Securities Markets:

Competition and Multiple Regulators Heighten Concerns about Self-Regulation

GAO-02-362: Published: May 3, 2002. Publicly Released: May 3, 2002.

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In the securities markets, competition among self-regulatory organizations (SRO) and their members for customer orders has heightened concerns about conflicts of interest in their roles as both market operators and regulators. Nasdaq--the market run by the National Association of Securities Dealers (NASD)--has been in competition with NASD members that run electronic communications networks. For years, the New York Stock Exchange (NYSE) has faced competition from members that trade NYSE-listed securities off of the exchange. Greater competition has generated concern that an SRO might abuse its regulatory authority--for example, by imposing rules or disciplinary actions that are unfair to the competitors it regulates. Some broker-dealers subject to the jurisdiction of multiple SROs also are concerned that differences among SRO rules and rule interpretations have caused inefficiencies in the use of broker-dealers' compliance resources. No formal process exists, however, for addressing rule differences that might cause material inefficiencies in the regulatory process. The law does not require SRO rules to be the same, and many differences exist for legitimate business reasons according to regulators. Broker-dealers with multiple SRO memberships said that examinations by multiple SROs were unnecessarily burdensome. Securities market participants have discussed alternatives that would address concerns about conflicts of interest and inefficiencies in the current self-regulatory structure. Securities and Exchange Commission officials said that they had no plans to change the current structure, preferring to let the industry reach a consensus on the need for appropriate change.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: In a November 26, 2002 letter to SEC, the National Association of Securities Dealers, Inc. (NASD) and New York Stock Exchange (NYSE) said that in response to the issues raised in GAO's report, they had sent a letter to the chief executive officers of their approximately 400 common members, asking for assistance in identifying inefficiencies caused by differences in rules or rule interpretations among SROs and by multiple examinations of broker-dealers. NASD and NYSE also established a joint Task Force that issued a June 2003 report entitled "The New York Stock Exchange and NASD Rule Differences: Response to Issues Raised in GAO Report Entitled Securities Markets: Competition and Multiple Regulators Heighten Concerns About Self-Regulation GAO-02-362." The report discussed the differences between the SROs' rules or their interpretations that members had identified, actions taken or planned to resolve the differences, and where no action was planned, the rationale for the continued differences. The SROs said that the Task Force would continue to meet periodically (three or four times a year) to review future rule proposals and, where practical, develop similar rules. They also said that the Task Force would serve as a forum for coordinating interpretations of similar NASD/NYSE rules. In addition, the SROs said that they would carefully consider the limited number of survey responses related to examination coordination in their ongoing efforts to further enhance the coordinated examination program. To further improve examination coordination, NASD and NYSE said that senior representatives of their examination staffs would continue to meet on a routine basis. The SROs' actions to date address GAO's recommendation, however, more time will be needed to fully assess their longer-term responsiveness to broker-dealers' concerns.

    Recommendation: The Securities and Exchange Commission's (SEC) Chairman should work with the self-regulatory organizations (SRO) and broker-dealer representatives to implement a formal process for systematically identifying and addressing material regulatory inefficiencies caused by differences in rules or rule interpretations among SROs and by multiple examinations of broker-dealers. In doing so, SEC should explore with the SROs and other market participants various methods for obtaining comprehensive feedback from market participants, such as having the SROs use a neutral party to independently collect and assess market participants' views.

    Agency Affected: United States Securities and Exchange Commission


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