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November 13, 2007

Reg NMS Sweeps Coming

By Peter Chapman

The Financial Industry Regulatory Authority, or FINRA, plans to begin sweep exams to check if broker-dealers are complying with Regulation NMS.

Doug Shulman, a FINRA vice chairman, speaking at last month's annual Security Traders Association conference, said the agency, recently formed by the merger of NASD and parts of NYSE Regulation, has been preparing for Reg NMS for the past two years. It is now ready to visit brokers and check on their compliance.

"We recognize that [Reg NMS] is actually a very complex endeavor for the whole marketplace," Shulman said. "That's why we haven't done a ton of things up to this point. And it is why we're going to be reasonable as we start our broad discussions with the firms. And we know the SEC has sent a similar signal."

FINRA has spent the past two years getting its over-the-counter trading facilities ready for NMS; getting its surveillance systems ready to detect patterns in practices and problems with NMS; adjusting its exam modules; and training its people. The sweeps will cover the period starting July 9, 2007, when Reg NMS kicked in for broker-dealers in a limited number of stocks.

Shulman noted the agency hasn't seen any market-wide problems with the NMS rollout. "It's been pretty smooth," he told the conference.

He added that "with all significant regulatory initiatives," the impact would not be known for a while. "But we do recognize that trading practices are continually evolving, and we will need to evolve with them."

Shulman wants to engage in a dialogue with the industry going forward in the years to come and as it starts to look at firms' compliance with Reg NMS.