NYSE, NASD are warned on merger

A merger of regulatory operations for the New York Stock Exchange and the NASD can proceed only if most members on the combined governing board are independent of the industry, Securities and Exchange Commissioner Annette Nazareth said Thursday.

“The commission is keenly interested in having effective board governance and having independent board directors,” Nazareth said in an interview.

The SEC has the authority to reshape the industry’s self-regulatory groups, she added, without saying whether the agency will do so.

The NASD, formerly the National Assn. of Securities Dealers, is asking member firms this month to approve new bylaws to allow a merger with the NYSE’s regulatory arm. The plan, which calls for a majority of governors to come from outside the industry, is opposed by a group of small brokerages concerned that it may unfairly diminish their clout.

If NASD members reject the merger, the SEC may dictate changes that are less desirable to members than the current proposal, NASD executives said.

Leaders of the dissident group, the Financial Industry Assn., questioned whether the SEC would really force a merger if brokerages objected.

“If they could just come in and do this anyway, why don’t they just do it?” John Busacca, a member of the group, said last week.

The group wants the NASD to protect brokers’ ability to elect a majority of board members.

The NASD and the NYSE are pushing the merger because they say it will eliminate regulatory duplication, cutting compliance costs.

The NASD has promised brokers a payment of $35,000 to reflect the reduced costs. Busacca said the payment to brokers should be $100,000. The payment can’t be increased because of tax reasons, the NASD said.