"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

In conformity with the requirements of the Securities and Exchange Act of 1934, the NASD filed its proposed rule change with the SEC on March 19, 2007.162 The submitted notice outlined several key changes to the NASD's by-laws that would accommodate the merger, including changes to its new governance structure.163 On March 26, 2007, the proposed rule change was published and commentary solicited from the public.164 Over 70 comment letters from industry firms, consumer advocates and investors voicing their opinions towards the merger and assisting the SEC in its approval decision were received.165

A. Comment Letters

1. Opposition

Smaller firms mainly voiced opposition to the consolidation because they believed their interests were not being considered.166 The three main areas of concern were: the by-law changes, the one-time payment to firms, and the arbitration forum.

The first area of concern was the by-law change. Most of the comments received opposing adoption of the by-law changes suggested that the new by-laws would not protect investors and would not give small brokerage firms adequate representation.167 Many of the smaller firms already felt that the industry favored the larger companies and that they were at a disadvantage, especially regarding the cost of compliance with regulatory provisions.168 In response to this concern, the NASD provided that this new organization would better protect investors because it would streamline securities firm regulation and take action ensuring that individuals advising the public were well-trained and that the products recommended were suitable for their clients.169

FINRA also believes that the new governance structure affords small brokerage firms greater input and representation.170 One benefit is that they will now have three seats on the FINRA board, instead of the one seat they had on the NASD board.171 Small firms will also be the only ones allowed to select their representatives.172 Additionally, "the small firm advisory board will be 50% elected instead of solely appointed by the NASD."173 This board will determine which exemptions might be appropriate for these companies174 and will serve as the voice of the smaller firms, ensuring "that issues of particular interest and concern to small firms are effectively communicated to and considered by the FESfRA Board of Governors."175

The second area of concern was the $35,000 payment. In anticipation of the cost savings to firms as a result of the consolidation, FINRA gave each member firm a one-time $35,000 payment.176 Several commentators felt that the amount was inadequate and that more could have been offered.177 In response, the NASD explained that as a taxexempt 501(c)(6) corporation, it is not permitted to pay out any form of dividends because doing so would result in forfeiture of this status.178 The NASD consulted with the Internal Revenue Service prior to announcing the expected disbursement amount,179 who granted approval because the payment represented the projected cash flows for each firm as a result of the consolidation.180 More specifically, it did not constitute a tax code violation because the payment is solely based upon the cost efficiencies that the consolidation is expected to yield.181