finra

(As Prepared for Delivery)

 

Oral Testimony Of Robert R. Glauber,
Chairman and Chief Executive Officer
National Association of Securities Dealers, Inc.
Before the Senate Committee on Banking, Housing and Urban Affairs
Hearing on Accounting and Investor Protection Issues Raised by Enron and Other Public Companies

March 5, 2002

 

Chairman Sarbanes, Senator Gramm, Members of the Committee, thank you for this opportunity to testify on the vital, troubling and timely issues of investor protection and accounting regulation revealed by the collapse of Enron.

 

Let me begin with a quick overview of the NASD – because who we are bears directly on both the substance of what I’ll be saying and on the usefulness of the private sector regulatory model that we embody.

 

The National Association of Securities Dealers is not a trade association, but rather, the largest self-regulatory organization, or SRO, in the world. Under federal law, every one of the roughly 5,500 brokerage firms and almost 700,000 registered representatives in the U.S. securities industry comes under our jurisdiction.

 

For more than six decades, our mission and our mandate has been clear: to bring integrity to the markets and confidence to investors. We do this by writing rules to govern the conduct of brokerage firms and employees; licensing industry participants and maintaining a massive registration database of brokers and firms; educating our members on legal and ethical standards; examining them for compliance with NASD rules and the federal securities laws; investigating infractions; and disciplining any members who fail to comply.

 

Our professional staff and independent governance provide needed expertise and indispensable credibility. And the standards we set are not mere trade group "best practices," but enforceable regulatory requirements.

 

To a large degree, as detailed in my written statement, the NASD’s history IS the history of successful self-regulation in the United States.

 

Every brokerage firm in the country that does business with the public MUST, by law, be a member of the NASD. With a staff of 2000, 15 district offices and an annual budget of some $400 million, we touch virtually every aspect of the securities business, and monitor all trading on Nasdaq and selected other markets.

 

By providing this layer of private sector regulation between the industry and the SEC, the NASD is not only a guardian for investors, but a bargain for taxpayers. If we didn’t exist, the SEC would have to increase its budget by roughly two-thirds, and its staff by about half, just to pick up all the regulatory duties now performed by NASD.

 

It’s little wonder that Congress and the SEC through the years have repeatedly identified securities industry self-regulation as a national asset worth preserving and enhancing.

 

Of course, our evolution has not been without false steps. In 1996, the SEC in its Section 21(a) Report criticized the NASD in part for putting its interests as the operator of Nasdaq ahead of its responsibilities as the regulator of the entire industry. NASD responded promptly by carving out NASD Regulation and Nasdaq as two distinct corporate entities, with separate Boards, management, and staff. And since then, we have spun off Nasdaq entirely – selling our last 27 percent stake in the company earlier this year.

 

As a result, NASD over the past half dozen years has returned to its regulatory roots with greater independence, resources and focus than ever. And I believe we are in a unique position to contribute to the vital national discussion this Committee is helping to lead on how to strengthen investor protection by improving accounting industry regulation.

 

Given our limited time, Mr. Chairman, I think the best way for me to do that is to quickly identify the attributes that are key to NASD’s effectiveness – from which I’ve sought to derive some "first principles" for successful private sector regulation.

 

An essential ingredient of the NASD’s success is independent, strong governance. At least half our Board of Governors comes from outside the securities industry. And our large, experienced professional staff is not beholden to the industry.

 

The NASD benefits from the combined ability to write rules, examine for compliance, and provide tough enforcement, all under one roof. This consolidation of the industry’s chief regulatory functions reinforces our authority, competence and credibility.

 

Our governance structure also relies on parties that have the right incentives to insist upon market integrity and investor confidence. Our Board includes representatives of the public, corporate issuers, and institutional investors, as well as the brokerage firms that make up our membership. The beauty of our system is that ALL of these interests – none more than the brokerage industry – want markets that investors will recognize as fair, efficient and safe.

 

This leads to our next key attribute, which is assured funding from that part of the private sector having the greatest interest in our effectiveness. The right people pay for the NASD’s services: namely, the brokerage firms who know that market integrity leads to investor confidence, which is good for business.

 

This steady and sufficient funding means we can afford the sophisticated technology, techniques and infrastructure it takes to regulate a fast-changing, technology-intensive industry. NASD’s technology budget alone is $150 million per year. No private sector regulator can succeed without sufficient ways and means.

 

Next, I cannot overstate the importance of the NASD being empowered to discipline our members with tough, public sanctions. Last year we brought more than 1200 disciplinary actions, resulting in over 800 expulsions or suspensions from the industry. That’s a big stick – the ability to bar someone from earning a livelihood in their chosen field.

 

In an average year we levy well in excess of $10 million in monetary sanctions. Already this year, acting jointly with the SEC, NASD sanctioned Credit Suisse First Boston $50 million for violations relating to its allocation of "hot" IPOs. Contrast this to the accounting industry, where no "Big Five" firm has EVER failed a peer review conducted by another.

 

The lesson is clear. Strong private sector regulation leads to one serious body keeping its industry clean. Weak private sector regulation leads to one hand washing the other.

 

Of course, with authority comes responsibility. Just as our members are accountable to the NASD, so we are accountable to the SEC. Strong oversight by government regulators protects investors by ensuring that someone is watching the industry watchdog.

 

Mr. Chairman, this is not the time and it is not my place to prescribe in detail what a new regulatory regime for the accounting industry might look like. But based on our experience in the securities industry, the question can fairly be asked whether a private sector regulator could help restore confidence in the accounting industry – and if so, what its essential characteristics should be.

 

First the threshold question. It is my considered opinion that if properly designed, a new private sector regulator could make a major contribution by tapping industry resources and insights not easily available to governments. To get the best of both worlds, however, these advantages should be matched with tough SEC oversight – under the watchful eye of Congress.

So the question becomes how best to attain these potential benefits. To do so, the new body would need the following essential features.

 

One: The new private sector regulator should be an independent organization, with a sizable, professional staff, and sufficient technology and infrastructure to stay apace of the accounting profession. It should seek maximum industry input consistent with maximum industry accountability.

 

Two: It should have a strong mandate from the government that sets its structure and empowers its enforcement arm with full authority to discipline the industry. And it should bring under one roof as many of the central regulatory functions, outlined earlier, as is feasible.

 

Three: It should have a governance structure based on enlightened self-interest – namely, the need for effective auditing to produce numbers that investors can rely on and markets they can trust. This implies a Board with many of the same parties as the NASD’s: reputable corporate issuers who want their financial statements to carry weight; institutional investors; broker/dealers; and the public. Accountants should be a small minority.

 

Four: It should have assured funding from some of these same self-interested parties, especially those with the biggest stake in the success of the system. Good candidates might be issuers, broker/dealers, and certainly – since they have a major stake in the credibility of their audits – the accounting firms themselves.

 

And finally: The private sector regulator should be subject to strong, appropriate oversight from the SEC and the Congress.

 

Mr. Chairman, I am convinced that even in the accounting industry, where self-regulation has suffered a bad name, there is a vital role to be played by private sector regulation.

 

Clearly, shaping such a system represents a great challenge. But the benefits to be gained are even greater. The NASD and I stand ready to help in any way we can.

 

Thank you.