Apparently there is a consensus that the merger of the National Association of Securities Dealers and the New York Stock Exchange’s self-regulatory organizations is a good idea. That is, there is consensus among the brokerage industry that it’s a good idea for the industry.
The matter is being put out to vote to members of these organizations this week, just in time for the Holidays. As the owner of a NASD member brokerage I am being barraged with communications from the NASD and companies hired by the NASD to persuade its membership to vote in favor of the merger. I’ve been invited to breakfast with NASD senior management here in Florida, as part of their national road trip to sell the deal. I received a call from Quest Research (hired by the NASD) telling me that the SEC “strongly recommends” I vote in favor of the proposal. As a former SEC attorney, I have always thought (and indeed advised clients) that it is illegal to represent that the SEC has approved or recommends anything, especially a given transaction. Apparently the SEC is looking the other way as this self-regulatory organization with a history of regulatory violations makes these statements. Quest also told me the proposed merger will ensure that the brokerage industry will continue to have a meaningful role in shaping its own regulation and that proposed merger will reduce the regulatory burden on my brokerage firm.
Finally (and this is the best part) I have been told if I vote “yes” I will be paid $35,000. Now this is a democratic process most Americans only dream of! Can you imagine being paid big bucks to vote in favor of industry regulation? Every industry should follow the NASD/NYSE’s lead. Don’t pay off elected representatives in Washington, pay off the voters directly. Treat the whole nation to lunch at Burger King perhaps. (Apparently 87.5% of the respondents to an InvestmentNews.com weekly poll recently agreed with the statement that the NASD’s $35,000 payment offer to its members constituted a “bribe.” But these respondents weren’t paid to vote in that weekly poll, so you have to wonder why they bothered.)
Another company hired by the NASD, Georgeson, has called asking if I have received my voting materials and offering to take my vote. I don’t have to even mail my voting materials.
There is one group which claims to represent smaller brokerages, the Financial Industry Association, opposing the merger. They believe the merger will benefit the largest firms and lead to the demise of the smaller firms. They cite the $103 million the NASD will pay the NYSE in connection with the transaction and question why larger payments to NASD members aren’t possible. (The NASD says a larger payment could jeopardize its tax-exempt status. Which begs the question: Why is a brokerage industry organization that pays its leaders millions in salaries tax-exempt?) I don’t know if the Financial Industry Association’s allegations are true or not but I do know better than to accept statements from the NASD about the brokerage industry and what’s best for the investing public.
This significant development in the history of self- regulation of the brokerage industry is being pursued in such haste that one has to wonder what’s really going on. Here’s the weird part: The NASD is simultaneously selling this merger deal to the public under the guise that it’s good for investors while (behind closed doors) it tells the brokerage industry it’s the best way of thwarting regulatory initiatives that might clean up the industry. Don’t fool yourself. This merger is not about investor protection and it will not enhance investor protection one iota. It’s all about the future of self-regulation of the brokerage industry.
There is an insurmountable conflict of interest inherent in self-regulation. That’s why the rest of us, who are presumably at least as trustworthy as stockbrokers, are not allowed to self-regulate. Today the brokerage industry is allowed not only to self- regulate but also self-adjudicate (through mandatory arbitration provisions in contracts with investors); self-insure (through the Securities Investor Protection Corporation) and even control public access to disciplinary records regarding its membership, such as regulatory, civil and criminal information.
Brokerage industry self-regulation as we know it today originated at a time (the 1930s) when few Americans had brokerage accounts. There was no public outcry for true regulation of the brokerages at that time because the lives of most Americans were not directly affected by the industry. While self- regulation may have made sense back then, in today’s “ownership society” where all Americans with retirement savings are expected to have at least one brokerage account and indeed the majority of American households already do, it makes no sense and it’s unfair. (Recall, I own now and have owned for 17 years, NASD member brokerages.)
A merger of the NASD and the NYSE, two conflicted self-regulatory organizations with histories of ineptitude, like the merger of Laurel and Hardy, may make for good comedy. However, the impact upon investors will be tragic. America’s regulation of its financial markets is arguably the best in the world and is critical for attracting investors globally. This nation can and should offer investors greater protection.
I am one of approximately 5000 NASD members permitted to vote on this merger and I will vote against it.
Edward Siedle President Benchmark Financial Services, Inc.
Setting Standards For The Investment Management Industry
