Mary Schapiro, chairwoman & CEO of the National Association of Securities Dealers, today called for an integrated approach to financial regulation.

Schapiro spoke today at the launch meeting of the newly created Securities Industry and Financial Markets Association in Boca Raton. She said that the NASD has been doing a lot of thinking about the need for the harmonization of regulation in the financial services arena. “In our own back yard we have met with the industry and the New York Stock Exchange to harmonize the rulebooks of both self-regulatory organizations and we will begin to propose harmonizing rule amendments, on a rolling basis, beginning with our next Board meeting in December,” she noted.

“But we are thinking more broadly than that. We believe that financial service products should have a harmonized approach irrespective of whether the product is insurance, securities, banking, or investment advisory,” she added.

“I am not necessarily talking about more regulation. But there should not be a kind of regulatory arbitrage that provides an incentive for the sale of one product over another. A customer should be sold an insurance product rather than a security because the salesperson makes the reasoned judgment that the insurance product meets the best interests of the client as opposed to the fact that such a sale may not be regulated by NASD, and subject to our myriad sales practice rules,” Schapiro said.

“That’s not only bad business for customers, it’s risky business for firms; the fact that a customer was sold a product or service that doesn’t come within our jurisdiction will not insulate from the lawsuit that is based on the customer being sold the wrong product,” she noted. “Therefore I argue that these regulatory arbitrage incentives among competing financial service products do not meet anyone’s interests. It will take a long process of partnering with other regulators to harmonize the investor protections available for related products, but if we don’t undertake it then who will?”

She noted that the NASD is now working with other regulators to extend the protections of suitability to insurance products, such as equity linked and fixed annuities. “Investors deserve no less,” she said.

Schapiro also said it sees the aging of the baby boom generation as a possible looming problem for the securities industry. “An event that creates both great potential for the industry, the promise of great benefit for investors and the potential for great abuse. Scandals in this area of financial services are certain to set off a reaction not just by NASD and the SEC, but also by federal and state elected officials,” she said.

“I urge you to stress test your products and strategies offered to seniors, to train your supervisors and sales force in the appropriate use of these strategies and products, and make sure that you have the appropriate internal oversight in place. If the retirement investment needs of these investors are undermined by unduly risky products and ill-informed decisions, then regulatory reaction will be as swift and wide-sweeping as experienced in the past,” she warned.

Schapiro also discussed a trend to what she termed “a more prudential approach to regulation”. This doesn’t mean prudential regulation in terms of ensuring solvency, but in helping regulated entities in their efforts to ensure regulatory compliance rather than relying on enforcement.

“The prudential versus enforcement based method of regulation is not an either/or proposition. There needs to be a balance between both forms of regulation and within enforcement itself there needs to be a balance of purpose,” she said.

She also suggested that US regulators are increasingly concerned that they do not over-regulate, and push business into other markets as a result. “In practice this means, that we are looking at our activities and rulemaking to ensure that we do not provide unnecessary incentives for our members that are multi-national financial service conglomerates, to move their activities outside the United States,” she said, adding that these interests must be carefully balanced, “because I am not suggesting that we will engage in a race to the bottom of the least regulation.”

Finally, she suggested that the NASD initiate a rule assessment program, which would provide a permanent systematic assessment of rules and their impact, benefit and costs. The NASD is not required to do a cost/benefit analysis in its rulemaking. “Most cost/benefit analyses are done before the fact, what we lawyers call ex ante. But these before the fact analyses suffer from the defect that assumptions must be made about the rule’s operation and its costs — in a sense guesswork is implicit in the process. What we are thinking about is a process that would occur on an ex post basis, that is, after the fact, and presumably be performed with harder data that would eliminate the need for some of the projections and assumptions that lead to more uncertain conclusions,” she said.