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May 16, 2007

New SRO's Single Rule Book Could Contain More Changes for Institutional Traders

By Peter Chapman

Rules governing institutional sales and trading could be in for a revamp once the NASD merges with NYSE Regulation.

Both leaders of the new self-regulatory organization-NASD chairman and chief executive Mary Schapiro and NYSE Reg chief executive Rick Ketchum-said recently they would take a fresh look at the rules governing institutional and retail businesses.

Schapiro, speaking at the Securities Industry and Financial Markets Association compliance and legal division annual seminar, noted that it is important to lose "the blinders of one-size-fits-all' rule making." That includes making "a clearer distinction in the rule set between retail and institutional investors."

As part of the merger, the two organizations will "harmonize," or merge, their respective rule books. That exercise, according to Ketchum, is the perfect time to rethink the regulation differences for broker-dealers conducting retail versus institutional business.

Ketchum, speaking at the same seminar, said it behooved the regulators to consider whether it was better to promulgate broad-based rules and leave their interpretation up to the discretion of individual firms, rather than to spell everything out in fine detail.

"The single-rule-book exercise is a great opportunity to look back and ask this question with respect to some number of our existing rules," Ketchum said, "in particular those relating to wholesale trading and institutional businesses, as opposed to retail selling practices."

Legal and compliance executives said a rethinking of the differences between institutional and retail regulation was warranted and, perhaps, long overdue. They noted that the issue was not new, and that movement along this track has been under way at the NASD for some time.

Dave Sobel, an executive vice president in charge of compliance and legal matters at institutional brokerage Abel/Noser Corp., sees the need for changes. He compared SRO rules to state laws.

"There are probably about a dozen states where you don't have to register if you deal with institutions," Sobel said. "It is these kinds of exemptions that should be in place."

In general, industry sources maintain that sophisticated institutional investors need less protection than ordinary retail investors. Some ask whether the so-called investor suitability requirements need to be rethought.

Brandon Becker, co-chairman of law firm WilmerHale's securities department, noted that "there is a long-standing interest in trying to develop an alternative regulatory regime for institutional investors as opposed to retail. The theory is that institutions can fend for themselves."

Becker said the last time the issue of regulatory differences was broached was after Congress passed the Securities Acts Amendments of 1975.

Change is not expected anytime soon. The merger is due to close in June. The integration of the two organizations, however, is slated as a three-phase, three-year project. NYSE Reg is not expected to fully disappear until the end of that time.