Increased Competition Has Heightened Some Market Participants’ Concerns about Conflicts of Interest

Nasdaq increasingly has been in competition with NASD members that operate as ECNs, while NYSE has competed for many years with members that trade its listed securities off of the exchange. This competition has heightened some SRO members’ concerns that an SRO could abuse its regulatory authority through rule-making processes, disciplinary actions, or use of proprietary information. In addition, some broker-dealers with multiple SRO memberships said that examinations by multiple SROs were unnecessarily burdensome. Some Broker-Dealers Were Concerned about Inefficiencies Associated with Differing Rules and Interpretations

According to both market participants and regulators, SROs generally had the same or similar rules. While no formal process exists for addressing differences among SRO rules and interpretations that might cause material regulatory inefficiencies, SEC, NASDR, and NYSE officials told us that they have found the existing rule review and public comment process to be effective for addressing concerns about rules. SEC officials said that the agency did not plan to dictate changes in the current structure to address these concerns but instead preferred that market participants reach a consensus on whether a need for change existed and, if so, the type of change that would be appropriate. However, this alternative would not address the regulatory inefficiencies that result from broker-dealers having multiple SRO memberships. Conclusions

As competition continues to drive the evolution of the securities markets, concerns about the conflicts of interest inherent in the current self- regulatory structure have grown in importance. For example, differences in rules and their interpretations have been used to justify the need for multiple examinations. Appendix I: Comments from the Securities and Exchange Commission

Appendix II: Comments from the National Association of Securities Dealers

Appendix III: Comments from Nasdaq

Appendix IV: Comments from the Securities Industry Association
What GAO Found

In the securities markets, competition among self-regulatory organizations (SRO) and their members for customer orders has heightened concerns about conflicts of interest in their roles as both market operators and regulators. Nasdaq--the market run by the National Association of Securities Dealers (NASD)--has been in competition with NASD members that run electronic communications networks. For years, the New York Stock Exchange (NYSE) has faced competition from members that trade NYSE-listed securities off of the exchange. Greater competition has generated concern that an SRO might abuse its regulatory authority--for example, by imposing rules or disciplinary actions that are unfair to the competitors it regulates. Some broker-dealers subject to the jurisdiction of multiple SROs also are concerned that differences among SRO rules and rule interpretations have caused inefficiencies in the use of broker-dealers' compliance resources. No formal process exists, however, for addressing rule differences that might cause material inefficiencies in the regulatory process. The law does not require SRO rules to be the same, and many differences exist for legitimate business reasons according to regulators. Broker-dealers with multiple SRO memberships said that examinations by multiple SROs were unnecessarily burdensome. Securities market participants have discussed alternatives that would address concerns about conflicts of interest and inefficiencies in the current self-regulatory structure. Securities and Exchange Commission officials said that they had no plans to change the current structure, preferring to let the industry reach a consensus on the need for appropriate change.