finra

Remarks by Mary L. Schapiro

President, NASD Regulation, Inc.

NASDR "Best Practices" Spring Securities Conference

Chicago, Illinois
May 16, 1996

 

I welcome the opportunity this morning to provide you with a first-quarter progress report on this young but already very productive organization.

 

One of NASD Regulation's new responsibilities and a key part of our preventive compliance agenda--will be bringing you the Spring and Fall securities conferences.

 

This is the first one to bear the NASD Regulation name, and I can't think of a better way to introduce this new entity to all of you than through a symposium which, among other things, focuses on the best practices in compliance.

 

While the NASD has been around for many years, the creation of NASDR begins a new era of securities regulation in the United States. I'd like to share with you my vision for this new SRO and how we have begun to build upon the legacy of regulation and member service that we have inherited. We have a unique opportunity to craft a regulatory organization truly in step--with our times wholly committed to investor projection and market integrity, reliant upon the most advanced technologies and prepared to rapidly respond to market developments. We have a singular commitment to the kind of effective, efficient and proactive regulation that is critical to instilling and building investor confidence in the markets.

 

In fulfilling our mission, we will be guided by a commitment to what I call the three "i's": 

  • Integrity in all that we do;
  • Innovative programs and services;
  • And most important, investor protection through a multi-faceted program that inspires confidence in our market and our industry.

Let me expand on each of these, starting with integrity.

 

If we are to demand that our members respond effectively and quickly to the challenges created by the fantastic growth in retail investing, new products, new technologies, new trading strategies or whatever else this rapidly evolving environment throws at us, then we must be prepared to do the same. We will no longer have the luxury of time in addressing the myriad of issues that our markets and investors face. Acting with integrity requires an organizational structure that is responsive. It means being in possession of adequate resources to deploy in solving problems, in anticipating problems and in preventing problems.

 

I am proud to say that NASD Regulation has a Board of Directors that agrees. Composed of 27 members, equally balanced between industry and non-industry, we have assembled a group of extraordinary talent, breadth and dedication. Their commitment to investor protection and thoughtful and efficient regulation was fully apparent at the inaugural meeting on Monday when the Board approved a new organizational structure for NASD Regulation and the addition of significant new resources.

 

Let me talk first about NASDR's corporate structure.

 

Our goal was to craft a structure that minimized excessive or unnecessary reporting lines...that enhanced the free flow of communication between offices and our members...and that sharpened the focus of the various offices, giving each clear responsibilities and concise missions. In developing the plan, we sought as well, to accomplish the goals set out by the Rudman Committee. These changes represent the most fundamental restructuring of the industry's largest self-regulatory operation since the NASD was founded more than 50 years ago.

 

Above all else, the structure is designed to maximize our effectiveness as a regulator--but not by abandoning the service component of our job. In areas such as the redesign of the CRD system and the public disclosure program, or preventive compliance and continuing education, we will be striving to blend service and regulation to maximize the benefits to both investors and members.

 

The process was a team effort, involving veteran managers and recent additions alike, and I would like to introduce one of those very valuable additions to you now. She is Elisse Walter, and Elisse will serve as Chief Operating Officer and Executive Vice President for Law and Regulatory Policy. Elisse was General Counsel at the CFTC and was at the SEC for 17 years, including 8 years as Deputy Director for the Division of Corporate Finance.

 

Elisse will be taking part in a session this afternoon on NASD Regulation's programs and structure, but in advance of that, I'd like to describe some of the key changes in structure:

 

First, since enforcement must be a central function of any effective regulatory organization, we will for the first time have an independent enforcement program that sets national priorities and goals and that will coordinate investigative and enforcement efforts with federal agencies, law enforcement officials and state regulators. It will have ultimate responsibility for the quality of all enforcement cases regardless of whether they are generated by the examination program in the districts, market surveillance, or customer complaints. The public will benefit from a comprehensive approach to enforcement and the industry will benefit from consistency in the application and interpretation of requirements.

 

Second, since market surveillance is also too essential and complex to remain a sub-program of any other office, for the first time, it too will become an independent function, reporting directly to the President.

 

By separating out and elevating enforcement and market surveillance, we will also be able to focus more effectively and efficiently on fulfilling another core obligation we have to the public--and that is an examination program that combines broad coverage through risk-based and routine examinations as well as examinations for cause such as those based on customer complaints and broker terminations. We have created a distinct office charged with, among other things, ensuring that we have and follow national standards where appropriate. Responsibility for coordination of examinations with other SROs, timely handling of customer complaints, and peer review of examiners' work will be lodged here.

 

Other changes that you will hear about in more detail this afternoon combine the Arbitration Department and the new Office of Hearing Officers, programs that share key characteristics necessary for success, including the need to manage a large, diverse docket with an appreciation for both speedy resolution and maintenance of fundamental fairness to all parties.

