Securities Guard
When Mary L. Schapiro took the helm of the newly formed NASD Regulation in 1996, she had already proved herself to be a tough and dedicated regulator during stints at the Securities and Exchange Commission and as chairwoman of the Commodities Futures Trading Commission.
Although one critic has dubbed her “Make My Day Mary,” her approach hasn’t been shoot first and ask questions later. Under her watch, the National Assn. of Securities Dealers’ self-regulatory unit has boosted staff, made it easier for investors to know the true price of stocks, toughened the testing requirements for member broker/dealers and increased the amount of continuing education broker/dealers must complete.
At NASD Regulation’s fall securities conference in November she stressed self-regulation as one of the most important ways to win investor trust.
Schapiro will be the featured speaker at Sunday afternoon’s general session (1 to 2:15 p.m.) of The Times’ Investment Strategies Conference. She was interviewed by phone from her Washington office.
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Times: What do you see as the current regulatory hot zones?
Schapiro: The two that jump to mind are the Internet and the micro-cap market.
Times: With the growth of small caps over the last decade, has the market started to outgrow the ability to be regulated?
Schapiro: As a general matter, regulating isn’t easy for a lot of reasons, and one of them is the fact that the markets have grown so dramatically. But I think that we have taken a number of steps in the last year, particularly in the last few months with respect to the micro-cap market and in particular the over-the-counter bulletin board, that will really make a big difference.
I think we’ll be able to keep up, but that’s not to say there won’t still be problems. There’s a high level of concern, for sure, on the part of all the regulators about this market and a high level of attention to it.
Times: Has the bulletin board reached the point where it needs a major overhaul?
Schapiro: I think it does need a major overhaul, and I think that’s what we have proposed in the past couple of months. We certainly haven’t reached a point where we’re going to throw up our hands and say: “Oh it’s just too hard to regulate all this. Buyer beware and we’re out of here.”
Times: So the NASD isn’t going to cut the bulletin board loose in any way?
Schapiro: No. What we’ve proposed is a rule, which the SEC will have to consider, to require that only publicly reported companies, either reporting their financial information publicly to the SEC or to a banking or insurance regulator, can be on the bulletin board. Any other company would have to be relegated to the pink-sheet market. That’s a dramatic change to the bulletin board, publicly reporting companies only.
There are two others. One would require that before a broker makes a recommendation to a customer to buy an over-the-counter stock--and that’s any over-the-counter stock, bulletin board or pink sheet--the broker must have reviewed current financial information.
The third piece is that we’re going to require that investors be given a standard brochure or explanatory piece that describes the differences between the bulletin board market and the over-the-counter market and the Nasdaq market or a listed market, so the public does understand that there aren’t listing standards and there are not the same kind of automated surveillance and some of the regulatory features that we have in the listed and Nasdaq markets available on the bulletin boards.
Times: You’ve said in the past that technology is the challenge and the solution. Given the problems with member firms that the SEC cited before your arrival and the general fear of Internet-based fraud, what do you tell investors to allay their suspicions that technology will only make it easier for them to be defrauded?
Schapiro: Technology makes markets like the Nasdaq far more efficient; provides, under the new order-handling rules, far greater opportunity for investors to participate in the marketplace; and provides them with tremendous liquidity. And the technology also, via the Internet and other mechanisms, gives investors access to high-quality information that they’ve never had before--that institutions have had but investors have never had--and those are two just tremendous benefits.
The problems with technology, on the other side, are really that to the extent somebody sets out to defraud the public--generally 10 years ago, they did it through mass-mailings or aggressive cold-calling--obviously e-mail and the Internet make that easier and much less expensive to do. But the same rules really apply for investors, whether we’re talking about fraud via a technological means or via the printed word. And that is [that] you cannot check your common sense just because you’re looking at a computer screen instead of getting an aggressive sales call at 8 o’clock at night.
Times: The relative anonymity of the Net makes fraud and manipulation easier--potential investors can’t be certain who is making a recommendation or claim. Do you think that Internet sites on which stocks are discussed should be required by law to institute real-name policies for participants?
Schapiro: I doubt that such a law would be effective. I’m not sure such a law would be constitutional. But you really hit on one of the big problems, and that is the anonymity of the Internet and the ability to profess profound inside knowledge about a new product or a company and convince a lot of other people of that, [which is what] makes it easier to defraud people.
We have in development--it should be ready this year--an interesting new surveillance tool, an Internet search engine that will patrol the chat rooms . . . to see what companies are being talked about and sort of give us a reading on the level of conversation and messaging about particular companies. Our analysts will get alerts every day that tell them that certain companies are being discussed a certain amount of time, and we’ll have the ability much earlier in the process to take a look at what’s going on and hopefully be able to alert the investing public that maybe something is brewing here.
It’s also going to alert us any time a Web site is created or a home page is created for a new company that’s offering stock or anything like that, so we can look at those very, very quickly.
Times: Arthur Levitt talks frequently about investor education as one way to cut down on fraud. Being on the self-regulatory side, do you think there needs to be more continuing education for brokers, and how much more?
