finra

Remarks by Douglas Shulman

Vice Chairman

Spring Securities Conference
Hollywood, Florida

May 18, 2006

 

Good afternoon. I know the beach, swimming pool, golf course and tennis courts are beckoning, so I thank you all for being here. In a few minutes, you're going to be able to have a discussion with members of NASD's senior staff and talk to them about whatever is on your mind. Since we've been doing these conferences for 15 years, I have a pretty good idea what topics you're going to want to discuss - exams, sweeps, rule interpretations and so on. So, I'm going to stay away from those and talk instead about another aspect of our work.

 

I hope you've noticed that over the past several years, NASD has become increasingly active in the area of information facilities and services. Prime examples of this increased activity are TRACE, in the bond market; our BrokerCheck system which gives the public access to broker's backgrounds; our recent assumption of OTC Equities facility (namely the Over-The-Counter Bulletin Board), which we took over from Nasdaq last fall; and our mutual fund efforts over the past several years.

 

This aspect of our work—providing information and transparency to both the industry and individual investors—is one of the things that sets us apart from government regulators. While our core responsibilities will always be rule-writing, examinations and enforcement, as a private-sector regulator we have the ability to ensure market integrity in other ways as well. A key way to enhance the market is to ensure that investors have access to the information that they need to make good decisions.

 

Information is the coin of the realm. And given the rapid and profound advances in telecommunications technology that have taken place - and continue to take place - since the advent of the Internet, the information available to all market participants today is light years ahead of what was available just a decade ago. That is a wonderful thing. And at NASD, we've been doing our best to keep up with these advances and to contribute everything we can to this new and growing wellspring of information.

 

It may be that we haven't done the best job of letting the industry know about this aspect of our work. As you well know, there's been a heavy emphasis on regulation and enforcement during the last few years. So, discussion of these other aspects of our work has to some extent been drowned out.

 

Let me start with TRACE, which went on-line in July 2002 with trade and price information on about 500 investment-grade corporate bonds. After four years of graduated growth, TRACE now reports on the entire universe of those bonds - about 30,000 of them, from investment grade to junk - within 15 minutes of any trade. Price, yield, rating, date of last transaction - it's all there, instantly accessible, easy to use and free of charge.

 

I know TRACE isn't universally loved; opening this window to investors has made commerce in bonds less profitable for dealers. On the other hand, though, we've heard from a number of bond traders that TRACE has made inter-dealer transactions smoother and easier.

 

Whether you love TRACE or hate it, it's hard to argue for continued opacity in the bond market when retail investors have been pouring money into it like water over Niagara Falls. If those investors can instantaneously get a wealth of information about their equity investments - and they can - there is no reason they shouldn't have the same degree of access to information about their fixed-income investments.

 

I might make the same argument about BrokerCheck. This is our system that allows the investing public to look up information on brokers or firms. The fact that this information is available is a powerful statement by this industry: that we have nothing to hide and that investors should have access to information on the people who guide them through the often confusing capital markets. I'm sure that if I were a registered rep, I'd be ambivalent at best about a service that lets people check on my background. But then, I like think I'd understand the necessity of it. Brokers and other investment professionals have extraordinary power over their clients' lives. At one extreme, you can help them get rich. At the other, you can ruin them. So, this is an important tool for investors to use in deciding whom to entrust with their life savings.

 

And the fact is that more than 90 percent of the nearly 660,000 registered reps we oversee have clean records and so have nothing to fear from a BrokerCheck search by a potential client. In fact, I should think they'd welcome it.

 

We're in the process of redesigning the BrokerCheck website to make it easier to use. As it is now, a user can have a hard time finding the broker he's looking for, because a lot of identifying information is required. On the redesigned site, it will be as easy as a Google search - you just type in the broker's name. When an investor requests information on a broker, the information will be organized in a way that will make it easy to understand.

 

A third aspect of this effort to stay on top of the demand for more and better information is our OTC Equities facilities, which include the Over-the-Counter Bulletin Board. It may seem incongruous for a regulator to be running a stock quotation service, particularly a regulator that has cut its ties to the two exchanges it once owned - Nasdaq and Amex. But our taking over the Bulletin Board from Nasdaq was a necessary condition of Nasdaq's being granted exchange registration, which it got in January of this year. As you know, we have statutory responsibility to provide quotation and trade reporting in the over-the-counter market. The OTCBB and Alternative Display Facility help satisfy this requirement.

 

They also are key transparency facilities of NASD. In fact, the OTC Bulletin Board brings the sort of transparency to the OTC equities market that TRACE brings to the corporate debt market. And, like TRACE, it's the only place investors can go to get up-to-date information on these securities. Any trade of an OTC equity must be reported to NASD within 90 seconds of execution.

 

The last area of information services I will talk about relates to mutual funds. It may be that the need for information and transparency is greatest with regard to mutual funds. As of March, there was $9.4 trillion invested in just over 8,000 funds. More than 50 million American households own mutual fund shares.1

 

In the aftermath of the so-called mutual fund scandals of a couple of years ago, we undertook an aggressive regulatory and enforcement campaign to clean up the abuses that had come to light.

 

You may have seen our Director of Enforcement, Jim Shorris, quoted in the press last month, saying that that campaign was winding down after a couple of years of intensive and necessary discipline. What the stories failed to note, though, was that concurrent to all the unpleasantness, we were - and still are - working hard to improve the mutual fund sales process in ways that benefit both brokers and customers. Here again, this is mostly a matter of providing information to both parties, so that everyone can be clear about exactly what they stand to gain and what they stand to lose.