In considering this new structure, we sought to create a responsive structure which maximized our ability to focus on investor protection. Thus, hand in hand with the new organizational chart, the Board authorized an increase of staff devoted to regulation and enforcement of more than 10% or 131 positions for 1996. These new additions will be dedicated primarily to supplementing the existing corps of examiners and significantly increasing the ranks of enforcement attorneys. This increase in resources will ensure that we will have the ability to participate in special sweeps and other focused regulatory or enforcement initiatives critical to the protection of investors and the maintenance of market integrity. There will also be increases in staff in market surveillance for review of market-making activities and for the review of investment company advertising.

 

Let me reassert that I believe that it is possible to be both a responsible regulator AND highly receptive to the needs of our members. The restructuring and staffing up should help achieve both. Together they will help NASD Regulation achieve the second "i" that I mentioned innovative programs and services...services to members, and to investors.

 

For example, I believe the new structure and staffing will help us reduce the incidence of duplicative and redundant examinations. It will allow us to work more effectively with the other SROs and it will allow our own examination staff to work "smarter" and more efficiently to accomplish this. We will be introducing a program of examiner peer review, for instance, to help us test the quality and completeness of our exam program.

 

And, where we can extend a helping hand to our members in the form of compliance tools or improved communication and disclosure, instead of just holding up a stop sign or taking an enforcement action--we should do so.

 

We will be developing a menu of preventive compliance programs over the coming months. Our belief in preventive compliance is one reason for last week's Special Notice to Members concerning sales practices and valuations of low-priced securities. The issues that we sought to remind you of in that Notice are critical to building confidence in the markets and in firms. It is an example of our commitment to quick action in the face of newly emerging issues and problems. It defines very well I think, the type of regulator we will be.

 

Our regulatory responsibilities continue to grow at an astounding rate. The answer, over the long run, to keeping up with this growth, cannot be to add more and more people. In recognition of this, the Board has made a major commitment to the development of technology to promote and facilitate the regulatory function. We will shortly be commencing a strategic review of our technological capabilities and a prioritization process to ensure that we are devoting our technology dollars to projects that enhance our ability to examine member firms and surveil the market.

 

We must also learn to more effectively respond to the technology employed by others. By this I mean specifically that we must find more effective ways to monitor the promotional activities we are seeing on the Internet. The public is being treated to anonymous sales campaigns, hype and fraud which is truly distressing and very elusive. NASDR can and should be at the forefront of tackling this problem.

 

In addition, we recognize that our future success in reaching investors will be dependent upon our ability to harness technology effectively-whether that is-- ultimately--on-line access to broker disciplinary histories or electronic logging of complaints or easy access to educational and market information.

 

Importantly, in addition to the general commitment to employ technology more effectively, the Board voted to approve in concept the creation of an electronic order audit trail, the first of its kind in any stock market. While I believe that our present market surveillance audit is ingeniously designed to identify questionable trading activity, it only provides us part of the story. Knowing who traded with whom and when is critical, but without knowing when the trading desk received the order, certain trading violations may go undetected. There is nothing more important to the future of The Nasdaq Stock Market than instilling in customers the confidence that their orders are being handled fairly. The order audit trail approved in concept by the Board this week will be a major stride toward increasing that confidence.

 

In that regard, let me close with a few words about the Nasdaq market more generally. We believe in the Nasdaq market and the important role that it has historically played and will continue to play in the capital formation process, particularly for smaller companies and in the opportunity it brings to investors to trade the securities of those companies. But, we will not tolerate illegal activity on the part of any market participant. Whether a firm is large or small, retail or market maker, we intend to be aggressive in the pursuit of inappropriate conduct. That is the single best thing we can do for investors and for the Nasdaq market. While we have huge responsibilities in regulating the 5,000 firms and more than half a million account executives, we do not intend to shrink from our equally important responsibility for oversight, surveillance and enforcement with regard to Nasdaq trading.

 

In this--and in all our regulatory responsibilities, I know that we can rely on the support and assistance of the industry front-line regulators--the compliance professionals. You are our partners in ushering in this new era of investor protection.

As I told the Spring gathering of NASAA regulators a few weeks ago, effective partnerships take work. I'm here to tell you this same thing. But I also want you to know that NASD Regulation is committed to doing whatever it takes to make our partnership succeed. I'm talking about working with you on issues where you need our help-whenever and wherever they arise.

But the bottom line is whether or not our actions our new structure, bigger budgets, our enforcement proceedings, market surveillance, preventive regulation, or other activities-result in the ultimate protection of investors.

 

Only then will we fulfill our responsibilities to investors. Only then will we truly help the securities industry in this country to prosper.

 

I hope my comments this morning have been helpful in orienting you to NASD Regulation.

 

Our partnership is a work in process. For our part at NASD Regulation, I can tell you we are not finished making changes. Indeed the process of change will be continuous, though perhaps not quite as dramatic as it has been during these first few months of our existence. When further changes come-as they surely will we-will seek your input and keep you informed.

Along the way, I personally welcome any and all input you might have that will help us more completely fulfill our regulatory obligations to the public.

 

Thank you.