Everything old is new again. On January 1, 2016, the New York Stock Exchange (“NYSE”) – now owned by Intercontinental Exchange, Inc. – will be taking back some of the regulatory responsibilities it yielded to the Financial Industry Regulatory Authority (“FINRA”), starting in 2007 when the NYSE and National Association of Securities Dealers (“NASD”) merged their self-regulatory functions. The goal then was to address inefficiencies and overlap that often resulted from the concurrent oversight by these two self-regulatory organizations (“SROs”).
Securities industry SROs date back to the 1930’s, when Congress passed a series of broad acts designed to avoid a repeat of the 1929 Stock Market Crash. Included in this legislation was the Securities and Exchange Act of 1934 (the “Exchange Act”), which, among other significant measures, set forth national exchange registration requirements. Under these requirements, a prospective exchange must file with the Securities and Exchange Commission (“SEC”) its “rules of the exchange” designed to allow the exchange to regulate the conduct of its members so as to protect investors and the public interest. In effect, this requirement resulted in national exchanges, such as NYSE, functioning as SROs. In 1938, Congress passed the Maloney Act, which amended the Exchange Act and established the concept of registered national securities association SROs. Provisions of the Maloney Act required that broker-dealers register with either a national securities exchange or a “registered securities association.” Accordingly, in 1939, the NASD was founded to serve as the SRO responsible for monitoring the conduct of member brokerage firms and exchange markets.
Over the next 60 years, self-regulation took hold and then dramatically expanded to the point where those subject to self-regulation, not to mention government oversight, became well-positioned to make the case that they were unfairly burdened by an overbroad and inefficient regulatory regime. By the turn of the century, both the NASD and NYSE, which shared many common members, had evolved into active and omnipresent regulatory forces on Wall Street. In response to industry pleas for more efficient regulation, the NYSE and NASD created a plan to consolidate their regulatory operations into a single organization (the “2007 Allocation”). The SEC approved this plan on July 26, 2007, and four days later, FINRA opened its doors for business, or, more accurately, regulation.
Under the 2007 Allocation, FINRA assumed, and the NYSE was relieved of, examination, enforcement, and surveillance responsibilities for members common to both organizations (“Common Members”) with regard to a set of “Common Rules” set forth in the plan. NYSE reserved some of its oversight authority, including (1) examinations of Common Member conduct covered by NYSE Rules not part of the Common Rules and/or federal laws or regulations; (2) surveillance, investigation, and enforcement with respect to (a) conduct relating to trading on or through NYSE systems or facilities, (b) conduct otherwise covered by NYSE-only Rules, or (c) whether conduct under (2)(a) or (2)(b) constituted a violation of federal laws or regulations.
In June 2010, NYSE ceded its residual market surveillance and enforcement duties to FINRA under a “Regulatory Services Agreement” (“RSA”). Consequently, FINRA took on the responsibility to monitor NYSE member conduct under NYSE rules, investigate and enforce violations of NYSE rules, and conduct disciplinary proceedings arising out of such enforcement actions. At the time, the SEC noted that the evolution and increasing fragmentation of the securities markets called for effective cross-market, cross-product oversight. NYSE Euronext’s CFO, Michael Geltzeiler, stated that the move marked a step towards the optimal structure of a single market surveiller. Between the 2007 Allocation and the 2010 RSA, NYSE had given FINRA essentially all member regulatory functions previously performed by NYSE Regulation (“NYSER”) including all disciplinary proceedings relating to NYSE-specific rules and non-FINRA members. The RSA was drafted to expire on December 31, 2015.
In 2011, the NYSE transferred responsibility for investigating insider trading occurring on the NYSE to FINRA. Since this transfer, FINRA essentially has been the only self-regulator on the industry beat. However, FINRA learned last fall this distinction was only temporary.
On October 6, 2014, NYSE announced NYSER would be taking back market surveillance, investigation, and enforcement duties from FINRA upon the RSA’s expiration. NYSER’s reclaimed authority encompasses the enforcement of rules that specifically govern the markets operated by ICE: the New York Stock Exchange LLC, NYSE Arca, Inc., and NYSE MKT LLC (the “NYSE Exchanges”).
NYSER has identified two primary drivers for its return to regulation: (1) taking direct responsibility for monitoring activity on the NYSE Exchanges; and (2) early detection of potentially violative behavior and prompt disposition of such instances. NYSER CEO Mary Brienza stated that NYSER’s expertise and proximity to the markets being regulated will enable more effective surveillance and rule enforcement. In anticipation of its re-assumption of regulatory duties, NYSE has created an entirely new Enforcement Department, consisting of attorneys, examiners, paralegals, and investigators.
Starting in January, regulatory inquiries concerning conduct primarily occurring on the NYSE markets will be initiated by NYSER, which will also handle any resulting enforcement actions to final disposition. However, FINRA will still be responsible for overseeing compliance with the Common Rules allocated to it through SEC Orders in 2007 and 2011, which means insider trading occurring on the NYSE markets will still be within FINRA’s purview. FINRA will also continue to perform cross-market surveillance and investigation, as well as the registration, testing, and examinations of NYSE broker-dealers.
The most pressing question presented by this new regime is whether there will be a return to the pre-FINRA state of affairs wherein firms were subject to regulatory overlap and the associated burdens and costs. Only time will tell if two’s a crowd, but the securities industry is hopeful the precise line-drawing that characterizes this new arrangement, coupled with better coordination practices, will at least keep overlap to a minimum.
In the short term, while NYSE gears up and gradually assumes its new duties, the regulatory landscape is not likely to change dramatically. However, in-house legal and compliance staff, as well as outside counsel, would do well to familiarize themselves with the new rules, procedures, and NYSE staff that the new year will bring.