Securities Markets: Competition and Multiple Regulators Heighten 
Concerns about Self-Regulation (03-MAY-02, GAO-02-362). 	 
                                                                 
Increased competition among securities self-regulatory		 
organizations (SRO) and their members for customer orders has	 
heightened concerns about the conflicts of interest inherent in  
their roles as both market operators and regulators. Nasdaq--The 
market operated by the National Association of Securities Dealers
(NASD), Nasdaq--has been in competition with NASD members that	 
operate electronic communications networks. The New York Stock	 
Exchange (NYSE) faced competition for many years from members	 
that trade NYSE-listed securities off of the exchange. Heightened
competitive 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 were also concerned that differences among SRO	 
rules and rule interpretations 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. According to  
regulators, the law does not require SRO rules to be the same,	 
and many differences exist for legitimate business reasons.	 
Broker-dealers with multiple SRO memberships also said that	 
examinations by multiple SROs were unnecessarily burdensome.	 
Securities market participants have discussed alternatives that  
would address, at least in part, concerns about conflicts of	 
interest and inefficiencies in the current self-regulatory	 
structure. Securities and Exchange Commission officials said that
the agency did not plan to dictate changes in the current	 
structure, preferring to let the industry reach a consensus on	 
the need for appropriate change.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-362 					        
    ACCNO:   A03211						        
  TITLE:     Securities Markets: Competition and Multiple Regulators  
Heighten Concerns about Self-Regulation 			 
     DATE:   05/03/2002 
  SUBJECT:   Brokerage industry 				 
	     Competition					 
	     Conflict of interests				 
	     Securities regulation				 
	     Self-regulatory organizations			 
	     Stock exchanges					 


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GAO-02-362
     
Report to Congressional Committees

United States General Accounting Office

GAO

May 2002 SECURITIES MARKETS

Competition and Multiple Regulators Heighten Concerns about Self- Regulation

GAO- 02- 362

Page i GAO- 02- 362 Securities Markets Self- Regulation Letter 1

Results in Brief 1 Background 3 Increased Competition Has Heightened Some
Market Participants?

Concerns about Conflicts of Interest 5 Some Broker- Dealers Were Concerned
about Rule Differences and

Multiple Examinations 17 Market Participants Have Discussed Alternative
Approaches to

Self- Regulation 24 Conclusions 29 Recommendations 30 SEC, SRO, and Industry
Comments and Our Evaluation 30 Scope and Methodology 32

Appendix I Comments from the Securities and Exchange Commission 36

Appendix II Comments from the National Association of Securities Dealers 38

Appendix III Comments from Nasdaq 41

Appendix IV Comments from the Securities Industry Association 46 Contents

Page ii GAO- 02- 362 Securities Markets Self- Regulation Abbreviations

DEA designated examining authority ECN electronic communications network MOU
memorandum of understanding NASD National Association of Securities Dealers
NASDR National Association of Securities Dealers Regulation NYSE New York
Stock Exchange SEC Securities and Exchange Commission SIA Securities
Industry Association SRO self- regulatory organization

Page 1 GAO- 02- 362 Securities Markets Self- Regulation

May 3, 2002 Congressional Committees As competition among markets has
increased, so have some market participants? concerns about the inherent
conflicts of interest that securities self- regulatory organizations (SRO) 1
face in their dual roles as market operators and regulators. One response to
increased competition- demutualization, or the conversion of SROs from
memberowned organizations to shareholder- owned corporations- has raised
questions about potential effects on conflicts of interests, particularly in
for- profit entities. Additionally, broker- dealers 2 that are members of
the two largest SROs, the National Association of Securities Dealers (NASD)
and the New York Stock Exchange (NYSE), have continued to raise questions
about the efficiency of SROs? rules and examinations.

Focusing on the issues market participants have identified, this report
describes how the Securities and Exchange Commission (SEC), NASD, and NYSE
have been addressing concerns about (1) the impact of increased competition,
including demutualization, on the ability of SROs to effectively regulate
members with which they compete and (2) possible regulatory inefficiencies
associated with broker- dealer membership in multiple SROs. In addition, the
report describes alternative approaches that some securities market
participants have discussed as a means of addressing concerns about the
current self- regulatory structure.

Increased competition among SROs and their members for customer orders has
heightened some members? concerns about the conflicts of interest inherent
in the roles of SROs as both market operators and regulators. Nasdaq- the
market currently operated by NASD- increasingly has been in competition with
NASD members that operate

1 SROs have an extensive role in regulating the U. S. securities markets,
including ensuring that members comply with federal securities laws and SRO
rules. SROs include all the registered U. S. securities exchanges and
clearing houses, the National Association of Securities Dealers, and the
Municipal Securities Rulemaking Board.

2 Broker- dealers are individuals or firms that buy and sell securities for
customers or for themselves.

United States General Accounting Office Washington, DC 20548

Results in Brief

Page 2 GAO- 02- 362 Securities Markets Self- Regulation

electronic communications networks (ECN). 3 NYSE has faced competition for
many years from members that trade NYSE- listed securities off of the
exchange. Heightened competitive pressures have 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. Market
participants? views differed on whether demutualization will heighten the
potential for such abuses. Despite SRO and SEC measures that are intended to
address potential abuses of regulatory authority, these concerns persist.

Some broker- dealers that were subject to the jurisdiction of multiple SROs
were also concerned about inefficiencies associated with SRO rules and
examinations. The broker- dealers were concerned that differences among SRO
rules and rule interpretations 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. According to regulators, the law does not require SRO
rules to be the same, and many differences exist for legitimate business
reasons. Broker- dealers with multiple SRO memberships also said that
examinations by multiple SROs were unnecessarily burdensome. Efforts to
improve examination coordination have not fully addressed their concerns,
although such efforts continue.

Securities market participants have discussed alternatives that would
address, at least in part, concerns about conflicts of interest and
inefficiencies in the current self- regulatory structure. SEC officials said
that the agency did not plan to dictate changes in the current structure,
preferring to let the industry reach a consensus on the need for change and
the type of change that is appropriate. Additionally, they said that
industry initiatives, such as Nasdaq?s application to register as an
exchange, were transforming the regulatory landscape. In the meantime, SEC
officials said that because the current self- regulatory structure had been
working adequately, immediate action was not needed. Alternatives that have
been discussed include having ECNs work within the current regulatory
structure by registering as exchanges and thereby becoming SROs, as well as
making more dramatic changes to the regulatory structure, such as
consolidating self- regulation in a single entity not

3 ECNs are electronic trading systems that automatically execute matching
buy and sell orders. They are a type of alternative trading system- an
automated market in which orders are centralized, displayed, matched, and
otherwise executed.

Page 3 GAO- 02- 362 Securities Markets Self- Regulation

affiliated with any market. None of the alternatives involving changes to
the regulatory structure currently appears to have sufficient support from
market participants for implementation.

This report recommends that the SEC Chairman work with the SROs and broker-
dealer representatives to implement a formal process for systematically
identifying and addressing material regulatory inefficiencies caused by
differences in rules or rule interpretations among SROs and by multiple
examinations of broker- dealers. The report also recommends that, in doing
so, SEC explore with the SROs and broker- dealer representatives various
methods for obtaining comprehensive feedback from market participants,
including having a neutral party collect and assess market participants?
views.

We received comments on a draft of this report from SEC, NASD, Nasdaq, the
Securities Industry Association (SIA), 4 and an ECN. The respondents
generally agreed with the report?s conclusions and recommendations, however,
three respondents expressed additional concerns. The comments are discussed
in greater detail at the end of this letter, and the written comments are
reprinted as appendixes I through IV.

The federal regulatory structure of the U. S. securities markets was
established by the Securities Exchange Act of 1934 (the Exchange Act).
Congress also created SEC as an independent agency to oversee the securities
markets and their participants. Under the Exchange Act, the U. S. securities
markets are subject to a combination of industry selfregulation (with SEC
oversight) and direct SEC regulation. This regulatory scheme was intended to
give SROs responsibility for administering their ordinary affairs, including
most of the daily oversight of the securities markets and broker- dealers.

The Exchange Act provides for different types of SROs, including national
securities exchanges and national securities associations. Entities
operating as national securities exchanges or associations are required to
register as such with SEC. As of March 31, 2002, nine securities exchanges

4 SIA is a trade group that represents broker- dealers of taxable
securities. SIA lobbies for its members? interests in Congress and before
SEC and educates its members and the public about the securities industry.
Background

Page 4 GAO- 02- 362 Securities Markets Self- Regulation

were registered with SEC as national securities exchanges. 5 As of the same
date, NASD was the only registered national securities association; NASD
Regulation (NASDR) is its regulatory arm. Although it is the SRO, NASD
delegates to NASDR, its wholly owned subsidiary, SRO responsibilities for
surveilling trading on Nasdaq and the over- the- counter market and for
enforcing compliance by its members (and persons associated with its
members) with applicable laws and rules. Nasdaq also surveils trading on its
market and refers potential violations to NASDR and SEC for investigation.
While NASD is currently the parent company of Nasdaq, NASD is in the process
of selling Nasdaq.

Recognizing the inherent conflicts of interest that exist when SROs are both
market operators and regulators, the Exchange Act states that to be
registered as a national securities exchange or association, SEC must
determine that the exchange?s or association?s rules do not impose any
burden on competition and do not permit any unfair discrimination. 6 SROs
are also responsible for enforcing members? compliance with their rules and
with federal securities laws by conducting surveillance of trading in their
markets and examining the operations of member broker- dealers.

