On July 30, in an historic move, NASD and NYSE Member Regulation consolidated into a single regulatory organization for the securities industry. The newly formed organization, called the Financial Industry Regulatory Authority, Inc. (“FINRA”), is now the largest non-governmental regulator for all securities firms doing business in the United States.
Operating under SEC supervision, FINRA conducts regulatory oversight of more than 5,000 securities firms and 666,000 registered representatives. It is responsible for rule writing, firm examination, enforcement, and arbitration and mediation functions, along with all functions that were previously overseen solely by the NASD (including market regulation under contract for NASDAQ), the American Stock Exchange, the International Securities Exchange and the Chicago Climate Exchange. In addition, FINRA is responsible for operating industry utilities, such as trade reporting facilities and other over-the-counter operations. The consolidation of functions into FINRA is intended to streamline the broker-dealer regulatory system, reduce the financial burdens placed on member firms as a result of duplicate selfregulatory structure, and permit the establishment of a single set of rules governing membership matters, with the aim of enhancing oversight of U.S. securities firms and enhancing investor protection.
In connection with the consolidation, many staff and functions of NYSE Regulation'’s Division of Enforcement will transfer to FINRA, which will assume responsibility for all investigations and disciplinary proceedings relating to violations of NYSE member firm rules by NYSE member organizations and members. However, NYSE Regulation, Inc. will continue to be responsible for the regulatory oversight of trading on the NYSE. This regulatory consolidation will not affect the individual exchanges’ regulation of their own listed companies.
In furtherance of the consolidation process, the NYSE has filed with the SEC a proposed rule to amend membership rules to reflect the changes to the regulatory landscape. These rules would apply to members of FINRA that are also members of the NYSE. In accordance with the proposed rule, FINRA will adopt the NYSE Rules that relate to member conduct, including rules relating to financial and operational standards of member organizations, books and records, and other non-trading functions of firms. One such rule is the requirement that all organizations that currently are or propose to become NYSE member organizations also become members of FINRA. Likewise, NASD has filed with the SEC, amendments to its membership requirements to provide for a waive-in process for current NYSE member organizations that are not also NASD members, to apply for and be approved for FINRA membership on expedited basis. If these two filings are approved and NYSE-only member organizations are then approved as FINRA members, FINRA will be responsible for disciplinary proceedings that pertain to NYSE member firm rules. NYSE Regulation’s Enforcement Division will retain responsibility for investigating and enforcing violations of NYSE Rules that have not been incorporated by FINRA.
The FINRA rulebook currently consists of both NASD Rules and NYSE Rules. The incorporated NYSE Rules apply solely to those members of FINRA that are also members of NYSE on or after July 30, 2007. Firms that were members only of NASD as of July 30, 2007, remain subject only to NASD Rules, provided they do not become NYSE members, in which case they would be subject to both NASD Rules and the NYSE Rules. Similarly, a firm that becomes a new member of FINRA only (and not a member of NYSE) will be subject only to NASD Rules. In interpreting the rules, FINRA will continue to apply the same interpretive materials that NASD and NYSE applied prior to consolidation.
While the securities industry has mostly favored the NASD/NYSE combination, some critics have said the NYSE/NASD consolidation could erode investor protection. The National Association of Professional Financial Advisors (“NAPFA”) and Financial Planning Association (“FPA”) complained in a press release that investors will be confused by the broad scope of the new regulator’s name. NAPFA and FPA believe that the sweeping name implies FINRA will have authority over all professionals offering financial products and services, when in fact FINRA has no regulatory sway over financial planners and registered investment advisers. Despite the criticism, the securities industry remains hopeful that this consolidation will ease the compliance burdens and overall will improve the efficiency of regulation of securities firms.