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July 27, 2005

NASD Opposes SEC's SRO Plan

By Peter Chapman

(Traders Magazine, July 2005) -- The SEC's SRO rule proposal goes too far for the NASD.

An NASD official recently criticized aspects of the SEC's proposal aimed at weakening the ties between a self-regulatory organization's business and regulatory sides. Doug Shulman, the NASD's president of markets, services and information, decried the SEC's push to eliminate industry representation on key SRO committees.

"NASD is informed by industry, but not controlled by industry," Shulman told attendees at the SIA's annual market structure conference. "We should still have industry on key committees."

In its "Fair Administration and Governance of Self-Regulatory Organizations" release, the SEC proposed that major SRO committees only have independent directors.

The NASD, in a letter, also petitioned the SEC not to treat it as an SRO operating a trading facility. The NASD, which owns 40 percent of Nasdaq, plans to divest itself once Nasdaq gains exchange status. The NASD also opposes the SEC plan to have SROs create a chief regulatory officer position and a regulatory oversight committee.

"Our CEO is our chief regulatory officer," Shulman said.

Under the SEC's proposal, the regulatory arm of an SRO must adhere to four major principles. First, the majority of board members must be from outside the securities industry. Second, key committees must be staffed entirely from outside the industry. Third, SROs must maintain either structural or functional separation between its regulatory and business sides.

That would entail the creation of the position of chief regulatory officer. This exec would report to an independent oversight committee.

Fourth, members of the SRO could control no more than 20 percent of the voting interest in the organization. The SEC declined comment.