The Exchange Act also mandates that securities SROs operate under direct SEC
oversight and authorizes SEC to ensure that SROs do not abuse their
regulatory powers. 7 SEC inspects SROs to ensure that they are fulfilling
their SRO duties, focusing on, among other things, the quality of SRO
financial operations examination programs; market surveillance,
investigations, and disciplinary programs; and customer complaint review
programs. SEC also reviews rule changes proposed by SROs for consistency
with the Exchange Act and SEC rules. Finally, SEC provides direct regulation
of the markets and their participants in a number of ways, including direct
examinations of broker- dealers, investigations into

5 The exchanges were the American Stock Exchange, Boston Stock Exchange,
Chicago Board Options Exchange, Cincinnati Stock Exchange, Chicago Stock
Exchange, International Securities Exchange, NYSE, Philadelphia Stock
Exchange, and Pacific Exchange.

6 Sections 6( b) and 15A( b) of the Exchange Act set forth, respectively,
the standards that national securities exchanges and national securities
associations must meet. 7 Sections 6, 15A, and 19 of the Exchange Act
establish a statutory scheme for national securities exchanges and
associations that vests both types of entities with almost identical self-
regulatory responsibilities and imposes virtually the same oversight
requirements on SEC.

Page 5 GAO- 02- 362 Securities Markets Self- Regulation

markets and their participants, disciplinary actions for violations of the
Exchange Act, and promulgation of rules and regulations.

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. Market participants expect that demutualization will increase
the ability of exchanges and other markets to compete both domestically and
internationally, however, their views differ on how it might affect
potential abuses of regulatory authority related to conflicts of interest.
SEC generally concluded that it is too soon to predict the effects of
demutualization. Concerns about conflicts of interest persist despite
measures by SEC and the SROs that are intended to address them.

NASD?s dual roles as the owner- operator of Nasdaq and as the primary SRO
for the 11 ECNs 8 that compete with Nasdaq have created conflicts of
interest between NASD?s economic interests and regulatory responsibilities,
which NASD?s pending spin off of Nasdaq is intended to mitigate (discussed
further below). SEC regulations require ECNs, as registered broker- dealers,
to be members of at least one SRO. 9 According to an ECN official, the ECNs
chose NASD as their primary SRO because the unique trading rules as well as
other features of the Nasdaq market were conducive to the growth of the
ECNs? business.

ECNs are an alternative to the Nasdaq market for trading in Nasdaq stocks.
They differ from Nasdaq and registered exchanges principally in that they do
not require an intermediary to execute orders. ECNs match orders
electronically and anonymously, while Nasdaq broker- dealers, in

8 According to Nasdaq, as of March 25, 2002, the 11 ECNs were Archipelago,
Attain, BTrade, Brut, GlobeNet, Instinet, Island, MarketXT, NexTrade,
REDIBook, and Track ECN. In addition to these ECNs, other alternative
trading systems exist, such as the Portfolio System for Institutional
Trading, also known as POSIT.

9 Under SEC regulations, an ECN must be registered either as a broker-
dealer or as a national securities exchange that has the full regulatory
responsibilities of an SRO. 17 C. F. R. sect. 242.301 (2001). Increased

Competition Has Heightened Some Market Participants? Concerns about
Conflicts of Interest

Nasdaq?s and NYSE?s Competition with Members Creates Conflicts of Interest

Page 6 GAO- 02- 362 Securities Markets Self- Regulation

their roles as market makers, 10 act as intermediaries for all customer
orders. In deciding whether to use an ECN or a Nasdaq market maker,
customers consider such factors as execution quality, transaction costs, and
anonymity.

The number of ECNs and their share of total Nasdaq volume have grown
significantly since 1993. According to SEC, in 1993 all alternative trading
systems (including one ECN) 11 accounted for about 13 percent of the total
volume in Nasdaq securities. By October 2001, ECNs alone accounted for over
30 percent of the total volume in Nasdaq securities.

SEC and certain ECNs have attributed a significant part of the growth in the
volume of Nasdaq securities traded on ECNs to the SEC orderhandling rules 12
that SEC promulgated to enhance competition and pricing efficiency in the
securities markets. Before the rules became effective in 1997, only ECN
subscribers had access to the orders and, thus, to the prices that ECNs
displayed for Nasdaq securities. Implementation of the rules resulted in
ECNs? orders for Nasdaq securities being displayed and accessible to the
public on Nasdaq, thereby providing the public an opportunity to obtain any
better prices that might be available on ECNs. 13 According to one ECN, both
Nasdaq?s access to ECNs and the efficiencies that ECNs brought to the Nasdaq
market through the electronic matching of orders have contributed to the
overall growth of trading in Nasdaq securities.

NYSE, as an SRO that operates a market, has also confronted conflicts of
interest between its economic interests and its regulatory responsibilities.
Specifically, for many years the exchange has regulated competing member
broker- dealers that trade its listed stocks off of the exchange.

10 A market maker maintains a market in a security by standing ready to buy
or sell that security on a regular and continuous basis at publicly quoted
prices. 11 In 1993, SEC referred to automated screen- based trading systems
used by institutions and broker- dealers, including what are now called ECNs
and alternative trading systems, as proprietary trading systems. Of the
current ECNs, only Instinet existed at that time.

12 The order- handling rules are SEC Rule 11Ac1- 4 (the Display Rule) and
amendments to Rule 11Ac1- 1 (the Quote Rule). 13 In March 2000, SEC approved
a Nasdaq rule change that allows ECNs to connect to the Nasdaq automated
linkage for trading NYSE and American Stock Exchange- listed stocks, thereby
allowing public access to these markets that is similar to that available
for Nasdaq stocks.

Page 7 GAO- 02- 362 Securities Markets Self- Regulation

Customer orders for NYSE stocks that are not sent to the floor of the
exchange to be executed are executed internally by a broker- dealer or in an
alternative market. A broker- dealer internalizes an order when it executes
a customer order for a security in house or directs the order to an
affiliated dealer, instead of sending the order to an exchange or another
market. Numerous large broker- dealers that are NYSE members have also
established relationships with regional exchange specialists and sometimes
route their orders to them instead of to NYSE. In addition, member broker-
dealers direct orders to alternative markets, such as ECNs or third- market
broker- dealers. 14 Competition with member broker- dealers may increase
with the May 2000 rescission of NYSE Rule 390, which had restricted off-
exchange trading by NYSE members in NYSE- listed securities. 15

Some SRO members expressed concern that increased competition between SROs
and their members had given SROs a greater incentive to abuse their
regulatory authority. These members were concerned that SROs could adopt
rules that unfairly impede the ability of members to compete against the
SROs- for example, by adopting rules that give preference to noncompetitors?
orders. An official from one broker- dealer also noted that an SRO might
sanction a competing member more severely than other members by, for
instance, inappropriately concluding that the member had failed to satisfy
its best- execution obligation when it routed an order to a competing market
for execution rather than to the SRO. ECNs have also expressed concern that
an SRO, in its regulatory capacity, could obtain proprietary information
from a member and, in its capacity as a market operator, inappropriately use
the information. For example, an SRO might obtain proprietary information
about its members? customers and then use that information to market its
services to the customers.

Some institutional market users that were not SRO members were more broadly
concerned about how conflicts of interest in the self- regulatory structure
affected the fairness and efficiency of the securities markets.

14 Third- market broker- dealers are NASD members that trade exchange-
listed securities without being members of the exchange. 15 Adopted in 1976,
NYSE Rule 390 was subsequently amended to apply only to stocks listed on
NYSE as of April 26, 1979. Subject to many exceptions, the rule prohibited
exchange members from dealing in NYSE- listed securities away from a
national securities exchange. SEC approved the repeal of the rule on May 5,
2000. Competition and

Demutualizaton Raise Concerns Among Some Market Participants about
Regulatory Abuses

Page 8 GAO- 02- 362 Securities Markets Self- Regulation

These market users asserted that the self- regulatory structure was
inherently biased in favor of broker- dealers that were SRO members and
owners and that SROs interpreted their rules to favor these broker- dealers.
These market users, as well as some broker- dealers, told us that they did
not believe that their concerns were addressed when these concerns diverged
from the interests of the most powerful broker- dealers at the exchange.
Market users also said that the current self- regulatory structure
ultimately impeded market- driven innovations that could improve competition
and benefit the investing public. One investment company official cited NYSE
Rule 390, which had been in place for 20 years, as a classic example of the
difficulty of repealing an anticompetitive SRO rule. 16

Demutualization has heightened the concerns of some SRO members about the
potential for abuses of regulatory authority. 17 They expressed concern that
a demutualized, for- profit market operator might be more likely to misuse
its regulatory authority or be less diligent in fulfilling its regulatory
responsibilities in a desire to increase profits. For example, demutualized
SROs might have a greater incentive to propose rules that unfairly
disadvantage members or other markets or inappropriately sanction or
otherwise discipline members against which the SROs compete. Other SRO
members expressed concern that demutualized market operators might have a
greater incentive to either insufficiently fund or otherwise inadequately
fulfill their self- regulatory responsibilities.

