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.
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.