Under the 49th: U.S. regulators look at CE, hybrid SROs

(May 17, 2005) Sorry, but you have to eat your greens. After years of debate, the National Association of Securities Dealers (NASD) ended a policy whereby people who were considered securities industry veterans were exempt from continuing education requirements.

NASD nixed all exemptions from the Regulatory Element component of its Continuing Education requirements last month. Previously, those who had been registered and had clean disciplinary histories for the 10 years before the CE program was enacted in 1995, did not have to take the exam. No such exemptions were offered for the Firm Element CE track.

Compliance officers frequently complained the grandfathering of certain people within the registered populations at their firms made it difficult to track the completion of Regulatory Element exams, and that many older registered persons would claim they were exempt when they were, in fact, required to complete Regulatory Element CE. NASD requires suspension of reps who don’t complete Regulatory Element, so the exemptions were a bone of contention between compliance and staff.

The Regulatory Element is a computer-based test designed to determine whether registered persons are up to date on changes to regulations and compliance rules. The tests are taken every three years. NASD says it has updated its registration database so that it will automatically remind compliance officers when testing windows open for personnel who formerly had been exempt.

To read the NASD notice, please click here.

Securities and Exchange Commission

The Securities Industry Association (SIA), arguably the most influential industry organization in the U.S., got behind the proposed hybrid self-regulatory model outlined in a Securities and Exchange Commission (SEC) concept release late last year.

The release asked the industry to address conflicts of interest between regulatory obligations and the interests of members, market operations, and listed issuers. It also requested comments on the alleged higher costs perpetuated by the existing multiple SRO model, as well as difficulties in ensuring proper cross-market supervision. The SIA, which represents the industry’s largest firms, has long advocated regulatory consolidation because its members complain about conflicts among compliance rules established by NASD and the New York Stock Exchange (NYSE). Unlike smaller firms, SIA members consistently have regulatory relationships with both SROs and complain the minor differences are time consuming and costly.

SIA president Marc Lackritz said the hybrid proposal “offers the best structure for minimizing regulatory duplication [and] addressing conflicts of interest.” Under the hybrid model each marketplace would have an SRO to oversee trading rules and listing requirements. However, a second SRO to which all firms would belong, would enforce regulations that apply to brokerage operations, including but not limited to sales practices, financial responsibility requirements, qualification of personnel, and record-keeping.

Lackritz said the simplified system would allow the SEC to better oversee SRO operations, and ensure each market self regulator adequately funds surveillance by charging sufficient fees to cover oversight costs. Low fees charged by some of the regional exchanges have long led to them being accused of spending inadequately on surveillance and providing lax supervision.

NASD also came out in favour of the hybrid model. Chairman Robert Glauber said, “The pure hybrid model would enhance efficiency by eliminating inconsistent member rules, staff, and infrastructure, strengthen intermarket surveillance, and minimize some of the current conflicts in the self-regulatory system.” Further, he said the change will “address the regulatory gaps that exist as a result of the disparities among markets, such as inconsistent rules and regulatory data collection requirements, and resulting surveillance activities, and the inability of any one SRO to analyze all activity across such markets.”

Industry observers say NASD’s supportive tone is driven by the fact it considers itself the odds on favourite to become the Hybrid regulator. Unlike the NYSE, its regulatory arm has been separated from the marketplace, and it has a larger contingent of members to give it clout.

Indeed, fear of losing franchise is apparent in comments from the NYSE and some of the regional exchanges. Mary Yeager, NYSE’s assistant corporate secretary urged the SEC to approach the problem by improving the existing self-regulatory system and to not force firms to incur the disruptions and added costs necessary to convert to the hybrid model.

Jeffrey Brown, senior vice president in the office of legislative and regulatory affairs at Charles Schwab, suggested the move to a hybrid regulator could remove industry expertise and turn the process over to career regulators. “Member participation brings with it a practitioner’s knowledge of the industry and historically has made the regulatory and enforcement process pragmatic and efficient,” he said. “This fundamental principle must be retained if we are to consider the structure ‘self-regulation.'”

To read the concept release, please click here.

To read industry comment letters responding to the concept release, please click here.

Self-Regulatory Organizations

Persons who perform administrative roles at securities analyst firms will not be subject to the qualification exam that full-fledged analysts must pass to work in the business, the NYSE said May 2. The rule change also exempts employees of foreign firms in cases where NYSE can determine appropriate registration and examination requirements are in place.

To read the rule filing, please click here.

Filed by Philip Porado, Advisor’s Edge philip.porado@advisor.rogers.com

(05/17/05)

Philip Porado