However, other market participants believed demutualization could reduce at
least some conflicts and lead to needed changes in market structure. Market
users such as mutual funds asserted that by diversifying market ownership
through the sale of stock, and thus reducing the influence of broker-
dealers, demutualization could reduce the conflicts of

16 According to SEC, NYSE Rule 390?s restrictions on off- board trading had
been criticized as an inappropriate attempt to restrict competition among
market centers. According to NYSE, the rule was intended, at least in part,
to encourage broker representation of customer orders and to maximize the
opportunity for investors? orders to interact with one another in a central
location, the theory being that in these ways customers would receive better
order execution.

17 Although the motivations for demutualization are the same across markets,
demutualization may not raise the same concerns outside the U. S. securities
markets because of differences in market structure. For example, Commodity
Futures Trading Commission officials told us that demutualization in the U.
S. futures markets has raised fewer concerns related to conflicts of
interest than it has in the U. S. securities markets because, due to the
current structure of the markets, futures exchanges and their members
generally have not been direct competitors.

Page 9 GAO- 02- 362 Securities Markets Self- Regulation

interest inherent in a self- regulatory structure based on member- owned
markets that regulate themselves. According to these market users,
diversifying the exchange ownership base could shift management?s focus from
the narrow interests of intermediaries to the broader interests of all
market participants, potentially benefiting the investing public.

According to NYSE officials, demutualization and for- profit status raise no
new issues for the exchange. NYSE could demutualize or its members could
become its shareholders without any change in the incentives that currently
motivate exchange actions. That is, demutualization does not introduce any
new conflicts of interest issues. NYSE?s chairman noted that the exchange
would continue to have a strong economic incentive to preserve its
reputation as a well- regulated entity, regardless of its organizational
structure.

Demutualization is expected to enhance the ability of markets to compete by
enabling them to raise capital in the securities markets to fund business
efforts and by better aligning the economic interests of markets and their
owners. Under current member- owned structures, actions markets might
otherwise take to enhance their competitiveness might be rejected or adopted
very slowly by member- owners that do not perceive a direct benefit from
them. For example, member- owners (that is, broker- dealers) that derive
income from acting as intermediaries in the trade execution process might be
reluctant to support the introduction of technology if it reduces their
income from acting as intermediaries. In contrast, shareholders of a
demutualized exchange would be expected to support cost- effective
technology that improves customer service and thus the competitiveness of
the market, because they would expect it to increase the value of their
investments by attracting more business to the exchange. To improve their
competitiveness, Nasdaq and the Pacific Exchange, 18 as

18 In October 1999, the Pacific Exchange filed a proposal with SEC to
separate its equities operation into a wholly owned corporate subsidiary,
which SEC approved in May 2000. Subsequently, the exchange entered into a
partnership with Archipelago Holdings, Inc., to allow a subsidiary- the
Archipelago Exchange- to operate as a facility of the Pacific Exchange for
trading equity securities. In September 2000, the Pacific Exchange announced
its plan to convert into a for- profit stock corporation. In October 2001,
SEC approved the rules allowing the facility to operate. Demutualization Is

Expected to Enhance Competitiveness, but Its Effects on Conflicts of
Interest Are Not Yet Known

Page 10 GAO- 02- 362 Securities Markets Self- Regulation

well as several U. S. futures 19 and foreign exchanges, 20 have demutualized
or are in the process of doing so. In 1999, NYSE also announced plans to
demutualize but subsequently postponed its plans indefinitely.

An SEC economist said that the effects of demutualization could not be
predicted, as they depended on a balance between the competing incentives of
maximizing profits and providing effective regulation. The balance between
these incentives would differ depending on who owned and controlled the
market. Also, as under the current ownership structure, the incentive to
reduce regulatory costs would be balanced against the risk that any
resulting reduction in regulation might harm the public?s confidence in the
integrity of the market. A loss of public confidence could ultimately reduce
profitability if, for example, investors moved their transactions to other
markets.

SEC officials further explained that both for- profit and not- for- profit
SROs face inherent conflicts of interest, but noted that demutualization has
the potential to heighten or create variations of existing conflicts of
interest. SEC officials stated, for example, that while all SROs face
pressure to minimize the costs of fulfilling their regulatory obligations,
for- profit entities could be more aggressive in promoting their commercial
interests, such as by using regulatory fees to finance nonregulatory
functions. SEC officials emphasized, however, that because conflicts of
interest already exist within the not- for- profit structure,
demutualization does not necessarily require a wholesale change in
regulatory approach. They noted that the Exchange Act has significant
safeguards to address conflicts of interest and abuses of regulatory power.
Finally, in commenting on the growing trend among SROs to contract out
certain regulatory services, SEC officials stressed that SROs are still
legally responsible for fulfilling self- regulatory obligations that are
contracted out. 21

19 On November 13, 2000, the Chicago Mercantile Exchange became the first U.
S. financial exchange to demutualize. On November 17, 2000, the New York
Mercantile Exchange completed its demutualization. The Chicago Board of
Trade was still in the process of demutualizing on March 31, 2002.

20 Among the many foreign exchanges that have demutualized are the OM
Stockholm Exchange (in 1993); the Australian Stock Exchange (in 1998); and
in 2000, the Stock Exchange of Hong Kong, Bourse de Montreal, London Stock
Exchange, and Toronto Stock Exchange.

21 For example, the International Securities Exchange has contracted with
NASDR to provide regulatory services.

Page 11 GAO- 02- 362 Securities Markets Self- Regulation

NASD has attempted to address concerns about conflicts of interest by
reorganizing its regulatory operations and is in the process of selling its
market operations. In addition, NASD and NYSE officials told us that their
markets have relied on internal controls to address these concerns. SEC has
used its authority under the Exchange Act to monitor the markets and address
concerns about abuses of regulatory authority.

In 1996, NASD created NASDR as a separate nonprofit subsidiary to address
concerns related to the conflicts between NASD?s regulatory functions and
market operations. 22 Beginning in March 2000, NASD began implementing plans
to sell Nasdaq to NASD members and other investors in order to limit the
common ownership of Nasdaq and NASDR. In November 2000, Nasdaq filed an
application with SEC to register as a national securities exchange. 23 The
planned restructuring will separate NASD and NASDR from Nasdaq and, in
NASD?s view, minimize any issues related to conflicts of interest, including
those related to demutualization. 24 Under the restructuring, ECNs and other
broker- dealers doing business with the public (holding customer accounts)
will remain NASD members. They will continue to be regulated by NASD but
will no longer be competing against an NASD- operated market. 25 According
to NASD, the restructuring will be substantially complete with the sale of
NASD?s

22 The Rudman Commission recommended the restructuring in a 1995 report. The
Commission was established to review the governance of NASD in response to
allegations of collusion among Nasdaq market makers to fix prices.

23 Subsequently, Nasdaq filed three amendments to its initial filing, most
recently on January 8, 2002. As of that date, Nasdaq?s application was
pending before SEC. 24 To avoid concerns related to conflicts of interest
involving the regulation of competing members, the Toronto Stock Exchange
and the Montreal Exchange separated their market regulatory functions from
their for- profit business functions.

25 NASD will still own the American Stock Exchange and will thus continue to
regulate exchange members competing with that market. Regulatory Measures
Exist

to Address Conflicts of Interest

NASD Is Continuing to Reorganize and Has Used Internal Controls to Address
Concerns about Conflicts of Interest

Page 12 GAO- 02- 362 Securities Markets Self- Regulation

remaining Nasdaq common stock, which is expected to occur by June 2002.
However, NASD will retain an interest in Nasdaq after this date. 26

According to one ECN, the planned spin- off of Nasdaq will not fully solve
the conflict of interest problem because, not only will NASD retain an
interest in Nasdaq, but Nasdaq will still be NASDR?s biggest customer for
its regulatory services. As such, NASDR could face a conflict between its
ethical responsibility as a regulatory services provider and the economic
incentive to, among other things, retain its largest revenue source.
Accordingly, competitors might be concerned that NASDR will perform its
regulatory services in a way that gives Nasdaq a competitive advantage. 27
Also, because Nasdaq has applied to become an SRO as part of NASD?s plan to
demutualize Nasdaq, the restructuring will not address conflicts of interest
related to market- specific regulation by the new SRO. 28 That is, as an
SRO, Nasdaq will have regulatory authority over members that operate or use
competing markets.

In addition to adopting a structure designed to minimize conflicts between
regulation and competition, NASD?s self- regulatory functions are subject to
its internal controls and the oversight of SEC and the NASD and NASDR boards
of directors. The boards of directors, which include public members, are
intended to provide additional assurance against abuses of regulatory
authority. The NASD board, to which the Nasdaq board will

26 According to NASD, NASD?s interest, if any, in Nasdaq common stock after
the spin- off will depend on the extent to which the warrants for common
stock that NASD sold as part of the transaction remain unexercised. Since
some of the warrants need not be exercised until June 28, 2005, NASD?s final
interest in Nasdaq common stock might not be known until then. In addition,
according to NASD, NASD will retain a controlling interest in Nasdaq through
its ownership of voting preferred stock until Nasdaq becomes a registered
exchange. Upon Nasdaq becoming a registered exchange, the voting preferred
stock will be automatically redeemed. NASD currently owns 100 percent of the
nonvoting Nasdaq preferred stock and may continue to do so after the spin-
off is complete. However, should Nasdaq complete an initial public offering
or other offering of equity securities, it must buy back the nonvoting
preferred stock with the proceeds from the offering.

27 According to NASD, its 10- year contract with Nasdaq can be terminated in
the first 5 years for cause only. In the next 5 years, the contract can be
terminated for cause or if Nasdaq is able to internalize the services
provided by NASD or obtain them for significantly lower cost from a third
party.

