Regulatory Challenges in the Securities Industry
Glauber, Robert R., Journal of Applied Finance
This is an edited version of Dr. Glauber's address to the FMA Annual Meeting Luncheon, October 8, 2004.
The 90s-era corporate governance debacles at Enron, WorldCom, and elsewhere coincided, more or less, with a spate of scandals and misdeeds in the securities industry that hurt investors-mutual fund chicanery, compromised research, a litany of inappropriate sales practices by brokers and dealers and other abuses-most of which came to light after the market bubble popped in 2000. All this misbehavior put the regulators on red alert, and we're likely to stay there for some time. Even so, now that the smoke has cleared somewhat, this strikes me as a good time to step back and survey the field. What is the state of play between the regulators and the regulated? What issues are we focused on now? And what issues are likely to engage us in the near future? I will take a shot at those questions after I give you a quick primer on who we are and what we do.
Since 1938, NASD has been the world's largest private sector regulator of the financial sector. Federal law requires every securities firm that does business with the public to be a member of NASD, which is a not-for-profit organization. Approximately 5,300 brokerage firms and 660,000 stockbrokers and registered representatives fall under our jurisdiction. NASD registers member firms, writes rules to govern their behavior, administers examinations for compliance with our rules and the federal securities laws, and initiates enforcement actions against those who break the rules. Unlike Nasdaq and the New York Stock Exchange, NASD does not develop or enforce listing standards for any listed companies. Nor is NASD responsible for operating an exchange for the profit of its members and owners. This is a consequence of NASD's strategic decision in 2000 to be purely a regulator, rather than an owner or operator of markets.
NASD created Nasdaq and ran it from its inception in 1971 until 2000. Over the years, it became increasingly clear to us that regulating a market that you own was not an easy proposition to defend. So, we reached an agreement to sell Nasdaq and that agreement awaits final approval from the sec.
NASD also bought the American Stock Exchange in 1998 and has reached an agreement to transfer it to its seat-holders. That deal, too, awaits sec approval. After the sales, we will continue to regulate both Nasdaq and the Amex under contract.
Today, we are a more tightly-focused organization. Our 2,400-plus people, based in Washington, New York, and 14 district offices around the country, concentrate entirely on our mission of protecting investors and upholding the integrity of the markets. We do this in a number of ways: 1) we devote voluminous resources to educating investors and industry professionals, 2) we work to make markets more transparent and fathomable and, as I said, 3) we make rules-subject to sec approval-and punish those who break them. We constantly review those rules to make sure they are up-to-date.
NASD also operates the world's largest securities-related dispute resolution forum, which helps resolve monetary and business disputes between and among investors, securities firms, and individual brokers. NASD Dispute Resolution handles about 90% of all securities-related arbitration and mediation cases in the United States. Last year, we received about 9,000 requests for arbitration. That fairly sums up our mission and operations. So, let us get to some issues.
As 1 mentioned, we have been very active in the mutual fund area. In addition to the marquee issues of market-timing and late-trading, we have been taking action against broker-dealers that put their own compensation ahead of their customers' needs when deciding what funds to recommend.
We have also uncovered a pervasive problem with the payment of so-called breakpoint discounts for high-dollar mutual fund purchases. Briefly, if you invest $50,000 or more in a mutual fund, you're probably entitled to a discount on the front-end load. …