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Campos Calls for Harmonized Regulation of Broker-Dealers

SEC Commissioner Roel Campos, in a speech in Armonk, New York, said that between two potential models for exchange self-regulation --the hybrid model or the independent regulatory and market corporate subsidiaries model, he prefers the hybrid model. While it poses its own set of challenges, Campos said the hybrid model would eliminate duplication, reduce the costs of regulating broker-dealers and reduce conflicts of interest. The hybrid model, discussed in the SEC's November 2004 concept release on self-regulation, envisions that exchanges would retain their SRO responsibilities with respect to market operations, but the regulatory functions relating to broker-dealers would be carried out by a single-member SRO. Campos' remarks were posted on the SEC's Web site.

The current regulatory model must evolve to reflect changes in the marketplace, including the demutualization of exchanges, according to Campos. Recent governance failures are an example of the problems with the current self-regulatory model, in his view. As exchanges become for-profit, one of the main problems is providing adequate funding for their regulatory programs. The NASD's restructuring prior to Nasdaq's independence and the NYSE's creation of NYSE Regulation reflect the model of separating the regulation and the market with a holding company structure. This model will not reduce the duplicative regulation by multiple SROs, Campos noted, unless they merge these functions through joint ownership.

Under the hybrid model, Campos said the SROs would merge their regulatory functions through joint ownership to produce one set of rules, procedures and examinations. He acknowledged that problems may arise in communication and coordination between the SRO performing the member regulation and the exchange performing its own market regulation. Funding may also pose a problem, but Campos believes it could be resolved.

Demutualization has presented challenges internationally as well. Campos reviewed some of the approaches that have been undertaken by foreign regulators. An even more complicated set of questions arises in the context of acquisitions or mergers of cross-border exchanges, although Campos said the SEC's involvement may be limited.

Whatever model is adopted for SRO regulation, it must work efficiently and effectively, according to Campos. He believes that the SEC has to move quickly to address the issues, starting with short-term solutions. For instance, Campos said the SEC could improve the coordination of examinations between regulators and eliminate the duplicative and inconsistent regulation of broker-dealer members by exchanges. The exchanges can eliminate duplicative and inconsistent regulation within their existing self-regulatory frameworks, he said. He noted that the NYSE, in cooperation with the NASD, plans to submit to the SEC within one year proposed rule changes to reconcile inconsistent rules and to issue a report on the rules that have not been reconciled.

Other improvements should be seriously considered, according to Campos. He said it may be worth considering whether all market surveillance should be removed from exchange structures to ensure complete independence.

For now, Campos urged the NASD and the NYSE to continue their efforts at harmonizing their rules with a goal of creating a single regulator for broker-dealers. The regulator may be a joint venture of some other entity, he said. If properly constructed, a joint arrangement can mitigate most conflicts, even if it does not completely eliminate them, in his view. There are many hurdles, but Campos believes they can be overcome.