The New York Times (November 28, 2006) — The New York Stock Exchange and NASD announced plans on Tuesday to merge their regulatory organizations and eliminate duplicative and inconsistent rules, granting Wall Street firms a longstanding wish.

The proposed merger, announced at a news conference with Christopher Cox, chairman of the Securities and Exchange Commission, could result in significant cost savings to Wall Street’s largest firms. About 200 firms have been subject to the regulatory oversight of both the Big Board and NASD.

NASD also announced that once the merger was completed, it would pass on its cost-savings by making a one-time payment of $35,000 to each of its 5,100 members, and that it would reduce the annual assessment that members were charged for each of the next five years.

“This is a significant step forward for America’s investors and for our nation’s capital markets,” Mr. Cox said. “Eliminating overlapping regulation, establishing a uniform set of rules, and placing oversight responsibility in a single organization will enhance investor protection while increasing competitiveness in our markets.” But lawyers representing investors in arbitration cases against the firms criticized the proposed merger, saying it would deprive their clients of the choice between the two institutions’ different arbitration programs. The arbitration programs at the New York Stock Exchange and NASD vary in selecting and training arbitrators; depending on the circumstances, this could make a difference to investors, some lawyers said.

“The elimination of a choice of forum is anti-investor, and the decision to grant a monopoly for arbitration makes this intellectually dishonest,” said Steven B. Caruso, a New York lawyer who is president of the Public Investors Arbitration Bar Association, a group of about 600 lawyers specializing in representing investors. “Over all, while it’s nice to see that the consolidation will result in a Christmas bonus of $35,000 to the firms, I don’t see a single thing in this merger that will benefit investors.”

The two self-regulatory organizations, which are supervised by the S.E.C., are the largest enforcement agencies on Wall Street. Both organizations have undergone significant upheaval and revamping in the last decade in response to scandals that raised questions about their independence and effectiveness.

For years, major Wall Street firms subject to oversight by both NASD and the New York Stock Exchange have sought a consolidation to reduce costs and lessen oversight. While there were occasional discussions between the two markets, nothing happened, primarily because senior officials at both markets — including a former chairman of the Big Board, Richard A. Grasso — were protective of their turf. But earlier this year, amid efforts to make the different rules of the markets more compatible, talks to merge the two organizations began to take off, people involved in the discussions recalled.

Like most deals, the merger of the two agencies was largely made possible because of the cooperative personalities of the major players, those involved in the talks said.

Mary L. Schapiro, who earlier this year became the new head of NASD, was more amenable to fashioning a deal to the New York Exchange’s liking than her predecessor, Robert R. Glauber. She also had a history of working closely with Richard G. Ketchum, the head of NYSE Regulation, going back to their days together at the S.E.C. in the 1990s. Mr. Ketchum led the market regulation division of the S.E.C. while Ms. Schapiro was a commissioner.

The final deal was brokered through the major assistance of Annette L. Nazareth, an S.E.C. commissioner who once led its market regulation office, and Frank G. Zarb, the former chairman of NASD and a major presence on Wall Street and in Washington for much of his career. Both Ms. Schapiro and Mr. Ketchum had worked for Mr. Zarb at NASD.

Under the proposal, the regulatory arm of the New York Stock Exchange will continue to oversee market surveillance and compliance for companies listed on that exchange. NASD will be responsible for regulatory oversight of securities firms, arbitration and the training and licensing of brokers and dealers.

Senior officials at the two regulatory agencies said that they had no plans to reduce the size of the 2,400 NASD operation or the 470 staff officials in the regulatory group of the New York Stock Exchange, but expected that some unspecified reductions would occur through attrition. They emphasized the cost savings would be to the brokers and dealers who are regulated, not the regulatory bodies themselves. The shareholders of the NYSE Group, which is publicly traded, are not expected to see any direct financial benefit from the deal, the Big Board said.

The new regulatory organization, which has yet to be named, will be led by senior executives of the merged entities and overseen by a 23-member board of governors for a three-year transition period. (During the transition, a permanent governing structure will be drafted).

Ms. Schapiro, NASD chairman and chief executive, will become the chief executive of the new entity. Mr. Ketchum, the chief executive of NYSE Regulation, will serve as nonexecutive chairman during the transition. The merger is expected to be completed in the second quarter of 2007. It requires the approval of the members of NASD and the S.E.C.