28 SROs? regulatory responsibilities can generally be described as either
brokerdealer/ member- specific or market- specific. Member- specific
regulation generally includes on- site examination of broker- dealers?
compliance with financial and sales practice rules, while market- specific
regulation generally includes market surveillance and the enforcement of
exchange trading rules.

Page 13 GAO- 02- 362 Securities Markets Self- Regulation

continue reporting until the spin- off is complete, and the NASDR board both
have a majority of public members, while the Nasdaq board has an equal
number of public and industry members. The boards also receive advice from
various standing advisory committees. 29 In addition, all NASD employees are
required to sign a statement attesting that they will not share confidential
information with any unauthorized person, inside or outside of the
organization.

NASD officials described other internal procedures that should minimize
abuses of regulatory authority. According to NASD officials, NASD generally
solicits comments from its membership and the public on regulatory rule
proposals, and its board takes those comments into account before NASD files
these proposals with SEC. 30 In its disciplinary process, case initiation is
governed by internal procedures that require approval from a staff body
independent of NASDR enforcement and market regulation staff. After a
complaint is filed, the case is heard before a three- member body that is
also independent of these staff. If the matter is appealed, the appellate
decision is rendered by the National Adjudicatory Council, which is made up
of an equal number of industry and non- industry members.

An NYSE official told us that the exchange maintains strict internal
controls to address concerns about conflicts of interest between its market
operations and regulatory oversight. For example, NYSE cited controls to
prevent market operations staff from gaining access to information on
members that has been obtained for regulatory purposes. Additionally, NYSE
policy requires that regulatory staff sign a statement attesting that they
will not share confidential information with market operations staff. NYSE
policy statements also include details on compliance with the securities
laws, including the prohibition of any unfair treatment of customers or
members.

NYSE?s self- regulatory functions are also subject to the oversight of SEC
and the NYSE board of directors, which is intended to provide additional

29 NASD has a formal plan that governs the relationship among the NASD,
NASDR, and Nasdaq boards and that is intended to ensure the independence of
the NASDR and Nasdaq boards.

30 In contrast, according to an NASD official, Nasdaq?s market structure
rule proposals follow the procedure used by other SROs that operate a
market- the rules are typically discussed with membership committees but are
not sent out for public comment before being submitted to SEC. NYSE Has Used
Internal

Controls to Address Concerns about Conflicts of Interest

Page 14 GAO- 02- 362 Securities Markets Self- Regulation

controls against abuses of regulatory authority. The board has 27 members-
12 directors from the securities industry, 12 public directors that are
independent of the securities industry, and 3 exchange officials. The board
receives advice from various standing advisory committees, among them a
committee comprising institutional market users. According to NYSE
officials, institutional market users can voice their concerns to the board
through this committee.

The NYSE disciplinary process is also governed by a three- member review
panel. A disciplinary decision by this panel can be appealed to the NYSE
Board of Directors, which renders its decision after consultation with a
special review committee whose membership is balanced between industry and
non- industry members.

SEC has used its authority under the Exchange Act to address concerns about
abuses of regulatory authority arising from conflicts of interest, including
those related to demutualization and other issues. SEC has addressed such
conflicts through its oversight activities, which include reviewing and
approving SRO proposals for new rules and amendments to existing rules,
reviewing SRO final disciplinary proceedings, and other measures.

SEC reviews SRO proposals for new rules and for amendments to existing rules
to ensure that they are not anticompetitive, unfairly discriminatory, or
otherwise detrimental to the markets. Section 19( b)( 1) of the Exchange Act
requires SROs to file copies of proposals for new rules and amendments to
existing rules with SEC. 31 Once a proposal is filed, SEC is required to
publish notice of the proposal and provide an opportunity for public
comment. SEC is also required, among other things, to consider the
competitive effects of the rule. According to SEC, its rule reviews address
the concerns of some SRO members that an SRO could abuse its authority by
adopting rules that unfairly impede the ability of members to compete
against the SRO. SEC officials noted, for example, that while an SRO could

31 In January 2001, SEC proposed a rule to allow SROs to implement or alter
trading rules (other than those related to major market structure
initiatives) without waiting for SEC approval, provided that the SROs had
procedures for effective surveillance of activity covered by the trading
rules and for enforcement of the rules. According to SEC, the proposed rule
would foster innovation by allowing SROs to move more quickly and would
reduce the regulatory burden of SROs as well as help them maintain their
competitiveness. As of March 31, 2002, the rule had not been adopted. SEC
Has Used Its Authority to

Address Concerns about Regulatory Abuses and Related Issues

Page 15 GAO- 02- 362 Securities Markets Self- Regulation

propose an anticompetitive or discriminatory rule, SEC would not approve it.

According to officials of one ECN, SEC?s review of SRO rules, including the
public comment process, has been one of the most effective ways for ECNs to
have their concerns addressed. In particular, they said that SEC has
addressed comments ECNs have submitted in response to SRO rule proposals.
For example, ECNs expressed concerns about the anticompetitiveness of NASD?s
SuperMontage proposal, and NASD, at SEC?s direction, modified the rule
numerous times in an attempt to address ECN concerns. 32 More recently,
another ECN expressed concern to SEC about the competitive effects of a
proposed rule that would allow Nasdaq to charge higher transaction fees to
members that report less than 95 percent of their trades through Nasdaq but
use Nasdaq?s quotation system or make limited use of its execution systems.
The ECN was concerned, among other things, that the rule was filed under
section 19( b)( 3)( A) of the Exchange Act, under which such rules are
effective on filing. 33 Following discussions with SEC, NASD refiled the
rule proposal under section 19( b)( 2) of the Exchange Act pursuant to which
it would be subject to the public comment process and SEC approval before
becoming effective. 34 According to SEC officials, SROs have withdrawn rule
proposals after SEC expressed concern that the proposals might be
anticompetitive.

Some market participants, although agreeing that SEC?s public comment
process provides a mechanism for addressing concerns about potentially
anticompetitive activity by an SRO, also said that SEC lacks the resources,
tools, and expertise to identify and adequately respond to all instances of

32 On October 1, 1999, Nasdaq filed proposed rule changes with SEC to
establish order display and collection facilities and to modify its primary
trading platform, collectively referred to as the SuperMontage proposal.
Various aspects of the proposal were widely criticized as unfair or
anticompetitive. After numerous amendments, SEC approved the proposal on
January 19, 2001.

33 Although rule proposals filed under section 19( b)( 3)( A) of the
Exchange Act are effective on filing, they are also subject to a 21- day
comment period that begins at the time the notice of the filing is published
in the Federal Register. The Exchange Act authorizes SEC, within 60 days of
an SRO?s filing of a rule under section 19( b)( 3)( A), to annul the rule
change and require that the rule be refiled under section 19( b)( 2) of the
Exchange Act.

34 Notice of Filing of a Proposed Rule Change by the National Association of
Securities Dealers, Inc., Relating to Member Transaction Fees, Securities
and Exchange Commission Release No. 34- 45506 (proposed Mar. 5, 2002).

Page 16 GAO- 02- 362 Securities Markets Self- Regulation

anticompetitive activity by an SRO toward member competitors. According to
one ECN, an SRO committed to a course of anticompetitive activity through a
variety of rulemaking and rule enforcement activities may be able to achieve
success, particularly in the short term, using section 19( b)( 3)( A) of the
Exchange Act. This ECN was concerned about the ability of an SRO to
potentially obtain a significant long- term competitive advantage over its
member competitors through such activities, given the quickly evolving and
highly competitive nature of the securities industry.

To ensure that SROs actions are not discriminatory or otherwise
anticompetitive, SEC also reviews SROs? disciplinary actions during
inspections. According to SEC, these reviews address the concerns of some
SRO members that an SRO could abuse its regulatory authority by sanctioning
a competing member inappropriately or more severely than a noncompeting
member. The Exchange Act requires SROs, in administering their affairs, to
provide fair representation for members. According to SEC, the fair
application of SROs? authority to adjudicate disciplinary actions, including
meting out fines and suspensions, may be particularly important, because
these actions can have significant ramifications for broker- dealers. The
Exchange Act provides SEC with a check on SRO disciplinary actions that are
discriminatory or otherwise anticompetitive, requiring SROs that impose
final disciplinary sanctions on members to also file notice with SEC. Such
actions are subject to SEC?s review after appropriate notice and an
opportunity for a hearing. Upon appeal, SEC must determine whether the
action is consistent with the Exchange Act, SEC rules, and SRO rules and
then either affirm, modify, set aside, or remand the action to the SRO for
further proceedings.

SEC uses additional approaches to addressing industry concerns, such as
concept releases, special committees, and public hearings. For example, SEC
published a concept release in December 1999 to obtain views on the fairness
and reasonableness of fees charged for market information and on the role of
revenues derived from such fees in funding SROs. 35 In commenting on the
release, some SRO members questioned the fairness of funding SROs, which are
competitors for customer order flow, with revenues from the sale of market
information. Because of the diversity of comments received and concerns
raised by the concept release, SEC

35 SEC Concept Release: Regulation of Market Information Fees and Revenues,
Securities Exchange Act Release No. 34- 42208 (Dec. 9, 1999).

Page 17 GAO- 02- 362 Securities Markets Self- Regulation

created an advisory committee on market information in August 2000 to
provide the agency further guidance. SEC officials said they were reviewing
the advisory committee?s September 2001 report and the comments received
since it was issued to determine how to address concerns about market data.

