Battle over SRO merger rages on in court, at SEC

IRVINE, Calif. — The fight over the pending consolidation of the regulatory units of the New York Stock Exchange and NASD is proceeding apace on two fronts: in court and at the Securities and Exchange Commission. In comment letters this month to the SEC, many smaller firms complained they were being disenfranchised by the merger, and an influential state regulator criticized the deal as harmful to investors. The new board of the single self-regulatory organization would be “somewhat equivalent to a corporate board not subject to shareholder approval,” Bonnie Wachtel, principal at Wachtel & Co. Inc. of Washington, wrote in a comment letter. “There’s no question representation [of small firms] will be reduced,” she said in an interview. Ms. Wachtel and other critics also questioned why a $35,000 payment that was promised to NASD members was tied to the deal’s going through. NASD members in January approved bylaw changes needed to meet the deal’s terms. Those changes now are pending approval at the SEC. The agency’s comment period ended this month.
Sees harm to investors Industry critics of the deal also got some help from Massachusetts Secretary of the Commonwealth William Galvin, who called the deal “imprudent.” The loss of a regulator would harm investors, he said in a comment letter. A “diversity of SRO regulators will serve as an antidote to the problem of a regulator becoming accustomed to, and even tolerating, certain bad industry practices,” Mr. Galvin said. He pointed to mutual fund market timing and abuses with annuity sales as examples of harmful practices. Mr. Galvin and Brian Lantagne, head of the state’s securities division in Boston, did not return calls for further comment. Massachusetts is the only state to publicly oppose the deal. The North American Securities Administrators Association Inc. of Washington, which represents state and provincial regulators, filed a one-page comment letter in support of the merger but stressed the need for continued state oversight. NASAA president Joseph Borg, who also is director of the Alabama Securities Commission, didn’t return calls seeking comment. At the same time, the consolidation has received broad backing from industry groups, including the Securities Industry and Financial Markets Association of New York and Washington, the Financial Services Institute Inc. of Atlanta and the National Association of Independent Broker/ Dealers Inc. in San Diego. The NAIBD said that small firms wouldn’t lose representation on the new SRO’s board. The three board seats set aside for the smallest NASD members will help ensure that the regulator won’t overlook small firms, Lisa Roth, NAIBD chairman and president of ComplianceMAX Financial Corp. of San Diego, said in an interview. She added that NASD officials lately have been talking about “tiered” regulation. SIFMA has pushed hard toward a single rule book. Many of the complaints critics have about the consolidation mirror allegations made in a lawsuit against the SROs. The plaintiff in the case, Standard Investment Chartered Inc., a Costa Mesa, Calif., brokerage firm, sued both NASD and the NYSE in March in the U.S. District Court for the Southern District of New York, claiming that NASD’s proxy for the bylaw vote, sent to members in December, was incomplete and misleading. The lawsuit seeks to stop the transaction. In the latest development, on April 11, a judge in the case denied requests from the NYSE and NASD to halt discovery. The court earlier had approved limited discovery for purposes of deciding whether to issue an injunction to halt the merger. Standard is seeking merger-related NYSE and NASD documents, as well as depositions of NASD officials. The firm’s attorney, Richard Greenfield of Greenfield & Goodman LLC in Easton, Md., said that some confidential evidence has been produced by the defendants, adding that both NASD and the NYSE “are trying to avoid [or] evade most of the document requests.” NASD didn’t respond to requests for comment. On April 20, the court allowed Standard to file some information under seal. Mr. Greenfield said he also is trying to set dates for depositions. A tentative date of May 24 has been set for oral arguments on Standard’s request for a preliminary injunction. NASD earlier told the court that the deal wouldn’t close before June 1. Testimony and document production would have to be completed before the hearing. A decision on the injunction would likely occur a day or two after oral arguments. “I say kudos to the plaintiff and attorneys in [the Standard] case for standing up for those whose voice is being silenced,” Edward Siedle, president of Benchmark Financial Services Inc. of Ocean Ridge, Fla., said in a comment letter. He is a former SEC attorney. But if the suit delays the consolidation, it “will just tick off the [nearly] 3,000 firms [that voted in favor of the deal] that are waiting to get their $35,000,” Ms. Roth said in an interview.