Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: WEDNESDAY, September 20, 1995                   TAG: 9509200054
SECTION: BUSINESS                    PAGE: B-7   EDITION: METRO 
SOURCE: Bloomberg Business News
DATELINE: WASHINGTON                                  LENGTH: Medium

STOCK REGULATOR TO SPLIT DUTIES

The parent of the Nasdaq Stock Market has voted to accept an independent panel's recommendation that its dual functions be largely separated and its board be reconstituted.

The National Association of Securities Dealers both administers Nasdaq, the nation's second-biggest stock market, and enforces discipline against the 5,400 U.S. brokerage firms. Less than 20 percent of its board members are from outside the brokerage industry.

The NASD also adopted the recommendations of a panel headed by former Sen. Warren Rudman that seek to toughen enforcement by increasing resources, expanding audit capability and making discipline more professional, NASD president Joseph Hardiman said.

NASD spends about $100 million a year on enforcement.

Hardiman, who spoke along with Rudman at a news conference Tuesday, said the self-regulatory organization's board voted overwhelmingly to adopt the principles in the Rudman panel's 400-page report.

``These changes will come in the nick of time,'' said Rudman, who compared the NASD management structure to an assembly line that was originally formed to make 100 cars but now has to assemble seven times that many. ``Some cracks are developing in the system.''

Even so, the report said, ``The NASD has discharged its self-regulatory responsibilities, not of course with perfection or without difficulty, but professionally and reasonably.''

The market value of companies on Nasdaq has increased from $450 billion to $1.45 trillion in five years, the Rudman report said.

Rudman said his panel resisted calls to completely divorce NASD's regulatory and enforcement functions because the expertise gained in one operation enhances the performance of the other.

``It's important that the market be tied to those who operate them, those who are knowledgeable about them,'' he said.

The NASD staff will study the report and recommend at a November board meeting how best to implement the changes, with an eye toward putting them into effect by early next year, Hardiman said.

The Rudman committee was appointed in November by the NASD, in consultation with the Securities and Exchange Commission, to examine the self-regulatory body's governance amid investigations by federal regulators. The report caps interviews with more than 200 people by the panel, which consists of six financial specialists and the retired Republican senator from New Hampshire.

The NASD plans to create a separate enforcement unit, like Nasdaq, that will have its own board and will report to the parent, Hardiman said. Both these units are to operate ``with substantial deference'' from NASD, Rudman said.

Nasdaq now functions like a committee of the NASD board, with Hardiman presiding as chairman of both the Nasdaq and NASD boards, the report said.

Of NASD's dual mission, the Rudman report says ``It is largely a mission impossible. Fundamental change is required.''

Both Nasdaq, one-third of whose board are members of the public, and the new unit, dubbed ``NASD Regulation'' by the report, are to draw half their directors from outside the securities industry. Five of the NASD parent's nine members are to be public members drawn from academia, endowment funds, foundations, major trust companies, pension funds and public office, Rudman said.

``It is essential that both the perception and reality of fairness be reinforced,'' he said.

The recommendations seek to increase NASD's responsiveness to small member firms and investors, he said. Only five of the 26 NASD directors are currently from outside the securities industry. Both the New York Stock Exchange and the American Stock Exchange have 25 members, with 12 from the public, 12 from industry, and a chairman.

Nasdaq is the only U.S. stock market that operates electronically and among decentralized traders rather than from a trading floor. Its rapid 26 percent growth in volume this past year stems, in part, from the popularity of its many technology companies.