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Nazareth Addresses Evolution of Self-Regulation

Commissioner Annette Nazareth reviewed market changes that impact the self-regulatory organization model and the NASD-NYSE Regulation proposal to separate member regulation into a new SRO. Effective self-regulation requires vigilance and robust enforcement by the SRO, she said. It is critical that the SRO be structured so that the regulatory staff is independent, well-funded and accountable.

With today's for-profit SRO structures, Ms. Nazareth said there are new sources of conflict. Profit-seeking may detract from self-regulation, she explained, with less funding going to regulation. The expectation of a return on investments by shareholders may diverge from regulatory interests, she said. Ms. Nazareth said the NASD-NYSE Regulation proposal is an industry-driven solution that largely achieves the goals of the hybrid model of self-regulation discussed by former SEC Chairman Arthur Levitt in 1999 and in a subsequent white paper by the Securities Industry Association.

The new SRO would be responsible for member compliance for virtually all broker-dealer firms, Ms. Nazareth explained. It would have enforcement and mediation functions, and would draft rules, provide training and license members. Ms. Nazareth said the model would be more cost-effective once overlapping regulations are eliminated and uniform rules are established. She believes the proposed governance structure for the new SRO will help achieve its mission.

Ms. Nazareth noted that when Congress created the Public Company Accounting Oversight Board to provide for the regulation of accountants, it required that the five-person board may only have two members who have been certified public accountants. In her view, this model suggests that the independence of boards with regulatory oversight authority is very important to Congress.

Congress chose to diminish the role of the industry and industry representatives when it adopted the PCAOB model, she said. Much of the "self" in self-regulation was removed by Congress in this latest formulation of industry oversight, she noted. Ms. Nazareth said the NASD-NYSE Regulation merger represents a positive step in securities member regulation and responds to the evolving securities markets.