An Armistice at NASD --- for now

January 17, 2006

We are in the midst of an historic contested election between a slate of NASD Board candidates nominated by the NASD's National Nominating Committee and a slate of Dissident candidates who garnered petitions from more than 10% of the NASD's member firms. It is a dramatic moment in the history of Wall Street's self regulatory process. It is as close to civil war as an industry can be.

Why have we reached this point?

I think there are several reasons. The seeds of Wall Street's self-regulatory organization scheme were planted in the late 1930s in legislation that essentially thought the brokerage industry could regulate itself. At the time, a noble idea --- if not one that made some sense.

But the securities industry at the dawn of World War II is not remotely similar to the sector now before us. In the ensuing years we have welcomed television, computers, the Internet, nuclear power, jet flight, and so many other amazing developments that the age of the creation of self-regulation now seems quaint. While age does not necessarily impose obsolescence upon all things, in this case the clock has taken a noticeably negative toll.

Moreover, virtually everyworking man and woman now has some ownership of stock --- be it through a mutual fund, online trading, or a retirement plan. The inner sanctums of the floors of the stock exchanges are less remote than decades before. Today, we all feel Wall Street's pain. Which is why the concept of self-regulation is now a bit outdated. Wall Street is no longer about the business regulating the business. Now it's about rules and regulations that impact all of our savings and retirement dollars. Wall Street sneezes and we all get a cold.

In the 1970s an upstart idea took shape in the form of an electronic "exchange" . . . NASDAQ. Under the guidance of Gordon Macklin, NASDAQ/NASD rose to become a bona fide challenger to the dominance of the New York Stock Exchange. What started as a bunch of market makers on telephones quoting stocks, mushroomed into a growing behemoth. This amazing march was started by a group of upstart traders who thought there was a better way to trade stocks than standing at a specialist's post all day. They were laughed at. To their credit they stuck with it. And the market is all that much better for the vibrant competition they brought to it.

Subsequently, under the leadership of Frank Zarb, NASDAQ/NASD dropped the challenger's role and became an alternative to NYSE --- pound for pound, in the ring, the two markets were able to go round after round, as the action see-sawed. Zarb's political finesse and his ability to create consensus served him and his organization well. It rose to dizzying heights. We should also remember that during the Zarb regime, the Department of Justice investigated NASDAQ for essentially price fixing the quoted market, and the SEC slammed the NASD/NASDAQ for failing to ensure impartial regulation. Despite those two body blows, Zarb maneuvered his organization through the dangerous reefs and into calmer seas and some safety.

However, as the NASDAQ/NASD and NYSE fought it out for your investment dollars, the regulatory integrity of both markets suffered. Regulation became politicized. Regulations was as apt to be marked by the cop looking away from misconduct, as it was by that same cop condoning misconduct. Major firms used the self-regulators to attack and contain their smaller competitors. Management at the regulators misused their offices to serve partisan agendas of powerful industry cliques. In the end, all the players suffered.

Unfortunately, in an effort to address some of the historic and contemporary imbalances in its agenda, NASD brought in Robert Glauber as its chief executive --- a decision I sincerely believe was the wrong one, at the wrong time. I am no fan of the Glauber regime. I believe it has been marked by a growing distance between the regulator and the regulated. I believe it has further divided the membership between large and small firms. I believe it has exacerbated industry conditions to the point that it gave birth to the vibrant dissident movement that has swept the country. I have no doubt that Robert Glauber was a sincere academic and civil servant prior to arriving at NASD. I just do not believe he was able to adjust his style to the needs --- the desperate needs --- of the membership.

All of the above has conspired to bring us to the sad state of affairs where we now are; essentially, in a war between many competing factions within the NASD community. I believe that the dire prognosis of this situation forced the NASD Board to recently announce that Robert Glauber would be replaced in December 2006 by Mary Schapiro. As with the predictions of pundits about Iraq, let's just say that folks aren't exactly filling Wall Street with joy over the announcement.

And that is a mistake!

Lest there be any doubt --- I am a HUGE fan of Mary Schapiro and I enjoy what I would uncharacteristically describe as a cordial professional relationship with her. I am encouraged that Schapiro will make meaningful efforts to mend fences with the dissident community. I believe that Schapiro has watched both Zarb and Glauber closely, and realizes that Zarb's political finesse ultimately served him far better than Glauber's academic/bureaucratic distance.

Accordingly, I have urged the NASD dissident community, for which I have served as pro bono legal counsel for many years, to avoid any press attacks against Schapiro and give me a chance during the upcoming months to try to cultivate a working relationship between her and the dissident movement. Some have called this my attempt to broker a ceasefire. So be it.

As many of my dissident colleagues will likely attest to, I have a reputation for being a "maverick" and am not a shrinking violet when it comes to confrontation. Accordingly, if I am espousing a step-down from hostilities as it relates to the proposed Schapiro regime, that is a marked divergence from my pattern and practice of dealing with NASD --- and that is a noteworthy change. There's an old line of Nietzche's that warns that when we go hunting for monsters, we have to be careful that we too don't become one. I think that is a fair concern at this juncture. The dissident movement must be careful not become so strident and unreasonable that it become indistinguishable from the same failures that we see at NASD and NYSE.

I can't promise that Schapiro will prove better than what we presently have, but I believe that she is going to make an attempt to address many of our historic and current criticisms. I respect and trust her, and that's not something I often say about any regulator --- and she's earned that from me. Let's give her a chance. Frankly, she deserves it.

So, let the current contested election run its course. We'll see in a few weeks whether any of the dissident candidates overcame the long odds and prevailed. More to the point, we'll see if change is in the air at NASD.

The arms are stacked. But the troops are still on the field. Frankly, I think Schapiro is exactly what we need. Hopefully, we'll all start talking to each other and start resolving the disputes between and among us. My, wouldn't that be nice for a change? Wall Street pulls itself together and channels all its creative genius to setting things right.