Remark at the 8th Annual Securities Industry Conference
Chairman and CEO
Thank you, Bill [Freund]. I’m very pleased to be here. And equally pleased to see the largest turnout ever for this conference. At this time and in this place, this itself is a real show of strength and resilience. So for coming out and staying attentive throughout a long day, you all deserve a big hand.
Little more than five weeks ago and ten blocks away from here, our financial community and our markets were dealt the most savage blow in their history.
The destroyed office space will be replaced. The shredded infrastructure will be strengthened. But the cold words “human capital” cannot begin to capture all the ways in which our friends and colleagues will never be replaced.
Yet somehow, for us, life must go on. We have the duty to keep the world’s greatest markets fully open for business. We have the challenge of dealing with pressures on our industry that were heavy even before September 11th. And we have the opportunity to take from the ashes of this tragedy lessons that we can apply to make our markets stronger than ever.
I want to discuss these subjects with you this afternoon from the NASD’s unique perspective. First, by describing what we saw in the broker-dealer community in the wake of the attacks.
Second, by summarizing how we have responded to help meet the immediate crisis, facilitate the return to full operation of the markets, and foster the health of the industry in the challenging environment going forward.
Finally, I want to discuss what we’ve been taught by this terrible episode – as seen not only through the prism of this last month and a half, but also through the lens of lessons learned a decade and a half ago.
I begin this account where you did: with the terrible realization of the magnitude of the blow. The NASD is the self-regulator for all 5,600 brokerage firms that are the pipeline connecting investors to the markets. And our New York office is located at One Liberty Plaza. So we’ve had a graphically detailed perspective on how the industry was affected by the events of the 11th, and how firms have sought to get back on their feet.
The picture we have found is both inspiring ... and daunting.
We have seen stories of great heroism and humanity. One key firm lost some two-thirds of its 1,000 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. That includes the New York Stock Exchange and The American Stock Exchange, which together worked miracles to help Amex timely reopen for business in borrowed space.
There were 31 main offices and 30 branch offices of broker dealers located in the World Trade Center. It took some doing, but we were eventually able to get in touch with every one of them.
In fact, senior NASD management personally called top executives at each of the 350 firms in lower Manhattan. Our purpose was simple. To see how you were doing. And to ask how we could help.
Based in part on what you’ve told us, we have taken a broad range of steps. Some mundane-seeming measures were in fact vital – such as providing investors with the contact information they needed to reach their brokers, and thus be reassured that they could access their accounts.
Other steps were explicitly systemic. The NASD participated with the SEC, Treasury Department, NYSE, Nasdaq, Amex and leading member firms in the day-by-day meetings that led to the decisions not to reopen the markets until we could do so with confidence and in unison the following Monday. We all agreed that a market opening followed promptly by an infrastructure failure would have been self-defeating.
We’ve had to take a number of other steps that were regrettably beyond the realm of the routine.
For one thing, as you know all too well, hundreds of floors of office space in Manhattan were destroyed or knocked out of commission. So the NASD created an electronic clearinghouse, where firms that need office space have been able to find firms with space available.
Other firms suffered losses so severe, they have decided to become branch offices of other brokerage houses. We have been smoothing the path as those firms seek to find suitable partners.
The NASD family of companies made a million dollar donation to The New York Times 9/11 Neediest Fund – and we’re matching employee donations to this and four similar charities – because it’s just the right thing to do.
We took out a full-page ad in the Wall Street Journal to let investors and firms both know, in a dignified way, that we are here to provide answers, information and help.
Needless to say, we’ve had to deal with the effects of the tragedy on our own people and New York offices.
And we have performed one service with a truly heavy heart. NASD records often are the best source of fingerprint images for those lost in the attacks. So with appropriate safeguards, we have provided thousands of these images for identification purposes to our member firms; police and fire authorities; and to the victims’ families.
Of course, as a self-regulatory organization, much of our work in this crisis has been to fashion reasonable regulatory relief wherever and whenever appropriate.