Some broker- dealers that were members of multiple SROs told us that
differences in rules and their interpretations among SROs resulted in
operational inefficiencies. While no formal process exists for ensuring
consistency among rules that might cause material regulatory inefficiencies,
regulatory officials said that the existing rule review and public comment
process has been effective in addressing related concerns. An ongoing NASD
effort could lead to the resolution of some of these concerns but regulatory
cooperation will be required as NASD?s authority is limited to its own
rules. In addition, some broker- dealers with multiple SRO memberships said
that examinations by multiple SROs were unnecessarily burdensome. Over the
years, SEC and the SROs have taken steps to improve examination efficiency,
most recently through efforts to improve examination coordination. However,
some broker- dealers told us that these efforts have not fully addressed
their concerns.

According to both market participants and regulators, SROs generally had the
same or similar rules. However, some broker- dealers with multiple SRO
memberships- principally NASD and NYSE memberships- were concerned that
differences in rules and rule interpretations among SROs were causing
operational inefficiencies. Some broker- dealers had multiple memberships
because, if they were active in more than one market, they could choose to
become members of the SROs operating those markets; and, if they did
business with the public, they were also required to belong to NASD. 36
Broker- dealers are subject to the regulatory oversight of each SRO to which
they belong, as well as to the oversight of SEC and state securities
regulators.

Some broker- dealers expressed concern about inefficiencies associated with
monitoring and complying with SROs? varying rules and rule

36 According to NASD, more than 5,500 broker- dealers were NASD members as
of March 31, 2002. According to NYSE, about 250 of these were also NYSE
members with public customers. Some Broker- Dealers

Were Concerned about Rule Differences and Multiple Examinations

Some Broker- Dealers Were Concerned about Inefficiencies Associated with
Differing Rules and Interpretations

Page 18 GAO- 02- 362 Securities Markets Self- Regulation

interpretations in areas such as determining what types of customer
complaints to report, how long to retain certain written records, and which
proficiency examinations broker- dealer employees must take and when. For
example, NASD and NYSE do not use the same proficiency examinations for
order takers, sales representatives, and branch managers. Further, NASD and
NYSE rules and rule interpretations differ on matters such as whether order
takers and sales representatives must pass the same proficiency examinations
and when candidates that pass these examinations can be promoted to branch
managers. According to some broker- dealers, to the extent that the skills
and proficiency of order takers and sales representatives affect the quality
of customer protection, these differences could result in varying levels of
customer protection among firms, while at the same time, disadvantaging some
firms in their ability to hire and retain staff.

When discussing the overall effect of differences in rules and their
interpretations with officials of several broker- dealers, they stressed
that their concerns were not about the cost of one or more specific
instances of differences in rules and their interpretations, but about their
cumulative effect on the efficient use of compliance resources. Broker-
dealers emphasized that the purpose of compliance is to protect the
integrity of the markets and investors, and the effort needed to sort out
compliance with multiple rules and rule interpretations strains these
resources. We could not assess the overall effect of differences in rules
and their interpretations because of the anecdotal nature of the information
provided.

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. According to SEC officials, SEC might use this process
to try harmonizing proposed SRO rules if the agency identified significant
differences or inconsistencies in them. They said that as part of the review
process SEC staff ask SROs to justify any differences between a proposed
rule and other SRO or SEC rules. For example, SEC officials told us that
through this process they ensured that NASD and NYSE harmonized their rules
on margin requirements for day traders. SEC also worked with NASD and NYSE
to coordinate antimoney laundering and analyst disclosure rules. According
to NYSE officials, only the reporting requirements for the money laundering
rules differ. These officials also said that the exchange is working with
NASD to develop uniform sales practice and margin rules for single stock
futures.

Page 19 GAO- 02- 362 Securities Markets Self- Regulation

SEC also commented that, while the review and public comment process can
address market participants? concerns that are raised at the time a rule
proposal is filed, the burdens associated with different SRO rules may not
become apparent until long after the rules have been implemented. SEC
officials further noted that the Exchange Act does not require that all SRO
rules be uniform. They said that SROs are entitled to set whatever rules
they determine are appropriate for their markets as long as the rules comply
with the Exchange Act. SEC officials stressed that the agency would not
impede one SRO from establishing higher standards than another, noting that
many of the differing rules exist for legitimate business reasons and
reflect differences in business models among markets. NYSE officials also
told us that most of NYSE- listed firms that do business with the public are
larger broker- dealers and that the rules imposed on larger firms are not
always appropriate for smaller firms.

An ongoing NASD rule modernization effort has identified differences among
NASD and other SROs? rules and could lead to the resolution of some
differences. In 1998, NASD began a review to identify rules that could be
repealed or modernized. In May 2001, NASD issued a notice to members stating
that it intended to expand and build upon this review with the goal of
ensuring that NASD rules accomplish their objectives without imposing
unnecessary regulatory burdens. NASD also indicated that it was developing
an ongoing process for identifying rules with regulatory costs that
outweighed their benefits, including rules that were obsolete because of
technological changes. The SIA?s response to the initiative discussed NASD
rules that SIA concluded were inconsistent with those of other SROs and SEC.
For example, SIA?s response 37 cited an NASD rule on posting price
quotations that SIA concluded was inconsistent with an SEC rule on
displaying limit orders. 38 NASD stated that it had begun the process of
meeting with other regulators, including NYSE and the states, in an effort
to coordinate inconsistencies among various rules. It also provided other
regulators with pertinent comments received in response to its notice to
members. NASD officials told us that although NASD was coordinating its
modernization efforts with other regulators and hoped to eliminate
inconsistencies among rules, NASD could address only its own rules.

37 Comment letter from the SIA regarding Special NASD Notice to Members 01-
35- Request for Comments on Rule Modernization Project (July 31, 2001). 38
Limit orders are orders to buy or sell securities at specific prices (or
better).

Page 20 GAO- 02- 362 Securities Markets Self- Regulation

SEC and SROs have taken actions to improve the efficiency of SRO
examinations of broker- dealers with multiple SRO memberships. These actions
stemmed from (1) a 1976 SEC rule under which the agency assigns
responsibility for conducting a broker- dealer?s financial and operational
soundness examinations to a single SRO, called the designated examining
authority (DEA); (2) another 1976 SEC rule that facilitated agreements among
SROs to reallocate certain oversight responsibilities; and (3) a 1995
memorandum of understanding (MOU) among SEC, four SROs, and state regulators
to coordinate examinations. While acknowledging that coordination efforts
have improved examination efficiency, some brokerdealers said that
additional improvements in efficiency are needed.

In its role as an SRO, NASD (through NASDR) is to periodically examine its
members? operations 39 every 1 to 4 years (depending on, among other things,
the size of the broker- dealer). Also in its role as an SRO, NYSE is to
conduct annual examinations of members that do business with the public.
NASD and NYSE examinations include two types of reviews. The financial and
operational review determines compliance with requirements addressing
business soundness. The sales practice review determines compliance with
requirements addressing, among other things, the quality of trade execution,
the existence of unauthorized trading, the fairness of pricing, and fair
dealings with customers, as well as compliance with market- specific rules
governing member conduct and trade execution. SROs may also conduct cause or
special purpose examinations as necessary to address specific problems or
industry concerns.

In 1976, SEC adopted rule 17d- 1, under which it designates a single SRO as
the DEA responsible for financial compliance examinations 40 of individual
broker- dealers that are members of multiple SROs. This rule was adopted
pursuant to the Securities Act Amendments of 1975, which authorizes SEC to
adopt rules to relieve SROs of the duplicative responsibility of examining
their members for compliance with the Exchange Act, its rules, and SRO rules
when the broker- dealer is a member of more than one SRO. However, because
Rule 17d- 1 relates only to financial compliance

39 In addition to SRO examinations, a broker- dealer may also be subject to
examinations by each state where it has offices and by SEC. 40 The DEA is
responsible for examining member broker- dealers for compliance with the
Exchange Act and SEC and SRO rules and regulations related to financial
responsibility, including SEC net capital and customer account protection
rules. Regulators Have Improved

Examination Coordination but Some Broker- Dealers Remain Concerned about
Multiple Examinations

SEC and SROs Have Improved Examination Coordination

Page 21 GAO- 02- 362 Securities Markets Self- Regulation

examinations, the common members of NASD and NYSE remained subject to sales
practice examinations by both NASDR and NYSE.

According to SEC officials, the agency selects the DEA for common members
based on the market the broker- dealer uses to execute a preponderance of
its customer orders or the market in which the brokerdealer has the most
memberships. As of March 31, 2002, according to NYSE officials, NYSE was the
DEA for about 250 broker- dealers that were also members of and subject to
examination by NASD. According to NYSE, these firms represented
approximately 90 percent of customer assets in the securities industry.

Also in 1976, SEC adopted Rule 17d- 2, which permitted SROs to establish
joint plans for allocating certain regulatory responsibilities that involved
their common members. Under the rule, which was also adopted as a result of
the Securities Act Amendments of 1975, all plans must be filed with SEC for
approval. SEC was to approve plans that, among other things, fostered
cooperation and coordination among SROs. For example, SEC approved a plan in
1983 under which the American Stock Exchange, the Chicago Board Options
Exchange, NASD, NYSE, the Pacific Exchange, and the Philadelphia Stock
Exchange periodically rotate among themselves responsibility for options-
related sales practice examinations for their common members. SEC approved
other plans in the 1970s and 1980s, under which the American Stock Exchange
and the regional exchanges deferred certain regulatory responsibilities of
their common members to the DEA (either to NASD or NYSE).

