"FIN RAH!" ... A WELCOME CHANGE: WHY THE MERGER WAS NECESSARY TO PRESERVE U.S. MARKET INTEGRITY

Fordham Journal of Corporate & Financial Law, 2008 by Cervantes, Yesenia

I. INTRODUCTION

In an age when news of a corporate merger seldom raises an eyebrow, it should come as no surprise that regulatory organizations would eventually follow suit. Corporate mergers are typically the result of efforts to increase the financial worth of the resultant company, in hopes of higher stock prices and, therefore, wealthier shareholders. However, the recent consolidation between the regulatory arm1 of the New York Stock Exchange ("NYSE") and the National Association of securities Dealers ("NASD"), the two self-regulatory organizations ("SROs") chiefly responsible for oversight of the U.S. securities industry, is the by-product of a different type of sought reward: efficiency.2

For years, members of the industry criticized the duplicative efforts made by these two agencies and the discrepancies resulting from conflicting rules.3 Under the former system, firms belonging to both agencies were "subject to dual-but not always consistent-ratebooks, examinations, investigations, sweeps and enforcement actions."4 In an attempt to rid the regulatory oversight schema of such contradictory rales, these two organizations "unveiled ... a plan to merge some of their operations" in November 2006.5 The final organization became known as the Financial Industry Regulatory Authority ("FINRA").6

As with any business deal affecting the overall economy, questions were raised concerning the potential impact on the public.7 The overarching purpose of the merger was investor protection.8 However, with optimism waning in the wake of the subprime mortgage debacle and the American economy dangling over the precipice of recession, some consumer advocates have questioned whether now is the best time to reduce the number of regulators looking out for their interests.9 To the contrary, such issues prove that now is precisely the time to consolidate and streamline the regulatory system.

The consolidation not only serves to address the issues of duplication and inefficiency within the regulatory structure, but also the conflicts of interest that in recent years have resulted as both organizations focused on profit generation instead of on their obligations as supervisory organizations.10 The NASD's role as creator and former owner of the NASDAQ and the NYSE's transition to a for-profit entity in 2006 caused some to question whether the two self-regulatory organizations could continue to regulate member firms in an impartial manner.11 Their return to exclusive service as regulatory agencies, especially in this time of economic turmoil, reinforces the true regulatory mission of investor protection.

A. Sub-Prime Disaster

Recent headlines have drawn the world's attention to the subprime crisis that has infiltrated virtually every aspect of the financial sector. Although some sectors have been impacted more than others, the securities industry has surely been shaken.12 Over the past few years, credit terms had become uncharacteristically flexible and home loans easily available, allowing anyone, including those with poor credit histories and with low incomes, to quality for a home mortgage loan.13 The easy access to credit appealed to individuals seeking the American dream of home ownership. Sadly, the dream turned into a nightmare as many, especially those with adjustable rate mortgages, found themselves unable to afford their mortgage payments and, subsequently, in default on their loans.14 Since the interest rates on over 1.8 million subprime mortgages are scheduled to increase in 200815 and 2009, the number of foreclosures will almost certainly continue to rise, necessitating the financial industry to address the consequences of its investment participation in subprime mortgages.

The stock market fallout in 200016 led to the development of innovative yet highly speculative financial products, such as credit default swaps, collateralized debt obligations, and other financial vehicles backed by subprime mortgages.17 These investment choices precipitated the venomous effects of the subprime mess on the brokerage industry.18 A true domino effect, one by one the big Wall Street firms stepped forward with their massive subprime-related losses.19 After releasing its 2007 third-quarter earnings, Citigroup announced that it would write down over $5 billion in losses, deeply cutting into the company's financials.20 The amount of write-downs continued to rise, resulting in thousands of employee layoffs.21 Merrill was also dealt a hard blow and is expected to write-down over $15 billion.22 Others soon followed,23 and the full extent of the damage is still to be determined.

The meltdown left many questioning why regulators did not prevent, or even foresee, the crisis, and wondering who dropped the ball.24 Many blamed the regulators for failing to recognize the foreseeable credit issues that would arise from this type of securitization.25 Some asked, "[Where was the NASD] when subprime funds were being dreamed up and then packaged and sold?"26 While it is too late to undo the damage, the consolidation comes at a crucial point in our economy's history and can be a tool to analyze what went wrong and prevent a future disaster.