In the days after the catastrophe, we coordinated with the SEC on trading halt issues, including foreign trading. We worked with our regulatory counterparts to explore limited and appropriate flexibility regarding margin issues. We granted relief from registration rules and Chinese Wall requirements that allowed affected firms to staff their trading desks in time for the markets’ reopening. And we granted relief from certain other rules, such as the Three-Quote Rule, in light of New York’s overwhelmed communications system.
I hasten to add that in every step we have taken, we have continued to put investor protection and market integrity first. And I can report that there has not been one minute since the attacks when our ability to monitor trading on The Nasdaq Stock Market has been compromised.
The same is true of the measures we have taken beyond the immediate aftermath of the attacks. For example, our relief from NASD deadlines has included rescheduling on-site exams. More broadly, we granted blanket extensions on any regulatory requests for information until October 1, and have extended these for particular firms as necessary and appropriate. We have provided personal staff assistance for firms that suddenly found themselves faced with net capital, financial, operational issues or computer systems problems which coincided with filing obligations in such areas as Focus, Short Interest, OATS and CRD.
We have extended test windows and continuing education requirements as a result of last month’s events. And we have negotiated fee refunds for test no-shows or cancellations for the same cause.
To maintain investor confidence, we have given guidance to investors about the reopening of the markets. To ensure quick access to reopening markets, we expedited our review of corporate financing filings. And to prevent the loss of industry momentum in membership applications, we have reached out to replace promptly any application materials that were lost as a result of damage to our New York office.
By the way, this is only the latest step we have taken to speed the review of membership applications without compromising market integrity or investor protection. Last year, we created safe harbors in the application process to allow firms to make certain expansions without obtaining NASD approval. More recently, we have found ways to streamline the review of those applications which do not raise significant regulatory concerns.
If all this seems bureaucratic – well, let me assure you, it has very real consequences for people’s lives. Consider the plight of securities industry professionals who are called into active military duty. Can they somehow remain registered and continue to receive transaction-based compensation? Reservists worried about supporting their families will be happy that our clear answer is “Yes” – and that while we maintain their membership in a special inactive status, all dues and assessments will be waived.
Many of the special measures we are taking in light of the attacks are spelled out on our updated Web Site, www.finra.org. It also includes a link to information about extensions in matters being handled through NASD Dispute Resolution. I urge anyone who hasn’t already visited our Web Site to do so soon.
You’ve just heard about many of the steps the NASD HAS taken as a result of the tragedy. Now I want to shift gears and, before taking your questions, offer some thoughts on what longer-term changes our industry may NEED to make in response to the tragedy. Simply put, what are the lessons of September 11, and how should we apply them?
This is admittedly a complex question. Fortunately, we do not answer it in isolation. We have a useful guide and point of comparison in our experience after the 1987 crash – or as we called it more politely on the Brady Commission, the “precipitous decline.” And based partly on that experience, we did a lot of things right this time.
For example, one of the striking things about the markets’ response to last month’s events is how much our industry and our markets benefited from our tremendous investments in capacity and technology over the last decade. In 1987, the market lost fully a third of its value in five days. Trading was chaotic, with a 22 percent loss on “Black Monday” alone. A huge part of the problem was lack of capacity. Too many people rushed for the door at the same time. When they couldn’t squeeze through, the panic only worsened. The psychology was akin to a bank run.
This time, there was no bank run mentality when the markets reopened on September 17th. Because investors realized they COULD trade, they did not do so in a panic. The result was a systemic triumph. Yes, the markets declined, but they did so in an ORDERDLY manner – as investors adjusted to new realities. And considering all that has happened, the way in which U.S. equities have traded over the last month is an amazing tribute to the confidence of investors worldwide in the fundamental soundness of our markets.
And I would underscore this. The improvements in capacity and technology that made this possible were made by the industry itself – because they were good business.
Our system of clearing and settlement worked well. A number of clearing firms reported that they used the days when the markets were closed to stress-test accounts and contact customers about vulnerable account balances. Risk management policies such as these contributed to the orderly resumption of trading.
