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The internal regulators of the New York Stock Exchange Inc. and the Nasdaq Stock Market Inc. may team up to better police their member firms but last week strongly opposed creating a “super-regulator” to handle the job. Officials from NYSE Regulation, which supervises the world’s largest stock exchange, and Nasdaq overseer NASD told lawmakers last week that cooperation between the bitter stock exchange rivals could go a long way toward reducing regulatory burdens on investment banks and brokerage firms. A joint effort to eliminate duplicative audits and ease other compliance obligations would be a better way to cut the regulatory costs, they said, than would alternative proposals, such as creating a universal regulator that would take over nearly all aspects of financial exchange supervision in the U.S. Complete dependence on governmental regulation “would be a tragic mistake,” NYSE chief regulatory officer Richard Ketchum said during a hearing of the House Capital Markets Subcommittee. Self-regulation, he explained, offers not only the benefit of greater industry expertise but also the ability to impose higher ethical standards than federal law requires. How to best handle self-regulation of the exchanges is becoming a bigger issue since the NYSE announced plans to go public by merging with electronic-trading firm Archipelago Holdings Inc. and Nasdaq proposed to combine with Instinet Holdings Inc. The biggest concern is that for-profit, publicly traded exchanges will face the conflicting goal of maximizing profits without compromising regulation. Additionally, the U.S. Securities and Exchange Commission has been looking at the possibility of self-regulating organizations, or SRO, reform. Although NYSE and NASD officials may have their hands full getting these two fierce competitors to play nice, both of the exchange police chiefs were nevertheless clear about the benefits of cooperation. “One glaring inefficiency in today’s regulatory scheme is the dual regulation of firms that are members of both the NYSE and NASD. Currently, these 180 firms are faced with dual rulebooks, dual examinations and enforcement, and dual fees,” NASD chairman Robert Glauber told the subcommittee. “A solution that makes sense is a partnership between the NYSE and the NASD to jointly handle the regulation.” Glauber estimated the 180 firms that belong to both the NASD and NYSE would collectively save about $50 million a year in fees and another $50 million in compliance costs if such a partnership were in place. Glauber said such savings could be passed on to investors. Ketchum said, “NYSE Regulation recognizes its responsibility to expand its efforts to partner with other regulators to further reduce or eliminate duplications.” The SEC has suggested some possibilities for revamping market oversight. They range from taking on all of the responsibilities of oversight to leaving the current status quo to several intermediate scenarios in between. A hybrid type system is what Securities Industry Association president Marc Lackritz is advocating. Lackritz said that in light of the pending exchange mergers, “The time is ripe for reform.” “Combining the SRO broker-dealer regulatory programs into one centrally managed entity — the hybrid SRO — would eliminate regulatory duplication and redundancy that occurs with rulemaking, data reporting, examinations, and enforcement actions. These regulatory inefficiencies consume time, energy and money, thereby stunting innovation and growth,” explained Lackritz. “Uniform, efficient regulation would allow firms to use their internal compliance resources more effectively, further strengthening investor protection.” SEC Chairman Christopher Cox said he also supports efforts to streamline self-regulation of brokerage firms and brokers and favors discussions toward that end. “I am encouraging these discussions — I think they can be very fruitful,” Cox told reporters after a public meeting with former SEC general counsels. Cox reiterated that he supports eliminating unnecessary duplication in regulating members of the securities industry. He said the key is determining when duplication is unnecessary and when it is “vitally important.” In the meantime, regulators at the NASD and NYSE are already working toward coordination. Ketchum said the two regulators have found 15 areas they use to examine firms’ sales practices and the joint program is “working well.” For example, in early 2005 the NYSE and NASD developed a plan of examinations. When the NYSE Regulation examines a firm for compliance with anti-money laundering rules, the NASD does not review this area when it examines the firm. Similarly, if NASD examines a firm’s compliance with business continuity planning, the NYSE does not cover that in its review. The NYSE and NASD have also worked together to conform rules when it makes sense to provide the industry with a single interpretation that avoids confusion. Copyright �2005 TDD, LLC. All rights reserved.

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