Concurrent with proposed legislation 41 and related hearings, SEC, four
SROs, 42 and the state securities regulators 43 entered an MOU in November
1995 to coordinate broker- dealer examinations. The MOU provided for the
SROs and states (through the North American Securities Administrators

41 The proposed legislation was called the Capital Markets Deregulation and
Liberalization Act of 1995 (H. R. 2131). Although the proposal did not
become law, a provision that required SEC to improve coordination was
subsequently included in the National Securities Market Improvement Act of
1996, which became section 17( k) of the Exchange Act.

42 The four SROs that entered into the MOU were the American Stock Exchange,
the Chicago Board Options Exchange, NASD, and NYSE. 43 The North American
Securities Administrators Association agreed to the MOU on behalf of state
regulators. The association is an organization of state, provincial, and
territorial securities administrators in Canada, Mexico, and the United
States that is devoted to investor protection and efficient capital
formation.

Page 22 GAO- 02- 362 Securities Markets Self- Regulation

Association) to meet requests from broker- dealers to coordinate specified
on- site regulatory examinations. In responding to these requests, SROs were
to share information and devise ways to avoid duplication. To the extent
practicable, sales practice examinations conducted by the DEA and any other
SROs were to be conducted simultaneously with the DEA?s financial and
operational examination. Cause examinations that resulted from customer
complaints or other matters were not subject to the MOU, nor were the
examinations that SEC conducted to evaluate the quality of SRO oversight.
However, the MOU encouraged coordination and cooperation for all
examinations to the extent possible.

An SEC official told us that the agency closely monitors and assesses SRO
examination coordination. According to SEC and SRO officials,
representatives of SEC, all SROs, and the states attend annual summits to
discuss examination coordination, review examination results from the prior
year, and develop plans for coordinating examinations for the coming year.
In addition, regional SEC staff and SRO compliance staff are to meet
quarterly to discuss and plan examination coordination, and SRO examiners
are to meet monthly to plan specific examinations of common members. At
these latter meetings, examiners are expected to, among other things,
collaborate on fieldwork dates, document requests, and broker- dealer
entrance and closeout meetings. SROs also are to share their prior
examination reports before beginning fieldwork.

Under the 1995 MOU, SEC agreed to maintain a computerized database to
monitor examination coordination. SEC developed the criteria for coordinated
examinations under the MOU as well as a database to track the number of
broker- dealers that requested and received coordinated examinations. Under
SEC criteria, examinations are coordinated when the SROs have at least 1 day
of concurrent fieldwork at the targeted brokerdealer. An SEC official told
us, however, that concurrent fieldwork was only one measure of coordination
and did not completely reflect the quality of coordination. However, using
this measure, SEC calculated that from 1997 through 2000 an average of 90
percent of those requesting coordinated examinations received them and that
in 2000 96 percent of requestors received coordinated examinations.
According to SEC officials, requests for coordinated examinations could not
be honored because other scheduled examinations took longer than expected or
because examiners had been reassigned to previously unscheduled cause
examinations.

Page 23 GAO- 02- 362 Securities Markets Self- Regulation

SEC?s most recent efforts to address concerns about multiple examinations
have focused on improving examination coordination. In a June 1998 report,
44 SIA concluded that, although SEC and the SROs had made considerable
progress toward improving examination coordination for broker- dealers with
multiple SRO memberships, more work remained to be done to reduce
duplication of efforts. In discussions with us, some broker- dealers
expressed continued dissatisfaction with inefficiencies associated with
multiple examinations. For example, although examinations could take a few
weeks, according to some broker- dealers, when all examination steps
(including both pre- and post- examination) were taken into account, firms
could be subject to some part of the examination process continuously
throughout the year, even with coordination. Because of the anecdotal nature
of the information provided, we could not determine the extent to which
multiple examinations caused inefficiencies or the extent to which efforts
to address inefficiencies through improved coordination were successful.

SRO data show that broker- dealers? participation in the coordinated
examination program has been declining. For example, the total number of
NYSE and NASD member firms participating in the program declined from about
63 percent in 1998 to about 54 percent in 2000. According to SEC officials,
these numbers do not necessarily indicate problems with the coordinated
examination program, since broker- dealers opt in or out of the program for
many reasons. SEC officials told us that some brokerdealers that have tried
the coordinated examination program have concluded that it is more efficient
for them to have two separate examinations. They said that an average of
five broker- dealers participating in the coordinated examination program
leave the program each year, typically because they lacked the space to
accommodate the larger teams that accompany concurrent examinations or
otherwise found the examinations to be disruptive to their operations. For
example, some broker- dealers have concluded that it is not efficient for
them to have staff with expertise in different areas of the firm?s
operations (such as sales practices and finance) available to interact with
examiners at the same time.

44 SIA surveyed its members about examinations done in 1997, the first full
year that the MOU was in effect, and reported the results in Regulatory
Examination Survey Report,

SIA, June 1998. Some Broker- Dealers Have

Remained Concerned about Multiple Examinations

Page 24 GAO- 02- 362 Securities Markets Self- Regulation

SEC officials told us that they were aware of broker- dealers? concerns
about examination coordination and that these concerns had been addressed on
a case- by- case basis. SEC officials stated that they often sought informal
feedback from individual broker- dealers and industry trade groups and would
continue to urge broker- dealers to discuss examinations and the examination
process with SEC and SRO staff. SEC officials also said that in mid- 2001,
the agency began a pilot program to coordinate the examinations of one large
broker- dealer. The pilot includes SEC, NYSE, NASDR, the Chicago Board
Options Exchange, and a number of state regulators. SEC expects the program
to help determine whether the agency can enhance information sharing among
regulators and alleviate any burdens associated with broker- dealers being
examined by multiple regulators.

Securities market participants have discussed alternative approaches to
self- regulation that would address, at least in part, concerns about the
current self- regulatory structure. 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. One alternative would expand the DEA program beyond
financial compliance to cover sales practices. An alternative some ECNs have
discussed for addressing their concerns involves registering as exchanges
and becoming SROs. Also, the broader securities industry has discussed
alternatives that would more dramatically change or replace the current
self- regulatory structure. These alternatives were detailed in an SIA
report published in January 2000 45 and included consolidating
responsibility for broker- dealer self- regulation and cross- market issues
in a single entity not affiliated with any market (hybrid SRO model),
consolidating all self- regulation- market- specific and broker- dealer- in
a single entity (single SRO model), or having SEC assume all the regulatory
functions currently performed by SROs (SEC- only model). At this time, none
of these models appears to have the support from market participants needed
for implementation.

45 Reinventing Self- Regulation, White Paper of the Securities Industry
Association?s Ad Hoc Committee on Regulatory Implications of De-
Mutualization, Jan. 5, 2000. Market Participants

Have Discussed Alternative Approaches to SelfRegulation

Page 25 GAO- 02- 362 Securities Markets Self- Regulation

According to SEC officials, the agency does not plan to dictate changes to
the regulatory structure. SEC officials told us that they believed the
agency had the authority it needed to make changes but preferred that the
industry reach a consensus on whether the need for change existed and, if
so, what type. Additionally, they said that industry initiatives, such as
Nasdaq?s application to register as an exchange, were transforming the
regulatory landscape. They elaborated that if Nasdaq became an exchange, it
would separate from NASD, mitigating ECN concerns about conflicts of
interest. In the meantime, SEC officials said that the current
selfregulatory structure had been working adequately and that immediate
action was not needed. SEC noted that members could initiate improvements
through their SROs, express opposition to a proposed course of action
directly to the SRO, or voice their concerns to SEC. Additionally, broker-
dealers could respond to proposed SRO rules both through SRO committees and
during the public comment process and could also use their membership in
organizations such as SIA to lobby for change.

The Exchange Act provisions under which SEC assigns a single SRO as DEA with
responsibility for financial compliance examinations could be amended to
include sales practice examinations. The result would be that each broker-
dealer would have only one examining SRO, thereby eliminating examinations
by multiple SROs. However, this approach would not address the conflicts of
interest that arise when SROs that operate a market regulate competitors or
the differences in rules and rule interpretations among SROs.

SEC opposed a provision to expand the DEA program that was included in
proposed 1995 legislation. 46 In related congressional hearings, the then
SEC chairman testified that, while SROs currently monitor trading activities
in their own markets, the provision would seem to require that DEAs also
monitor trading in other SROs? markets, which could be costly and
significantly less effective than the current system. The chairman also
pointed out that while an SRO has considerable incentive to enforce its own
rules, its incentive to enforce the rules of other SROs might not be as
strong. He stated that requiring an SRO to enforce the rules of another

46 The provision, which did not become law, was included in the Capital
Markets Deregulation and Liberalization Act of 1995, H. R. 2131, 104th Cong.
(1995). SEC Does Not Plan to

Dictate Change The DEA Program Could Be Expanded

Page 26 GAO- 02- 362 Securities Markets Self- Regulation

SRO would be inconsistent with section 19( g) of the Exchange Act, under
which each SRO is to enforce compliance with its own rules.

