Now that a lawsuit challenging the merger of the regulatory units of NASD and the New York Stock Exchange has been dismissed, attention has turned to the Securities and Exchange Commission, where NASD bylaw changes needed to seal the deal are pending approval.
IRVINE, Calif. — Now that a lawsuit challenging the merger of the regulatory units of NASD and the New York Stock Exchange has been dismissed, attention has turned to the Securities and Exchange Commission, where NASD bylaw changes needed to seal the deal are pending approval.
“The ball is clearly in the SEC’s court now, where it’s probably going to stay,” said Hardy Callcott, a San Francisco-based partner at Bingham McCutchen LLP of Boston, who has been watching the merger for his industry clients.
The SEC “can now go ahead and close the merger ... which they couldn’t do while the suit was pending,” he said.
But Richard Greenfield, an attorney for Standard Investment Chartered Inc., the Costa Mesa, Calif., broker-dealer that filed suit against the self-regulators in March, said he will either appeal the dismissal or ask the U.S. District Court for the Southern District of New York to reconsider its decision.
In dismissing the suit this month, Judge Shirley Wohl Kram said that Standard’s claims are a matter for the SEC to decide.
Standard claimed that the deal was unfair to member firms and that disclosures in Washington-based NASD’s proxy for the vote on bylaw changes were deficient.
The judge said if that is true, it is unlikely that the SEC will approve the deal.
“The court is incredulous that the SEC would endorse proposed [self-regulatory organization] rule changes” if the proxy process violated its own disclosure rules, Ms. Kram said in her ruling.
The decision wasn’t surprising, “given how pervasively [the SEC] regulates SROs,” Mr. Callcott said.
But opponents of the deal question whether the commission will give their views serious consideration.
Four of the five SEC members, including Chairman Christopher Cox, have supported the deal.
“They not only expressed support, they actually allowed NASD to say [the SEC] supported the deal,” said Ted Siedle, owner of Benchmark Financial Services Inc. in Ocean Ridge, Fla. “It’s utterly inappropriate for commissioners, and the chairman, to say before the merger, ‘I support it,’” said Mr. Siedle, a former SEC attorney who consults with pension plans.
The SEC routinely reviews proxies of public companies, he said.
“If any other company [told its investors that] the SEC strongly recommends you vote in favor of what we’re doing, the SEC would have been all over them,” Mr. Siedle said.
He and Standard’s lawyers have asked the SEC to look at confidential documents obtained from the defendants in the litigation. Those documents were sealed by the court.
Mr. Greenfield declined to say what the documents contain, but they “demonstrate conclusively that the proxy statement does not comply with federal disclosure standards,” he said.
Nevertheless, observers expect that the SEC will approve NASD’s bylaw changes in relatively short order.
“This is a high priority for the SEC,” Mr. Callcott said. “I expect them to give it expedited treatment.”
The SEC itself was involved in negotiating the merger, Mr. Callcott added, so it would be surprising if the “basic structure” of the proposed consolidation were not approved.
Assuming that the deal is approved, Standard could still appeal the SEC’s action to the U.S. Court of Appeals for the District of Columbia Circuit.
That court lately has thrown out some SEC rules that it considered illegal or improperly approved. In March, it overturned the broker-dealer exemption rule, stating that the agency exceeded its authority in exempting fee-based brokerage accounts from the Investment Advisers Act of 1940.
Fair representation
Some in the industry worry that approval of the new SRO would be one step closer to elimination of self-regulation.
That’s because under the proposed governance structure of the new regulator, any one brokerage firm would be limited to nominating and voting on, at most, three board seats out of a total of 23.
The new board would have 10 industry seats.
NASD members currently are able to nominate and vote for a majority of board members.
The reduction in voting clout could be a “tremendous setback to small firms,” said Albert Kramer, owner of Kramer Securities Corp. in Miami, who supports the basic idea of a consolidation.
But the industry is “much better represented” with the proposed new SRO than it was under NYSE governance, Mr. Callcott said.
NYSE member firms lost all industry representation in 2003 after the SEC approved reforms at the exchange. Big Board members lost their voting rights a year ago when the SEC approved the NYSE’s merger with Chicago-based Archipelago Holdings Inc.
In dismissing the Standard lawsuit, the district court noted that the SEC must “assure a fair representation” of member firms under the Securities Exchange Act of 1934.
The law doesn’t specify how brokerage firms must be represented on SRO boards. There is no specific requirement for the one-firm, one-vote policy, which NASD has upheld since it was chartered.
“I don’t know how no representation [such as what was the case at the NYSE] can be fair representation,” Mr. Callcott said.
Mr. Siedle, though, thinks that now is the time to do away with self-regulation and turn oversight over to the SEC.
With the baby boomers retiring and counting on investments for income, regulation is at a “critical juncture,” he said.
