Tuesday, November 28, 2006

Arranged Marriage

The NASD and NYSE will be consolidating their respective regulatory enforcement responsibilities into a yet to be named entity. The combination is expected to reduce costs and improve effectiveness of securities supervision. If anyone is surprised by this turn of events, one only need look at recent changes in leadership to see how a seemingly improbably combination is now a reality. The NASD is now under the direction of Mary Schapiro and the NYSE Group is headed by Richard Ketchum, two pragmatic individuals who spend far less time lining their own nests than their respective predecessors, Bob Glauber and Dick Grasso. Indeed, the two new generals once worked together at the SEC.

Although a relaxation in rules is not a likely result, the combination will mean the elimination of duplicative and conflicting rules. This in itself should lead to a nationwide cheer from broker dealers. It could also mean the elimination of duplicative audits for those firms which are both NASD and NYSE members. The chance to reclaim conference rooms from auditors alone should lead to widespread celebration. The real plus is the reduction in fees for NASD member firms, which will receive a holiday gift of $35,000 and a reduction in annual fees for the next five years.

What is the incentive to combine enforcement functions? The two firms say they will not reduce staffing levels, but there will likely be some savings by eliminating duplicative activities. Mostly we believe the two organizations are looking to focus energies and financial resources on revenue producing listings. U.S. exchanges have become less competitive in the last few years, largely as the result of increased regulatory oversight and corporate reporting requirements. The NYSE has also made plans to enter into a
merger of equals with Euronext, N.V.

What are the implications for small cap companies? There is really nothing in particular that holds promise or peril for smaller public companies. However, we note that a streamlining of regulatory mechanisms and the reduction in fees will be particularly beneficial for regional broker dealers. These firms are often the first to be inspired by small cap investment opportunities. If regional broker dealers find it easier and more economical to function, we expect the savings in time and financial resources to be directed toward new business.

Of course, there is much to be worked out. The deal has to be approved by the SEC as well as NASD members. We expect to hear more about the character of the new regulatory entity as the NASD goes out to promote the idea with members. A
schedule of member meetings has already been set.

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