US regulatory merger criticised

The 5,100 brokerages that make up the US financial industry are voting this January to change how their self-regulatory mechanisms work.

The plan is that brokerages will be regulated by a single regulatory organisation brought about by the merger of the regulatory arm of the National Association of Securities Dealers (NASD) with NYSE Regulation, the regulatory arm of the New York Stock Exchange, a unit of NYSE Group.

Despite the scandals of recent years, which include investment research manipulation, mutual fund trading abuses and insurance bid rigging, the change will not result in more oversight.

Mainly, the merger will help America’s largest brokerages to save money because they won’t have to battle investors on two fronts. Currently, brokerages that operate on both the NASDAQ and NYSE often face investigations by two regulatory bodies and face twice the costs. It’s estimated they could save up to $100m (£50.8m) if the merger goes ahead.

But for public companies and investors, the merger will mean nothing more than that they will have only one chance to air their grievances.

Growing opposition
While the proposed merger has received the blessing from the Securities and Exchange Commission, which oversees the oversight, there are many opponents, including many of the smaller NASD brokerages.

The vast majority of brokerages have fewer than 15 brokers, and many of those firms have banded together under a nascent organisation, the Financial Industry Association (FIA), to try to block the merger.

According to FIA founder Richard Goble, the merger is a sham and unnecessary because the NASD already regulates all firms. He says the real reason for the proposal is to hide some 600 bylaw changes that will end the “one firm, one vote” tradition at the NASD.

Read the small print
Goble sees these rule changes hidden in the merger’s fine print as an attack on smaller firms by the five-to-10 giant brokerages that are aiming to increase their market share. He believes that when the giant firms control NASD they will pass rules that will put the smaller firms out of business.

Outside of the close-knit world of the brokerages, opposition is growing from lawyers and other advocates who are disillusioned by the whole self-regulatory process that in recent years has been embarrassed by the likes of New York Attorney General Eliot Spitzer into being effective.

For instance, after the NYSE famously failed to spot that its board was over-paying its chairman Richard Grasso, Spitzer fought for the money to be repaid. He was also at the forefront of exposing other well-publicised scandals.

The brokerages are currently in a 30-day voting period with results expected in late January 2007.