The Fed and the SEC both earned very high marks in this crisis. The former pumped record amounts of liquidity into the system in the days immediately following the attacks. The latter focused like a laser beam on the sound reopening of the markets. Both allowed market actors to transact with confidence.
The SEC also did the right thing by appropriately relaxing the ordinary rules governing corporate buy-backs of stock. No one knows better than a listed company when its own shares are trading below their true value. This was a key to the market’s turnaround on October 20th of 1987. The SEC was wise to facilitate it this time around – and to do so in advance of the markets’ reopening.
Of course, I don’t want to imply that this tragedy revealed no weaknesses; it obviously did. Let me explore just a few of the lessons I believe we should take from it.
The most obvious one is that we must all do more – the NASD included – to terror-proof our industry and our markets. And in the spirit of not just winning the last war, we should protect ourselves against other catastrophes as well, from cyber-terrorism to natural disasters.
That means looking at things like more robust and redundant system architecture, and perhaps better dispersed back-office systems. It also means remembering that any vulnerability that hurts investor confidence hurts us all.
I salute Congress and the SEC for working to foster sound solutions in this area. And I hope that we as an industry are smart enough to address these issues with the same initiative and spirit of cooperation that have served us well elsewhere.
I likewise hope we all realize how vital it is to find the best ways of staying in contact with one another in times of crisis. If anyone should be the “gold source” of such current contact information, it is the NASD – but I have to tell you, in the aftermath of the attacks, tracking down our members was surprisingly difficult.
By contrast, back-up systems overall were a success story in this crisis. Thanks also in part to the geographic dispersal of clearing firms, the NASD is unaware of any customers who were unable to get their records. Then again, we don’t know what we don’t know. So this is another area where the industry’s own redoubled efforts will be welcomed.
On the other hand, some changes are almost certain to come legislatively if they come at all. For example, our industry may well be called upon to play a more active role in preventing money laundering.
Both houses of Congress have passed money laundering language that would expand the use of Suspicious Activity Reports from banks to broker dealers. This is important legislation. The NASD is committed to working in cooperation with Congress, the SEC, the industry and the investing public as this bill moves toward implementation.
A similar spirit of collaboration has infused much of what I’ve described this afternoon. The NASD has been but one piece of a vast puzzle, in which everyone has pulled together with the very best in human nature, to respond to a catastrophe caused by the very worst in human nature.
Our country has an amazing ability at times like this to rise up and come together. We’ve all seen it lately – in hundreds of ways large and small.
I can’t resist mentioning one tiny leading indicator in a lighter vein. Right around the corner from my Washington office, throughout the month following September 11th, there was a giant American flag in the store window of Victoria’s Secret.
I’m pretty sure that flag isn’t there most of the time. Though I’m no expert on what usually is. Honest.
Seriously, we have a host of economic and policy reasons for doing our utmost to harden our markets against terrorists, hackers and disasters. For this will help our markets retain the confidence of investors and companies worldwide. It will help our economy rebuild and rebound. And it will help our securities industry remain the envy of the world.
But I want to leave you with one further thought.
Thirty seven days ago, the world as we had known it was transformed. This very campus, a peaceful center for knowledge, was pressed into service as a center for triage.
Nothing will restore the lives lost on September 11th, reclaim the dreams stolen, or erase the pain of the victims’ families. No words we say or actions we take can ever make sense of such senseless slaughter.
But by applying what we have learned at such cost from this tragedy, we will help fill with some meaning and purpose the gaping hole that still smolders in this city, in our community and in our hearts.
Though we cannot fully comprehend our grievous losses, we can do something to redeem them. By heeding these lessons, we will strengthen the sinews of free market capitalism – and thus defend a way of life that the forces of terror are sworn to disrupt and destroy.
That, now, is our role in this struggle; our mission; and our duty.
Of course, I am speaking of much more here than economics, or finance, or even patriotism.
For behind these terrible lessons are human faces.
And it should not be hard to remember them.
Indeed, we have 6,000 reasons never to forget.
Thank you very much.