Securities and Exchange Commission Historical Society

The Institution of Experience: Self-Regulatory Organizations in the Securities Industry, 1792-2010

A Quiet Revolution

NASD Growth and Differentiation

For the NASD, recently emerged from its own crisis, 2000 to 2005 were years of steady growth and deliberate differentiation as it sought to realize plans made at the beginning of the decade. The NASD's two markets—Nasdaq and the AMEX—were to be spun off as for-profits while the NASD itself would go forward to fulfill the mission now defined as "self regulation and market integrity."106

In some respects, the NASD's commitment to focus solely on member and member firm regulation was a return to the model of the late 1930s, a model that the launching of Nasdaq had overturned. But experience in the intervening years had indicated that if an industry organization might still effectively regulate its members, industry insiders probably could not. In accordance with its 1996 settlement with the SEC, the NASD was now governed by a board with a majority of independent members. In matters of enforcement, staff—rather than industry committees—decided which disciplinary actions went forward, and professional hearing officers deliberated on those that did, with appeals to a National Adjudicatory Council (NAC) composed of industry and non-industry members, with industry members constituting no more than half.107

An even greater philosophical departure was the idea that an SRO could effectively conduct floor surveillance for an unaffiliated exchange. In 2001, Nasdaq contracted with the NASD for market surveillance services. That first customer might have been predicted, but the NASD soon picked up other exchanges, thus testing the concept of an independent industry regulator of both members and markets. The NASD even began regulating futures markets, contracting with the London International Financial Futures and Options Exchange and the International Securities Exchange in 2001.108

The SEC had put strict qualifications on the Nasdaq spinoff, so the transaction occurred in a number of stages over several years. But by 2002, the NASD and Nasdaq had become operationally separate and Nasdaq was running as a for-profit entity. Two years later, the AMEX was fully divested, and in 2006, the spinoff of Nasdaq was finally completed. The Nasdaq then received SEC approval for its registration as a national stock exchange. With these changes, the NASD was free, wrote CEO Robert Glauber, "from the conflicts and politics that arise from owning and regulating for-profit exchanges."109

With demutualization, the old tenet of the membership organization as self-regulator had already fallen. Now the tradition of the market operator as self-regulator seemed to have passed as well.

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(106.) 2000 NASD Annual Report

(107.) 2001 NASD Annual Report; 2002 NASD Annual Report

(108.) 2001 NASD Annual Report

(109.) 2005 NASD Annual Report

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image pdf (Courtesy FINRA)
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