Plan to Consolidate NASD and NYSE Member Regulation

An Important Message from Mary Schapiro, NASD Chairman and CEO


Dear NASD Member:

As you may be aware, this morning NASD and NYSE formally announced a plan to consolidate NASD and the member regulation functions of NYSE Regulation into a new, independent self-regulatory organization (SRO). I already emailed you to let you know talks were taking place on a plan to streamline securities regulation. I am pleased that we can now describe the consolidation plan for you in detail, as it is a significant step forward in increasing regulatory effectiveness, reducing costs for the industry and helping to ensure the competitiveness of our capital markets.

NASD has long supported the hybrid model of self-regulation, in which a single SRO, unaffiliated with for-profit markets, is responsible for member firm regulation. We believe this model is best for investors and the markets. This consolidation will bring that important goal to fruition and the Securities and Exchange Commission (SEC) has supported the effort. SEC Chairman Cox has publicly endorsed the concept and encouraged NASD and NYSE to push for more sensible, yet effective, regulation. In a November 10, 2006 speech to the SIFMA conference he called for an end of, "...our current system of two rulebooks, two separate SRO staffs, and two separate enforcement regimes..."

The plan, which is described more fully in today's press release, will establish a new organization that will operate under a uniform set of rules, replacing the overlapping jurisdiction and duplicative regulation that exist today. This consolidation will result in all firms dealing with only one rulebook, one set of examiners and one enforcement staff. In turn, this will greatly reduce unnecessary regulatory costs while increasing regulatory effectiveness for all firms. One rulebook will give us the flexibility necessary to more successfully accommodate firms' different business models and sizes in the regulatory structure. This new organization will be committed to an ongoing program of decreasing regulatory costs and reducing burdens for firms of all sizes.

The new single regulator will follow the NASD model—that is, it will be an independent, not-for-profit SRO. It will be sufficiently funded and insulated from conflicts of interest that could undermine regulation or erode confidence in the integrity of self-regulation. The SEC will regulate its operations and approve its rules as it does today.

While this plan will have the most direct impact on the nearly 200 firms that today are regulated by both NASD and NYSE Regulation, every NASD member will benefit directly from this consolidation. Once the NASD By-Law changes necessary to effect the plan are ratified by member firms and receive final SEC approval, every NASD member will receive $35,000 in recognition of the future economic efficiencies that the transaction will create. In addition, the Gross Income Assessment fee—a firm's annual dues to NASD—will be reduced by $1,200 (the minimum payment required) each year for five years. This effectively means that almost 2,500 small firms will pay no annual Gross Income Assessment fee for the next five years. This payment and the reduction of the Gross Income Assessment fee recognize the cost efficiencies we expect to flow from the creation of a single regulator. Combined with targeted expense reductions beginning in the third year of the transaction, these savings will result in further member fee reductions and a more efficient organization.

As you will see in the press release and hear about through the communications outreach we are undertaking, the new regulatory body will have a new governance structure, and its activities will be directed by a board that assures its independence and reflects the industry's diversity. The governance structure will blend current NASD and NYSE rules and traditions, appropriately balance public and industry representation and ensure fair representation of all member firms. Ensuring that industry representatives are at the table when important decisions are being made about the industry was one of the principles we insisted upon during our discussions with NYSE. As you may know, the NYSE does not have industry representation on its Boards. At NASD we believe broad industry representation is critical. By taking the initiative to ensure this was the case, we have strengthened self-regulation and institutionalized industry participation.

In total, the interim Board of Governors will have 23 members. Eleven governors will be appointed from outside the securities industry ("public governors"). Ten governors will come from inside the industry. Seven of these governors will be elected to the interim board and three will be appointed. Small firms (150 or fewer registered persons) will elect three seats on the board. Medium-sized firms (151 to 499 registered persons) will elect one board representative and large firms (500 or more registered persons) will elect three representatives on the interim board. An NYSE floor member, a representative of independent dealers/insurance affiliated broker-dealers and a representative of investment companies will round out industry representation on the board.

Let me point out one other new feature of this board. Firms will vote for industry nominees that are of like size to their own firm. Accordingly, this means that only small firms will vote for candidates running for board seats reserved for small firms. Likewise, only large firms will vote for candidates running for large firm seats, and only medium-sized firms will vote for the medium firm seat. In this way, firms are truly electing the board members that represent their firm size. All other board slots will be filled by appointment by the board.

These changes to the governance structure will be reflected in changes to the NASD By-Laws, which you will be asked to vote on in the near future. I believe, as I know many of you do, that having diverse industry representation on the board is important to ensuring that decision making is well informed and reflects the realities of the marketplace. The governance plan for the new organization is fair and balanced, and will guarantee that views from the entire membership are incorporated into decision making, while meeting the SEC requirement that a majority of the board be public.

We plan to communicate often with you about this plan in the coming weeks. We have scheduled a conference call for all NASD member firms at 1:00 p.m. ET on Thursday, November 30, 2006, to discuss the plan we've announced. With so many expected participants, we are asking all participants to register for the call in advance. Also, while it will not be possible to conduct a live Q&A during this call, we want to make sure we answer your questions and encourage you to submit them in advance. Please send any questions or comments to or via toll free fax to (866) 404-6420. We'll do our best to answer them on the call or as soon thereafter as possible.

Beginning today, a special section on the NASD Web site (—entitled "Regulatory Consolidation"—will carry news and information about the consolidation, member vote, upcoming events related to the consolidation and related topics. Once dates have been established for the member vote, you will receive a detailed packet of information and instructions on how to cast your ballot. We will conduct a series of member meetings in cities across the country during the coming weeks to discuss the plan and answer your questions. We know this is an extremely busy season for you professionally and personally, but we are asking that you take the time to learn more about this plan. It is important to you, and to our industry and the health of our capital markets.

We are in the process of providing NASD District staff with information about the plan, and I encourage you to contact your District Director or call (866) 404-3574 with any questions you might have regarding today's announcement.

In closing, let me say that I believe this consolidation is a win for the industry, a win for investors and a must for the future of efficient and competitively fair regulation. It has received unanimous approval from the NASD Board of Governors and been approved by the Boards of Directors of NYSE Regulation and NYSE Group. I firmly believe that it demonstrates our commitment to making regulation both more effective and focused and will enhance the integrity and strength of the securities markets.


Mary Schapiro
NASD Chairman and CEO