Model For Effective Self-Regulation November 2002 Daniel M. Sibears Senior Vice President & Deputy Member Regulation, NASD

2 | Self -Regulation | Confidential | Copyright 2002 NASD Introduction Self regulation typically involves a unique combination of private interests with government oversight.

3 | Self -Regulation | Confidential | Copyright 2002 NASD Definition, Role & Current Assessment  Role of self-regulation & its existence differs country to country, across market sectors and across the developed and emerging markets.  Broad objectives of self-regulation are the same as those identified for government regulation of financial markets in the IOSCO Objectives & Principles of Securities Regulation: to preserve market integrity, financial integrity and protect investors.  Self-regulation encompasses the authority to create, amend, implement and enforce rules of conduct with respect to the entities subject to the SRO’s jurisdiction and to resolve disputes through arbitration or other means.

4 | Self -Regulation | Confidential | Copyright 2002 NASD Elements of Effective Self-Regulation  Industry Specialized Knowledge  Industry Motivation  Contractual Relationship  Transparency & Accountability  Flexible SRO Compliance Programs  Coordination & Information Sharing

5 | Self -Regulation | Confidential | Copyright 2002 NASD Regulatory Oversight of SRO Functions & Associated Relationship between Regulator & SRO  Effective self-regulation must be defined within the context of government oversight.  Government oversight of SRO activities ensures that all interests are given the proper consideration and voice in all regulatory activities.  Governing statute should clearly delineate the respective roles of the statutory regulators and the SROs.  Statutory regulator’s role should truly be an oversight role.  Effective regulatory framework should ensure that there is little or no duplication of the regulatory work performed by SROs and the statutory regulators.

6 | Self -Regulation | Confidential | Copyright 2002 NASD Application of a Self-Regulatory Model  Internal rulemaking procedures  Authorization & access to marketplace, including fitness/qualification standards for market intermediaries  Establishment & enforcement of financial, operational and sales practice standards  Surveillance of market activity

7 | Self -Regulation | Confidential | Copyright 2002 NASD Application of a Self-Regulatory Model (cont’d)  Investigation, prosecution & adjudication of rule violations  Administration of a dispute resolution forum  Development & implementation of education programs for market participants and public investors; and  Sharing information and cooperating with other SROs and statutory regulators

8 | Self -Regulation | Confidential | Copyright 2002 NASD Closing Remarks Overall, self-regulation fosters integrity & ethics in the marketplace & among participants