Some market participants have also discussed a proposal that would allow
broker- dealers, rather than SEC, to select their DEAs. NASD officials were
concerned that this proposal could threaten NASD?s ability to provide
affordable regulatory services to small firms. NASD officials said that,
under this proposal, the large broker- dealers might select NYSE as their
DEA, while the small ones might select NASD. NASD would then lose the
revenue from large broker- dealers that currently subsidizes the cost of
regulatory services for smaller broker- dealers. For example, according to
NASD officials, the smallest NASD member pays $600 in annual fees, but the
average examination for such a broker- dealer costs from $7,000 to $10,000.
According to NASD officials, allowing broker- dealers to select their DEAs
could threaten the existence of NASD and thousands of small broker- dealers.

An ECN or other alternative trading system could become an SRO by
registering as an exchange and in doing so would avoid regulation by a
competing SRO. Having each ECN become an SRO would reduce conflicts of
interest that can arise when SROs that operate a market regulate ECNs.
However, this alternative would not address the regulatory inefficiencies
that result from broker- dealers having multiple SRO memberships. Three
ECNs- Island, Archipelago, and NexTrade- have explored becoming securities
exchanges, although no formal filings are currently before SEC. Archipelago
has since become a facility of the Pacific Exchange.

NASD officials expressed a general concern that, if SROs proliferate,
regulatory information would be reported to different regulators without
adequate coordination. Because no one regulator would see all relevant
information, abuses could continue undetected. They were further concerned
that competition among regulators- to be distinguished from competition
among markets- could lead to a race to the lowest regulatory standards and
undermine investor confidence in the securities markets. Other market
participants have observed that by marketing the quality of their services
to potential clients, competing regulators could create higher regulatory
standards. One ECN emphasized that SEC?s existing SRO oversight programs
focus on assessing whether regulatory service providers meet acceptable
levels of performance. ECNs Could Become SROs

Page 27 GAO- 02- 362 Securities Markets Self- Regulation

The SIA report endorsed replacing the current self- regulatory structure
with the hybrid SRO model, a proposal that was discussed in the early 1970s.
Under the hybrid SRO model, a single entity unaffiliated with any market
would be created to assume responsibility for broker- dealer oversight and
cross- market rules, including those related to sales practices, industry
admissions, financial responsibility, and cross- market trading. Individual
SROs would remain responsible for market- specific rules such as those
related to listings, governance, and market- specific trading.

Although some SIA members said it was premature to revamp the current
regulatory structure, the majority supported the hybrid SRO model because
they believed that it would reduce member- related conflicts of interest and
SRO inefficiencies. According to SIA, potential conflicts of interest would
be reduced because the new SRO would not be affiliated with a competing
market. Eliminating duplicative SRO examinations would reduce inefficiencies
in areas such as rulemaking, examinations, and staffing. SEC officials
agreed that consolidating member regulation into one SRO was an advantage of
the hybrid SRO model. They noted that the industry was moving toward a
hybrid model as Nasdaq separated from NASD and NASD contracted to provide
regulatory services to more SROs. Although NASD officials told us that they
did not have an official position on the hybrid SRO model, NASD has
supported the concept of separating market- specific and member regulation
in the past. In February 2000 testimony, the then NASD chairman noted that
NASD?s separation of Nasdaq and NASDR is the first step toward ?the right
regulatory model: the hybrid SRO model.? 47

In stating its opposition to self- regulatory changes, the NYSE chairman
said that spinning off NYSE regulation into an unaffiliated regulatory
entity would weaken investor protection and do irreparable harm to the NYSE
brand name. He noted that funding a separate regulatory body independent of
the exchange would eliminate economic efficiencies and synergies that result
from the integration of regulation into the NYSE market as a whole. NYSE
officials told us that because the hybrid model separates member from
market- specific regulation, the hybrid regulator?s examinations would not
review the operations of the entire broker- dealer and thus would be less
effective than examinations conducted under the

47 Testimony by Frank Zarb, chairman, NASD: Committee on Banking, Housing
and Urban Affairs; United States Senate (Washington, D. C.: Feb. 29, 2000).
Broker- Dealers and CrossMarket

Rules Would Be the Responsibility of a Single Entity (the Hybrid SRO Model)

Page 28 GAO- 02- 362 Securities Markets Self- Regulation

current regulatory approach. NYSE officials also said that the exchange had
postponed its plan to demutualize for several reasons, including concern
that such action might have had the negative consequence of forcing NYSE to
separate its regulatory and market functions. SIA agreed that the
disadvantages of the hybrid SRO model included the model?s inability to
address market- specific conflicts of interest. SIA and others concluded,
however, that the advantage of having personnel with specialized knowledge
overseeing market operations outweighed this disadvantage.

According to the SIA report, SIA attempted to gather data showing that the
hybrid SRO model would be a cost- effective approach to self- regulation.
However, it was unable to obtain the data it needed from the SROs. In the
absence of active support from NYSE and SEC for the model, SIA is not
currently pursuing it as a means of addressing market participants? concerns
about conflicts of interest and regulatory inefficiencies.

The SIA report also discussed the single- SRO model as a means of addressing
concerns about both conflicts of interest and regulatory inefficiencies.
Under this model, a single SRO would be vested with responsibility for all
regulatory functions currently performed by the SROs, including market-
specific and broker- dealer regulation. According to SIA, the single SRO
model could eliminate the conflicts of interest and regulatory
inefficiencies associated with multiple SROs, including those that would
remain under the hybrid SRO model. However, SIA did not endorse this
alternative, primarily because of the risk that self- regulation would
become too far removed from the functioning of the markets- a point of view
that was similar to NYSE?s comments on the hybrid model.

In addition, and in contrast to broker- dealer regulation, SEC officials
said that it might not be appropriate or feasible to give a single SRO
responsibility for surveilling all the markets because of differences in the
way trades are executed in each. That is, Nasdaq, NYSE, and other markets
have different rules that reflect their different ways of executing trades.
SEC has taken the position that SROs should continue to have ultimate
responsibility for enforcing rules unique to the SRO or relating to
transactions executed in the SRO?s market. Market operators have generally
shared this view. Markets and BrokerDealers

Would Be Regulated by One Entity (the Single SRO Model)

Page 29 GAO- 02- 362 Securities Markets Self- Regulation

The SEC- only model would address concerns about conflicts of interest and
regulatory inefficiencies by eliminating all self- regulation. Under this
model, SEC would assume all the regulatory functions currently performed by
SROs. Under a variation of this alternative that is not discussed in the SIA
report, SEC would assume just NASD?s obligation to regulate ECNs and other
alternative trading systems. SIA did not endorse the SEC- only model because
doing so would eliminate self- regulation of the securities industry, taking
with it the expertise that market participants contribute. SIA also expected
the SEC- only model to be more expensive and bureaucratic, because
implementing it would require additional SEC staff and mechanisms to replace
SRO regulatory staff and processes. In addition, according to the report and
SEC, a previous SEC attempt at direct regulation was not successful, owing
to its high cost and low quality (relative to self- regulation), convincing
SEC and other market participants that it was not a feasible regulatory
approach. 48

As competition continues to drive the evolution of the securities markets,
concerns about the conflicts of interest inherent in the current
selfregulatory structure have grown in importance. Such concerns, if not
effectively addressed, could undermine the cooperative nature of
selfregulation and erode confidence in the fairness of the securities
markets. As a result, an ongoing challenge for SEC and the SROs will be to
respond effectively to both real and perceived conflicts of interest.

The extent of the regulatory burden generated by differences in SROs? rules
and their interpretation and by multiple examinations of brokerdealers is
unknown. Obtaining a better understanding of related concerns could help
address the dissatisfaction some broker- dealers have expressed with the
current self- regulatory structure. For example, differences in rules and
their interpretations have been used to justify the need for multiple
examinations. As a result, the success of efforts to address concerns about
multiple examinations could be related to how concerns about differences in
rules are addressed. To improve its understanding of broker- dealers?
concerns, SEC could work with NASD, NYSE, and other

48 In 1965, SEC became responsible for direct regulation of a small number
of brokerdealers that traded only in the over- the- counter market. This
program, called the Securities and Exchange Only, or SECO program, was
designed to provide participating firms with a regulatory alternative to
NASD. In 1983, SEC concluded that the industry would be better served if the
program were discontinued, because needed improvements would be costly and
not an efficient use of agency resources. SEC Would Assume All

Regulatory Responsibility (the SEC- Only Model)

Conclusions

Page 30 GAO- 02- 362 Securities Markets Self- Regulation

market participants to identify and address differences in rules that might
cause material inefficiencies in the regulatory process. SEC could also work
with these market participants and through its ongoing pilot program to
better assess whether further improvements in examination coordination could
address the most significant problems associated with multiple examinations
of broker- dealers. As part of these efforts, SEC could instruct the SROs to
provide the agency with formal assessments of broker- dealers? satisfaction
with the coordinated examination program, including determining why some
broker- dealers choose not to participate and why others terminate their
participation, and of market participants? specific concerns about rules.
For example, a survey that is representative of broker- dealers and that is
administered by a neutral party could be used to determine the nature and
extent of concerns about rules and examinations. Such information might also
be useful to SEC and the industry in assessing the effectiveness of the
current regulatory structure.

Some broker- dealers and market participants believe that the concerns
raised by changes in the markets warrant further examination of alternatives
for revising the self- regulatory structure. In contrast, SEC has observed
that the regulatory landscape is in the process of transformation and that,
thus far, the current self- regulatory structure has been working
adequately. Without additional SEC and industry support, major changes are
not expected.

