September 8, 2006
OFFICE OF THE INDUSTRY'S ADVOCATE
a proposal by Bill Singer
The NASD should create an Office of the Industry's Advocate (OIA), which would be charged with advocating the interests of both NASD members and registered persons. I have advocated this concept for nearly a decade, as reported in the press and set forth in a number of articles I have authored.
For a reference point, please consider the role of the National Taxpayer Advocate (NTA), who is appointed pursuant to federal statute by the Secretary of the Treasury and reports to the Commissioner of the Internal Revenue Commission. I would specifically refer you to https://www.irs.gov/pub/tas/ntatestimonysfctax_gap072606.pdf, which is the July 26, 2006, Senate testimony of NTA Nina E. Olson.
NTA Olson begins her testimony (written statement) by noting four reasons that compel the IRS to enhance efforts at voluntary taxpayer compliance (rather than over-reliance upon enforcement):
1. Enforcement is best suited for willful violations and most taxpayers' errors are inadvertent;
2. Public policy prefers voluntary compliance rather than enforced;
3. IRS' limited resources are already strained by its current enforcement agenda; and
4. "harsh enforcement measures against inadvertently noncompliant taxpayers may increase distrust of the IRS and create deliberate noncompliance."
As NTA Olson's testimony demonstrates, the NASD's problems are not unique; likely all regulatory organizations experience tension within the dynamic between regulator and regulated. OIA should not be viewed as a Trojan Horse ominously standing outside the NASD's gates. To the contrary, if properly implemented and utilized, OIA would reduce (if not eliminate) much of the trench warfare that has characterized the past decade's relationship between the NASD and its industry critics.
As I envision the OIA, it would have a national office in New York City --- to underscore its roots in the "business" rather than in the "regulation" of the NASD community. This separation of offices from NASD/Washington would stress the OIA's independence from the regulatory-side of the SRO. The Director of the OIA (DOIA) would have observer status on the NASD Board. The OIA would issue an annual report card on each district and various NASD divisions, and would issue an annual report on regulator/regulated relations and issues.
There would be an annual election at each district for a District Industry Advocate (DIA), who would serve as a local contact for the receipt of industry complaints and suggestions. The DIA would use his or her knowledge of the district to mediate staff/member disputes and suggest improved policies and procedures. For those matters not amenable to a district-level resolution, the file would be transmitted to the DOIA.
OIA should also be used as NASD's "referee" for purposes of ruling on scheduling disputes during investigations, examinations, and OTRs. Pointedly, I am not suggesting inappropriate interference with "regulatory" prerogatives but would limit such OIA rulings to purely procedural issues such as the disputed timing of production or the disputed selection of the location/date/time of OTRs. Hearing disputes should remain within the province of the Office of Hearing Officers.
Why does NASD need an OIA? First and foremost, the NASD's role has dramatically changed since the 1930s when the idea of a self-regulator was developed and implemented. Frankly, NASD is no longer a "self" regulator in the sense that Wall Street regulates the securities industry. To the contrary, NASD has subtly transitioned into what is more properly termed a "private-sector regulator" in that far more diverse interest groups than a national association of over-the-counter securities dealers are involved in regulating the conduct of the association's members and associated persons. A fortunate consequence of that expanded constituency is that NASD now champions the interests of public investors, public companies, registered investment advisers, broker-dealers, registered persons, investment companies, etc.
An unfortunate consequence of that same expanded constituency, is that NASD has become less sensitive to the needs of its members and their associated persons. The most unfortunate consequence of NASD's new role is that an entrenched bureaucracy of regulators (often without significant industry experience) tends to dictate rules and agendas, whereas such prerogatives were once shared with the regulated.
Wish as it might, the securities industry cannot turn back the clock and other marketplace participants will simply not stand for such a reactionary move. As such, it is necessary to accept that NASD is no longer a partner in the self-regulatory process but now an outside regulator - and reports of plans to merge with the New York Stock Exchange's regulatory arm only underscore the ongoing nature of that transformation. Consequently, the industry desperately needs to have some spokesperson at NASD in the form of OIA, which will monitor proposed rules, consider complaints of Staff misconduct, and ensure that a zealous advocate is always arguing for fair and reasonable regulation and enforcement.