 

Take breakpoints, for example. After our examiners found what appeared to be a pervasive nationwide failure by broker-dealers to award breakpoint discounts to clients who bought shares in front-end-load mutual funds, we also found that most of these failures were not deliberate, but were the result of confusion and ignorance about who was entitled to these discounts and under what circumstances.

 

So, after taking action against the firms whose failures in this regard were negligent in the extreme, and ordering all firms under our purview to figure out whom they had deprived of discounts and reimburse them, we decided that we needed to make it easier for brokers to determine when their clients were eligible for these discounts. You should be able to do this without a background in forensic accounting.

 

So, we put together a task force consisting of senior people from the broker-dealer and mutual fund industries and asked them to study the issue and make recommendations. And what they recommended was that we establish a central data-base with all the information a broker would need to determine eligibility for discounts. All there in one place, accessible on-line.

 

We thought that was exactly the right idea, so we started working with the DTCC to create such a data-base and put it on our website. This was complicated. It took quite a while for us and the fund companies to collect all the necessary data and aggregate it in a way that makes it easy to navigate. But we've done it, it's called the Mutual Fund Breakpoint Search Tool and you can find it on our website. This data is in a constant state of flux, so NASD has committed to maintaining the data-base and keeping it up-to-date - at our expense.

 

This is an example of an area where NASD was perfectly situated to solve a market problem. We had the ability to bring players together from both the mutual fund and broker-dealer industries, and work with the SEC, ICI, SIA and DTCC to forge a solution to the problem. Both our influence and operational expertise could be brought to bear on this problem, and the solution benefited both the industry and investors.

 

We continue to look for other areas where we can take a leadership role in solving an industry-wide problem. As the SEC continues to contemplate mutual fund point-of-sale rulemaking, we have been working in the background to help the mutual fund and broker-dealer communities prepare for the operational aspects of any online disclosure. In fact, we have stated publicly our willingness to fund and build a utility that would house all of the information needed for online point-of-sale disclosure We stand behind that offer.

 

Let me take a few moments to talk about another important area of focus for us: simplifying the way we communicate our rules to you. Two years ago we launched our NASD webcast series. As compliance issues became more important to a wider audience within a firm, including supervisors and producers, we felt it was important to experiment with ways to communicate with these audiences. After all, we realize that our notice to members and final rules are generally only read by compliance and legal personnel, and we wanted to make sure our message was accessible to others. These five-to-seven minute webcasts are accessible free, online and are delivered in plain English. We currently have eight webcasts available, with topics ranging from mutual fund breakpoints, to anti-money laundering, to bond sales practices. To date, more than 135,000 viewers have seen these webcasts, and we plan to continue producing them.

 

I talked at the beginning about how the Internet and related technologies have brought profound change to the ways we live and work. One of those related technologies is the portable MP3 player, such as the iPod. When Steve Jobs introduced these devices, I'm not sure he envisioned that they would ever be used for anything more than listening to music. But they have proved so useful in so many other ways that some colleges and universities have begun distributing them to all their students,who use them to listen to podcasts of lectures and other presentations.

 

There's a lot of debate in the academic community about whether this is a good idea, but from our perspective podcasts are an excellent way for registered reps and compliance officers to keep abreast of regulatory issues at their own convenience - whenever and wherever they choose.

 

So, starting today, NASD has compliance-related podcasts available on its website. The first two cover anti-money laundering and branch office registration. Two more in the pipeline deal with outsourcing compliance activities and principals' role in supervision.

 

We'll also offer a monthly series of "NASD Updates" that recap upcoming regulatory deadlines, new Notices to Members, press releases and other issues of interest to compliance and operations staff. The first of these is available now. And, we'll offer audio of select NASD executives' speeches, starting with Bob Glauber's of tomorrow. It will be available soon thereafter. This is all free of charge.

 

Between webcasts and now podcasts, we will continue to use new media to make our intent and rules more accessible to the industry.

 

Finally, my explanation of our increased focus on information for the industry and investors would not be complete without a mention of our investor education initiatives. As you know, in 2003, we set aside $10 million and started the NASD Investor Education Foundation. The ten-million was derived entirely from fines we had imposed against brokers and firms. Now with a fund of about $85 million, the foundation makes grants to universities and non-profit organizations that conduct research and run programs aimed at helping mainstream investors understand basic finance and investing and how the markets work.

 

NASD also offers investors a range of educational resources that are more immediate than those that the foundation supports. On our website there are tutorials on mutual funds, 401(k)s, college savings plans and bond investing. There are expense analyzers for mutual funds and 529s. There are calculators for accrued bond interest, retirement saving, college saving, and a lot more.

 

In summary, I'll say that I hope you've discerned from all this that getting useful, timely information into your hands and into your customers' hands is a hugely important part of our mission. NASD is and will always be a regulator above all else, as that is the mandate Congress gave us. But the more we can help the brokers and firms we oversee avoid the sting of enforcement actions and sanctions, the more we can help investors approach the markets confidently and knowledgeably, the better off we all are.

 

So now I'll thank you for listening and let you have at our senior staff.

 

[Introduce them.]

 

1 ICI "Trends in Mutual Fund Investing," March 2006