We recommend that the chairman, SEC, work with the SROs and brokerdealer
representatives to implement a formal process for systematically identifying
and addressing material regulatory inefficiencies caused by differences in
rules or rule interpretations among SROs and by multiple examinations of
broker- dealers. In doing so, we recommend that SEC explore with the SROs
and other market participants various methods for obtaining comprehensive
feedback from market participants, such as having the SROs use a neutral
party to independently collect and assess market participants? views.

We requested comments on a draft of this report from the heads, or their
designees, of SEC, NASD, Nasdaq, NYSE, SIA, and three ECNs. We received
written comments from SEC, NASD, Nasdaq, and SIA that are summarized below
and reprinted in appendixes I through IV. In addition, we received oral
comments from the general counsel of one ECN on March 18, 2002; they are
also summarized below. Finally, we received technical comments from SEC,
NASD, NYSE, SIA, and a second ECN that Recommendations

SEC, SRO, and Industry Comments and Our Evaluation

Page 31 GAO- 02- 362 Securities Markets Self- Regulation

are incorporated into the report as appropriate. The third ECN did not
provide comments. The respondents generally agreed with the conclusions and
recommendations in the draft report, however, three respondents expressed
additional concerns.

SEC officials endorsed our recommendations and indicated that the agency
would work closely with NASD and NYSE to implement them. NASD, which also
agreed with our recommendations, highlighted its efforts to resolve issues
caused by differences in rules or rules interpretations through it rule
modernization project. NASD noted that its authority is limited to
addressing NASD rules and cited the importance of SEC participation to
further efforts to reduce inconsistencies in rules.

Nasdaq commented that the draft report generally provided an accurate
characterization both of the debate about conflicts of interest between the
primary SROs- NYSE and Nasdaq- and their respective markets and of some of
the steps that are being taken to mitigate those conflicts. However, Nasdaq
also said that the report largely overlooked a serious challenge to the
integrity of the self- regulatory system- that is, the alignment of regional
stock exchanges with ECNs for trading Nasdaq stocks. Nasdaq commented that
these alignments have copied Nasdaq?s

?competing dealer? market structure without also adopting the safeguards
necessary to regulate such a market. While this issue may deserve additional
attention, our report focused on concerns about potential abuses of
regulatory authority by SROs that regulate members against which they
compete for order flow rather than on the broader issues of competition
among markets or the quality of self- regulation SROs provide. The draft
report did note that SEC assesses the quality of all the SROs? regulatory
programs, which includes those of the regional exchanges. It also stated
that the concerns addressed were identified through a variety of means,
including discussions with Nasdaq officials and other market participants,
and that they did not represent all existing concerns.

SIA agreed with the report?s conclusions and recommendations but also
expressed concern that SROs often file rule changes with SEC without prior
public notice or opportunity for comment. As a result, affected firms learn
of proposed rule changes only when the rules are published for comment in
the Federal Register. SIA expressed a similar concern about rule
interpretations or clarifications that inadvertently impose new substantive
obligations on members, noting that SROs also issue these changes without
any public notice or opportunity for comment. Accordingly, SIA suggested
that market participants be engaged at the outset of the regulatory dialogue
in order to produce more balanced,

Page 32 GAO- 02- 362 Securities Markets Self- Regulation

resource- efficient regulation. We recognize that the need for public
comment must be balanced against the need for SROs to expeditiously
implement rules that can affect their competitiveness and that SEC and the
industry have been attempting to balance these sometimes conflicting
demands. To the extent that the timing of the public comment process is a
factor causing differences in rules and their interpretations, this issue
could be explored as part of SEC?s and the industry?s efforts to implement
our recommendations.

The ECN that provided oral comments on the draft report focused on concerns
about conflicts of interest in the self- regulatory structure as SROs
increasingly compete with the members they regulate. The ECN commented that
the report did not capture the full extent of the

?dysfunction? and competitive conflict in the current self- regulatory
structure, emphasizing its concern that ECNs had no viable alternative to
being regulated by a competitor. The final report includes some additional
information the ECNs provided in response to the draft that further
illustrates the nature of their concerns.

To review how SEC, NASD, and NYSE are addressing concerns about (1) the
impact of increased competition, including demutualization, on the ability
of SROs to effectively regulate members with which they compete and (2)
possible regulatory inefficiencies associated with broker- dealer membership
in multiple SROs, we reviewed relevant securities laws and SRO rules, SEC
concept releases and studies, SEC and SRO proposed rule changes, an NASDR
rule modernization notice, industry and academic studies and research
papers, and articles in academic and industry publications. We also reviewed
comment letters received on releases and proposals published in the Federal
Register. In addition, we interviewed officials of two federal agencies (the
Commodity Futures Trading Commission and SEC); three SROs (NASD (including
Nasdaq and NASDR), the National Futures Association, 49 and NYSE); three
ECNs; the Arizona Stock Exchange; two industry associations (SIA and the
Investment Company Institute 50 ); three investment companies that manage

49 The National Futures Association is an SRO that is responsible, under
Commodity Futures Trading Commission oversight, for qualifying commodity
futures professionals and for regulating the sales practices, business
conduct, and financial condition of its member firms.

50 The Investment Company Institute is a trade group that represents mutual
funds. Scope and

Methodology

Page 33 GAO- 02- 362 Securities Markets Self- Regulation

mutual funds or pension funds; eight registered broker- dealers (in addition
to the three ECNs); and two industry experts. We also identified the
concerns that are addressed in the report through these document reviews and
interviews. As a result, the concerns identified do not necessarily
represent all those that exist. Our review focused on the two largest SROs
in the equities markets- NASD and NYSE- because concerns related to the dual
role of SROs as market operators and regulators applied primarily to these
SROs. They were also the SROs that were the subject of concerns about the
efficiency of SRO rules and examinations affecting members that belong to
multiple SROs. Our review focused primarily on the securities markets
because the issues that have arisen in these markets have not yet surfaced
to the same extent in other markets.

To describe alternative approaches that some securities market participants
have discussed as a means of addressing concerns about the current self-
regulatory structure, we reviewed industry and academic studies and research
papers, articles in academic or industry publications, and congressional
hearing records. We discussed the alternatives identified with the officials
cited above.

We did our work in Chicago, IL; New York, NY; and Washington, D. C., between
October 2000 and March 2002 in accordance with generally accepted government
auditing standards.

We will send copies of this report to other interested congressional
committees. We will also send copies to the chairman of SEC, chairmen and
chief executive officers of NASD and Nasdaq, president of NASDR, chairman
and chief executive officer of NYSE, chairman and president of SIA, and the
three ECNs. Copies will be made available to others upon request.

Page 34 GAO- 02- 362 Securities Markets Self- Regulation

For any questions regarding this report please, contact me at (202) 512-
8678, hillmanr@ gao. gov, or Cecile Trop, Assistant Director, at (312) 220-
7705, tropc@ gao. gov. Key contributors include Roger Kolar, Melvin Thomas,
Sindy Udell, and Emily Chalmers.

Richard J. Hillman Director, Financial Markets

and Community Investment

Page 35 GAO- 02- 362 Securities Markets Self- Regulation

List of Congressional Committees The Honorable Paul S. Sarbanes Chairman The
Honorable Phil Gramm Ranking Minority Member Committee on Banking, Housing
and Urban Affairs United States Senate

The Honorable Michael G. Oxley Chairman The Honorable John J. LaFalce
Ranking Minority Member Committee on Financial Services House of
Representatives

The Honorable W. J. ?Billy? Tauzin Chairman The Honorable John D. Dingell
Ranking Minority Member Committee on Energy and Commerce House of
Representatives

Appendix I: Comments from the Securities and Exchange Commission

Page 36 GAO- 02- 362 Securities Markets Self- Regulation

Appendix I: Comments from the Securities and Exchange Commission

Appendix I: Comments from the Securities and Exchange Commission

Page 37 GAO- 02- 362 Securities Markets Self- Regulation

Appendix II: Comments from the National Association of Securities Dealers
Page 38 GAO- 02- 362 Securities Markets Self- Regulation

Appendix II: Comments from the National Association of Securities Dealers

Appendix II: Comments from the National Association of Securities Dealers
Page 39 GAO- 02- 362 Securities Markets Self- Regulation

Appendix II: Comments from the National Association of Securities Dealers
Page 40 GAO- 02- 362 Securities Markets Self- Regulation

Attachment omitted.

Appendix III: Comments from Nasdaq Page 41 GAO- 02- 362 Securities Markets
Self- Regulation

Appendix III: Comments from Nasdaq

Appendix III: Comments from Nasdaq Page 42 GAO- 02- 362 Securities Markets
Self- Regulation

Appendix III: Comments from Nasdaq Page 43 GAO- 02- 362 Securities Markets
Self- Regulation

Appendix III: Comments from Nasdaq Page 44 GAO- 02- 362 Securities Markets
Self- Regulation

Appendix III: Comments from Nasdaq Page 45 GAO- 02- 362 Securities Markets
Self- Regulation

Appendix IV: Comments from the Securities Industry Association

Page 46 GAO- 02- 362 Securities Markets Self- Regulation

Appendix IV: Comments from the Securities Industry Association

Appendix IV: Comments from the Securities Industry Association

Page 47 GAO- 02- 362 Securities Markets Self- Regulation

Appendix IV: Comments from the Securities Industry Association

Page 48 GAO- 02- 362 Securities Markets Self- Regulation (233666)

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