NASAA questions SRO-regulation harmonization

IRVINE, Calif. — State regulators are questioning whether some of the “harmonization” of rules of the regulatory operations of NASD and the New York Stock Exchange will harm investor protection. The North American Securities Administrators Association Inc. of Washington, which represents state and provincial regulators, is concerned that NASD rules will be adopted in place of NYSE rules. As a result, investor protection could be harmed, NASAA president Joseph Borg said during testimony at a Senate hearing May 17. Mr. Borg, director of the Alabama Securities Commission in Montgomery, said he is worried about several proposed NYSE rule changes that would adopt NASD standards for supervisor experience, broker training, customer complaint reporting and the use of joint offices by multiple brokerage or advisory firms.
“The higher [NYSE] standards ought to prevail,” Mr. Borg said in an interview. “Why harmonize down?” The NYSE proposals, the first round of proposed changes from the continuing harmonization effort, were filed with the Securities and Exchange Commission in February. They have yet to be published for comment. Mr. Borg’s testimony this month at the hearing of the Senate Banking subcommittee on securities, insurance and investment marked the first time NASAA has voiced public concerns about the regulatory consolidation. NYSE spokesman Scott Peterson said that the proposals Mr. Borg cited are examples “where we’ve moved away from more proscriptive rules and toward principle-based guidance.” NASD officials also have stressed the need for principle-based rules that allow regulators to tailor oversight to a firm’s business model. Mr. Borg’s criticism that investors will be harmed is a “broad, sweeping statement,” said Doug Shulman, vice chairman of Washington-based NASD. Whatever changes result from the harmonization effort, he said, investor protection will come first. At a compliance conference this month, NASD officials stressed that combining NASD and NYSE standards into a single rule book will be a long process subject to a public comment process. “All [participants] will be involved in this debate,” Mr. Shulman said. “We’ll have plenty of opportunity to get this right.” Significant changes The most significant proposed change for brokers made by the NYSE is to no longer require the reporting of oral customer complaints. NYSE firms long have complained about the difficulty in determining what should be reported as a complaint. NASD requires disclosure of written complaints only. Mr. Borg dismissed the idea that verbal complaints shouldn’t be disclosed. “People pick up the phone and talk” when they have a problem, he said. “We in Alabama take [complaints] over the phone, and we act on them.” The NYSE also is proposing to end experience requirements for supervisors. The Big Board requires three years’ industry experience, while NASD has no specific minimum for established firms. Additionally, the NYSE’s four-month training requirement for new registered representatives would be abolished in favor of no requirement. Also proposed for elimination is an NYSE rule that requires members to get approval before sharing office space with another broker-dealer or investment adviser. To get approval, firms must agree to physical separation, different signage and other requirements. The NYSE wants instead to adopt a “principle-based approach” that would require reasonable efforts to ensure that customers aren’t confused about whom they are dealing with, the NYSE’s rule filing said. The proposed rule also would add banks to the mix. NASD has no such rule. Office sharing became a “big issue when banks started putting investments folks” in bank branches, Mr. Borg said. He said that there have been instances when bank customers unwittingly purchased mutual funds. Principle-based mantra Lisa Roth, chairman of the National Association of Independent Broker/Dealers in San Diego, welcomed the NYSE’s movement to principle-based rules. The three years’ experience as a registered rep that the NYSE requires for supervisors may not be enough in some cases, she said. In other cases, that level of experience is unnecessary, said Ms. Roth, who also is president of ComplianceMAX Financial Corp. of San Diego. “I don’t see [lack of experience requirements] as being potentially harmful to investors,” she said. Firms themselves are best able to judge ability, Ms. Roth added. Principle-based rules “seem to work for [investment advisers],” she said. Mr. Peterson said that the NYSE’s rule on sharing office space includes such requirements as the height of walls and separate hallway entry doors. In proposing a more flexible rule, “we’re not getting away from the idea that there must be separation between bankers and brokers,” he said. But some fear that the “principle- based” mantra is code for relaxing standards. “The reality is, [principle-based regulation is] almost always an excuse for less regulation,” said Barbara Roper, the Pueblo, Colo.-based director of investor protection for the Consumer Federation of America in Washington. There could be legitimate reasons to regulate small and large firms differently, she said. “But with oral complaints, it seems clear those need to be reported,” regardless of firm size, Ms. Roper added. Mr. Borg said that NASAA doesn’t have an issue with tiered rules or allowing flexibility for operational procedures. “If a firm does not have overseas accounts, should they have different money-laundering standards? Probably,” Mr. Borg said. But the self-regulatory organizations shouldn’t lower standards that “go to the duty that every professional has to their customer,” he said.