Schapiro: Last month we shortened the cycle for continuing education--we went from two years, five years, 10 years after you became a broker, and now we’ve gone to two years, then [every] three years thereafter. We shortened that cycle because we do believe continuing education is an important foundation for good sales practices.
We’ve also added two new exams. For brokers to be qualified to trade government securities, there’s an exam they have to take now, and to be a market maker there’s an exam now. It has a firm element, that the firm designs, which focuses on its particular product lines and niches.
Times: During your speech at NASD’s fall securities conference you spoke about the trends of globalization and consolidation. What specific regulatory concerns do you have about that?
Schapiro: Globalization presents enormous challenges for regulators because, by our nature, we are very focused on our own domestic market and, by their nature, investors tend to be much more global in their perspectives, particularly large investors. And, of course, the entities that we regulate . . . are very, very much multinational companies now. As a regulator, you have a fear that you’re only seeing a very small piece of what you really need to be seeing in order to do an effective job. I think we need to do more in terms of working with foreign regulators and self-regulators on two fronts. One is we don’t want to impede cross-border business, so we need to ensure that we are not standing in the way of firms operating on a global basis. But at the same time, we need to make sure we have access to information from each other as regulators to ensure that if a problem develops in one part of the world, it’s not transmitted throughout the entire financial system, and that’s a real challenge.
Times: Do you see the emergence of a true global market where everybody can buy the same kind of stock issues worldwide and therefore there needs to be some kind of treaty to deal with that?
Schapiro: I think we will see a truly global market. I don’t think there’s any doubt about that, and if you look at what’s happened in the past 10 years, we’ve seen enormous strides in that direction. I think regulators are going to play catch-up for quite a while in this area. Regulators have done a pretty good job of developing memoranda of understanding on information-sharing, and I think those work reasonably well. But they don’t really address the concepts of a global regulatory structure, and that, I think, is a much more difficult issue, and I don’t know that we’ll ever necessarily achieve a truly global regulatory structure.
Times: A recent report from the U.S. Commission on Civil Rights paints a bleak picture of minority hiring at brokerages. Do you see a role for the NASDR in improving this?
Schapiro: Yes. And I don’t know how we’ll define that role going forward. But I think at a minimum our role is to use the bully pulpit as a visible regulatory organization, one that I will say has not done everything it can do with respect to minority hiring, although it is doing a better job all the time and it is a high priority for us to achieve diversity, not only in our own hiring, but in our committee structure, which is how the industry really helps support the self-regulatory functions. It’s an active subject for discussion here at the moment.
Times: What is the one precaution you wish every investor would take when picking a broker?
Schapiro: The key thing to do is to call or e-mail the NASDR public disclosure hot line and get the disciplinary history of the broker before making the decision to entrust that person with your hard-earned money. Armed with that information, I would go further. I would talk to other people about the broker, ask the broker for some references, talk to other clients of the broker and make sure you’re perfectly comfortable.
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Information for Investors
Investors who want to check the disciplinary history of a broker or firm can do so by calling NASD Regulation’s Public Disclosure hot line at (800) 289-9999. A printout is free to individual investors and is sent by fax or mail. Requests also may be made via e-mail by filling out a form at NASDR’s Web site. Follow the directions at:
https://www.nasdr.com/2000.htm
General investor information is available by phone from NASDR at (301) 590-6500. Both the National Assn. of Securities Dealers and NASDR provide extensive information for investors at their Web sites:
https://www.nasdr.com/2500.htm
https://www.nasd.com/is_foyer.html
Regulatory Agencies
Securities and Exchange Commission
Office of Investor Education and Assistance
(800) SEC-0330
(202) 942-7040
TTD: (202) 942-7065
Commodity Futures Trading Commission
3 Lafayette Centre
1155 21st St. NW
Washington, DC 20581
Phone: (202) 418-5000
Fax: (202) 418-5525
Other Regulatory Organizations
North American Securities Administrators Assn. Inc.
1 Massachusetts Ave. NW
Suite 310
Washington, DC 20001
(202) 737-0900
National Assn. of Securities Dealers Inc.
1735 K St. NW
Washington, DC 20006-1500
(202) 728-8000
NASD Regulation
1735 K St. NW
Washington, DC 20006-1500
(202) 728-8000
Stock Markets, Exchanges
American Stock Exchange
86 Trinity Place, 7th Floor
New York, NY 10006-1881
(212) 306-1442
Chicago Board Options Exchange
400 S. LaSalle St.
Chicago, IL 60605
(312) 786-7056
Nasdaq Stock Market
National Assn. of Securities Dealers Inc.
1735 K St. NW
Washington, DC 20006-1500
(301) 590-6500
New York Stock Exchange
20 Broad St., 23rd Floor
New York, NY 10005
(212) 656-5530
Pacific Exchange Inc.
115 Sansome St., 2nd Floor
San Francisco, CA 94104
(415) 393-4000
