finra

Testimony of Robert R. Glauber
President and CEO

Before the Committee on Banking, Housing and Urban Affairs 

Hearing on the Condition of the U.S. Financial Markets

U.S. Senate

 

September 20, 2001

 

Introduction


Good morning, Mr. Chairman, Senator Gramm, Members of the Committee. On behalf of the NASD, I want to thank the Committee for this opportunity to testify – and to commend you for holding a timely hearing on a vital subject.

It is vital because the barbaric attacks of September 11 were an assault not only on our country, but also on our financial markets. I am here to tell you how the broker/dealer industry has responded to these attacks, and the condition we have found it to be in their aftermath.

 

As a self-regulatory organization, or SRO, the National Association of Securities Dealers is not a trade association. Rather, under federal law, our job for more than six decades has been to help write and administer the day-to-day rules that govern the U.S. securities industry – and every one of the more than 5,600 registered broker-dealers in the United States today. We also monitor every trade executed on The Nasdaq Stock Market, the largest-volume market in the world. And Mr. Chairman, I am proud to say that at no time during the past week and a half was our ability to monitor Nasdaq trading or protect investors compromised.

 

This role has given us a graphically detailed perspective on how firms were affected by the horrific events of September 11, and how they are getting back on their feet.

 

The picture we have found is inspiring. It is also daunting.

 

The first time I testified before the Banking Committee was in 1988 and I was here to present the Brady Commission Report on the market break of 1987. While no one could foresee the current situation and the national tragedy we find ourselves discussing today, it is nonetheless significant that what we learned from the crisis in 1987 made the markets stronger, in much the same way I am confident this crisis will make the markets stronger. The lessons learned in 1987 have provided a solid foundation for what the industry has done in this crisis - and that has enabled us to cope with the events of September 11th and their aftermath.

 

State of the Firms

 

There were 31 main offices of broker dealer firms located in the World Trade Center. There were 30 branch offices of firms located there as well. Over 350 additional firms have offices in the affected area south of 14th Street in Manhattan. Many of these firms have performed herculean tasks to get up and running. One key firm lost 700 of its 1000 employees; took a vote to stay open; and worked through the night to do so. Countless markets and firms – ordinarily the fiercest of competitors – have cooperated like the closest of friends.

 

Over the last nine days, we have focused on providing a range of critical services to these firms.

 

Our first and most immediate task last week was to do our best to contact the member firms with offices in the World Trade Center. From that first phone call onward, we have offered these firms our support and assistance. Our senior management staff has almost completed calls to every member firm in southern Manhattan.

 

The cost of the week long business interruption and physical dislocation compounded with investors pulling back from the market will create a challenging set of circumstances under which these firms will have to operate. We have talked to hundreds of firms and they have serious concerns. Our job is to help them continue operations while at the same time maintaining the safety of the markets.

 

Regulatory Relief

 

Last week, we gave firms relief from registration provisions and information barrier requirements that permitted firms in the affected area to staff their trading desks in time for the markets’ reopening on Monday. We also granted regulatory relief from certain technical rules, including the 3-quote rule, in recognition of the overtaxed communications system in New York.

While keeping investor protection foremost, we coordinated with the SEC on many issues, including trading halts while the market was closed.

 

We will grant 120 additional days to all registered representatives to fulfill continuing education requirements and will likewise extend test windows by 120 days. Anyone reapplying to work in the industry that misses the two-year window because of this week’s events will be granted a waiver. We have negotiated fee refunds for test no-shows or cancellations with Prometric, our testing and continuing education subcontractor. We are granting blanket extensions until October 1 on any regulatory requests, and stand prepared to extend these as necessary.

 

Information Clearinghouse

 

In addition to providing this relief from regulations without compromising the protection of investors, we have served as the focal point for reliable information for firms and investors. We have worked to keep member firms informed about what the rules are and what type of relief is available.

 

We created an office space clearinghouse network where the firms that need office space because of the tragedy can find firms that have space available.

 

Some firms, as a result of their World Trade Center office destruction, seek to become branch offices of other firms. We are assisting those offices in that endeavor.

 

One other service is done with a truly heavy heart. NASD maintains a vast database that contains fingerprint images for registered employees and the back office employees if they have access to books and records or to funds or securities of customers. So we are providing such images for identification purposes to member firms; law enforcement, rescue and recovery authorities; and families to aid in the search for missing persons and in identifying victims.

 

In addition to providing aid to the firms, we are answering questions from investors unsure about the status of their brokers and portfolios. Especially important are customers worried about their accounts with a broker in New York impacted by the crisis. For these investors, we have posted the customer contact information on the NASD Web Site. Where no contact information is available, we have directed customers to a NASD Call Center that can then provide them individualized research and assistance.

 

On September 14th, we issued a telemarketing fraud alert that warns brokerage firms and investors of the scams that, sadly, have already sprung up to take advantage of Americans' urge to contribute to relief efforts.

 

Role of Clearing Firms In the Orderly Resumption of the Markets

 

Many of our members are clearing firms - companies that arrange for the settlement of securities transactions. Of the approximately 120 clearing firms we regulate, the substantial majority is located outside of lower Manhattan. As such, most NASD clearing firms were not directly affected by the World Trade Center attack. Many of these firms were closed on Tuesday with their operations department staff returning on Wednesday and working through Friday. In several instances, firms reported that they used the time to stress-test accounts and contact customers about account balances. The most frequent contacts were to customers with margin accounts whose equity appeared to be approaching the maintenance margin requirement, or customers with accounts that were anticipated to decline in value upon the resumption of equity trading in the U.S. This latter group included investors whose accounts, for example, contained airline stocks.

 

While the NASD cannot attest to these practices at all clearing firms, it is clear from our contact with member firms that many of them instituted the policies and procedures that I have just described. We believe that the widespread dispersal of member firms across the United States, coupled with the firms’ implementation of their risk management policies, substantially contributed to the orderly manner in which trading resumed on Monday, September 17, 2001.

 

Continuing to Self Regulate

 

Through this entire crisis, NASD has continued to operate as a self-regulatory organization. We have continued to protect the integrity of the securities markets and promote investor confidence. Our services are provided primarily through our subsidiaries – NASD Regulation, Inc., and NASD Dispute Resolution, Inc. The NASD also owns the American Stock Exchange and holds a significant, though minority, stake in the Nasdaq stock market.

 

We have over 1,500 employees devoted exclusively to carrying out our regulatory and enforcement responsibilities. We carry out our mandate from our Washington headquarters and 14 district offices located in major cities throughout the country. Our New York District office, located at One Liberty Plaza, is our largest office and has been closed temporarily. We have relocated examiners from our New York office to our New Jersey, Long Island and Philadelphia District Offices. By doing this we were able to continuously support and serve our members and our markets. We are working on reestablishing, as quickly as possible, our physical presence in New York at an alternate location.

 

Conclusion

 

I want to thank the Committee for this opportunity to describe our industry’s efforts to help get the markets back into full operation. As the industry’s self-regulator of broker-dealers, we think it is important to express pride and confidence in the markets’ reopening; to express sorrow for those lost; and to remind investors, our members and our markets that we are here to provide answers, information and help.

 

Make no mistake, these attacks were an assault on our financial markets as well as our nation. We will ensure their ultimate failure by working together to maintain the most liquid, transparent and trusted markets in the world.