Subject: File No. SR-NASD-2007-023
From: Charlie Cray
Affiliation: Director, Center for Corporate Policy

April 16, 2007

The consolidation of the NASD and NYSE (the two SROs) -- a transaction encouraged by the SEC -- was done deceptively and possibly illegally.

Therefore, the SEC is in no position to render a decision on this flawed rule change.

The historical record reveals that the merger was obtained through what can accurately be described as a panic-inducing "bums rush" campaign designed to garner the consent of NASD members that are not also NYSE members. These rank-and-file NASD members were pushed and induced to support the deal because they stand to lose out in the deal.

The campaign involved serious (and possibly illegal) procedural omissions, as well as a lot of one-sided boosterism (including unfounded assertions in public that the transaction would promote "efficiencies" in the regulatory process -- one reason for the SEC's support).

In particular, the NASD's membership was provided with a very short time to decide, during the holiday season when promoters knew the members would be distracted, as well as a proxy statement that failed to fully disclose how the process was decided.

The Proxy Statement was not disseminated to NASD members until December 14, 2006 (the day before the beginning of Chanukah and shortly before Christmas), and the vote was scheduled shortly after the Holiday season, on January 19, 2007.

The NASD and NYSE rushed to consummate the consolidation in this manner in order to avoid possible resistance from the NASD's own members, which would have potentially manifested itself at the NASD's 2007 Meeting of members. But the merger was pushed through in a way to avoid such a meeting.

In addition, members were pressured by the perception of an undocumented threat of federal regulatory intervention unless the consolidation was approved.

In addition, the terms and conditions of the proposed consolidation were assembled behind closed doors, and largely dictated by large securities brokerage firms that are members of both SROs, with very little to no participation by NASD rank-and-file members.

The SEC apparently played no role in determining or approving the terms and conditions of the transaction, disregarding any obligation to ensure that the transaction was conducted in a lawful manner.

In particular, the SEC should have ensured that membership approval of the transaction met the requirements of Delaware law, which requires that the proxy statement provided to voting members include the actual contractual agreement between NASD and the NYSE.

Indeed, the proxy did not include the secretive agreement, which means it was deceptive by omission. Thus, we believe that the transaction was illegal even though the members voted for it, because it did not meet the requirements of Delaware law.

The proponents of the merger may also have violated Delaware Law by providing a Proxy Statement that was replete with conclusory, one-sided statements, without describing in full the true nature of the transaction, and without presenting the actual NYSE-NASD contract itself to the NASD membership before the vote (as opposed to merely the proposed changes in the by-laws).

For the members of the NASD that are not members of the NYSE, these omissions were key.

Unlike the NYSE, the NASD operates under the "one firm, one vote" rule in electing the NASD's Board of Governors. Only 200 of the largest are members of the NYSE. Thus the proposal may be unfair to NASD members on governance grounds, since their influence over the new SRO will be substantially diluted under the new governance structure.

In addition, monetary inducements were offered to small NASD firms to exercise their votes under the "one firm, one vote" principle. (See New York Times, 11/29/06, "Let's Vote On Securities Rules. Oh, and Here's $35,000").

In effect, this illegitimate deal amounts to the wholesale disenfranchisement of some NASD members by a small group.

Charlie Cray
Center for Corporate Policy
Washington, DC