IRVINE, Calif. — Opponents of a merger between the regulatory operations of NASD and the
New York Stock Exchange haven’t given up on their efforts to stop the deal.
Some smaller firms and their allies hope that a lawsuit filed this month, coupled with political pressure, will be enough to scuttle the deal — or at least slow down what they see as a juggernaut effort to reshape regulation to their detriment.
Meanwhile, NASD of Washington this month filed with the Securities and Exchange Commission proposed bylaw changes needed for the merger. The filing will be published for a 21-day comment period, said SEC spokesman John Nester, who didn’t know when the proposal might be published. NASD spokesman Herb Perone said that the self-regulatory organization wants to close the deal in the second quarter. NASD originally had said that the transaction would close by April 2.
In January, NASD members approved the changes by a near two-thirds majority.
But the lawsuit may have thrown a monkey wrench into the works. The proposed class action, filed against NASD on March 8 in the U.S. District Court for the Southern District of New York, challenges the manner in which the SRO conducted a member vote approving the bylaw changes. The legal challenge, brought by Costa Mesa, Calif., broker-dealer Standard Investment Chartered Inc., claims that NASD’s proxy statement was misleading. It seeks an injunction to stop the deal, and unspecified monetary damages.
The class action has caught many industry observers off guard, in part because Jack Norberg, chief executive of Standard Investment Chartered, previously wasn’t associated with groups opposing the merger.
“We were very surprised by [the suit],” said Richard Goble, president of the Financial Industry Association of Longwood, Fla., which took the lead in urging member firms to vote against the merger.
Mr. Norberg, whose website says that his firm specializes in closely held, thinly traded securities, didn’t return phone calls seeking comment.
His attorney, Richard Greenfield of Greenfield & Goodman LLC in Easton, Md., said he received about 100 supportive phone calls from broker-dealers after the suit was publicized.
Others are skeptical about the class action’s chances.
“Good luck with that,” said Thomas Fehn, a securities attorney at Fields Fehn & Sherwin in Los Angeles, who doubts that the challenge will stand.
NASD chief executive Mary Schapiro “did a decent job of combing the NASD” membership for support, he said.
“We believe this lawsuit will be found to have no merit and that the transaction will move forward as planned,” Mr. Perone said.
But some firms that supported the merger are nevertheless worried that the suit — even if unsuccessful — might delay the $35,000 NASD promised each member should the deal go through, said Doug Schriner, president of Harrison Douglas Inc., a broker-dealer in Aurora, Colo.
He is a member of NASD’s committee for District 3 in Denver.
Foes of the merger are hoping that other efforts to stop the deal might bear fruit.
In February, Sen. Wayne Allard, R-Colo., contacted the SEC expressing concerns about the merger.
He was acting on behalf of constituents Chet Hebert, a Centennial, Colo.-based compliance consultant, and Rod Lueck, owner of Techmate Inc., a Littleton, Colo., technology firm. They had complained to the senator about NASD’s proxy-solicitation process and the lack of a secret ballot.
Both Mr. Hebert and Mr. Lueck, who are vendors to smaller broker-dealers, are worried that a merged SRO will negatively affect smaller firms by taking away the power they had at NASD to nominate and vote for a majority of board members.
Mr. Lueck said he believes that because of the scrutiny, the SEC is “probably not going to rush [the
consolidation approval] through.”
But according to Mr. Nester, the SEC hasn’t “experienced any unusual Hill interest [about the merger].”
Other bureaucratic delays also could hold up the deal.
Critics say NASD, which is chartered in Delaware, hasn’t yet produced a required opinion letter from the
Internal Revenue Service. The opinion is needed to ensure that the $35,000 payment would be legal under Delaware non-profit law.
NASD also must get approval from the Department of Justice and the Federal Trade Commission, which handle antitrust reviews.
Those reviews are pending. Mr. Goble has been encouraging firms to complain to the Justice Department.
This month, he sent the department a list of firms protesting what they said were threats and intimidation from NASD representatives during the voting process.
The vote “was conducted in a fair manner,” said Mr. Perone, who added that firms had “significant opportunity” to review the terms and attend informational meetings.
The result of the member vote, he said, was “direct and clear.”
