions, as well as all other current NASD responsibilities, including market regulation by contract for NASDAQ, the American Stock Exchange, the International Securities Exchange and the Chicago Climate Exchange. NYSE Regulation will continue to oversee the NYSE market, through its market surveillance division, related enforcement functions, and listed company compliance.

Something is not mentioned in this article. I have confirmed that a one-time $35,000 payment will be made to every single NASD member firm IF this merger happens. This applies to even one man shops or M&A firms that may not even need to be members. The current NASD member firms must approve the bylaw changes so that the merger can happen.

Compare that payment with the circumstances described in this regulatory action: http://www.nasd.com/PressRoom/NewsReleases/2006NewsReleases/NASDW_018022 ...and the irony should be obvious to all. This does'nt even take into account the NASD's own Rule 3060 (The gifts and gratuities rule).

I have also been informed that "merger" is a taboo word to describe this as far as the NASD is concerned. They prefer to use the word "consolidation" to describe this process.

Why the bribe?

You don't mince words, do you? LOL!

Considering that this will cost the NASD $1.75MM (5,000 member firms x $35k), that is a very good question.

Just speculation, mind you, but I think a few factors resulted in the "payment to reflect the cost savings the consolidation will produce" (NASD's language), aka "bribe".

1. Most of the NASD member firms are considered to be "small firms", which the company defines as firms having less than 150 sales reps. They will need those firms to approve the bylaw changes, for this to happen.
2. For some strange reason. :-^) a lot of small brokers have come to the conclusion over the last few years that they are being regulated out of existence and have become suspicious of the NASD. I've heard from quite a few firms that insist that the NASD is really a puppet of the 20 largest brokerage firms. (Personally, I believe that is overstating the regulatory environment of the last five years, but it does contain a tiny nugget of truth.) The $35k is just one bone being tossed to the small firms. The new governing body of the consolidated SRO will have MORE small firm representation, on a proportional basis than the firms have with the NASD. And supposedly, the NYSE and NASD rules are to be pared down when the rules are integrated.
3. Simple good business practice. Write some big checks, mend some fences, add 200 HUGE firms to your revenue base (thus recouping your costs over 3-5 years), and keep the SEC happy for a while.

Make no mistake, the feds REALLY want this happen. Which means NASD REALLY wants it to happen, too.

Should'nt have too much effect.

What NYSE is actually cutting loose is a not for profit corporation (NYSE Regulation, Inc.) operating under the "NYSE Group, Inc."

When NYSE wanted to go public, the SEC would'nt approve it without their regulatory arm being set up like this, since the Manley Act did not allow for SRO's to be operated on a "for profit" basis. A convenient legal fiction -- between annual assessments and fines, any SRO doing its job effeciently and effectively should have more revenue than expenses. This may actually cost NYSE as a whole some money. But not too much.

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