WASHINGTON -- National Association of Securities Dealers' members voted overwhelmingly to turn the NASDAQ Stock Market into a for-profit company.
The approval by 84 percent of the NASD's member brokerages clears the way for the association to sell NASDAQ by September. The NASD plan seeks to raise $1.5 billion by making two sales of NASDAQ stock and warrants to brokerages, companies and institutional investors."The members' message is a realization that this is not only good for them but represents survival for NASDAQ," NASD and NASDAQ Chairman Frank Zarb said in an interview.
Zarb said turning NASDAQ from a not-for-profit membership organization into a private company would let it more nimbly compete with electronic trading rivals in the United States and in Europe. A shareholder-owned company can make corporate decisions more quickly and raise money more easily to fund NASDAQ's growing technology needs, he said.
After NASDAQ is sold, its new board of directors will decide by the end of the year whether to make an initial public offering of NASDAQ stock, Zarb said. The New York Stock Exchange, the largest U.S. stock market, also is considering raising money through an IPO next year.
The NASD member vote handed a victory to Zarb and a stinging defeat to dissident NASD board member Alan Davidson. Davidson, a small-firm activist, campaigned against the plan after endorsing it in January.
Davidson said he was disappointed by the vote but unrepentant in his opposition.
"The vote reflects confusion and fear of retaliation by the member firms," said Davidson, who also is president of the 200-member Independent Broker-Dealers Association.
Of the 4,185 member firms voting, 3,423 approved the plan, 652 opposed it, and 110 abstained, the NASD announced today. About 1,300 firms didn't vote. About 60 percent of NASD member firms have fewer than 10 employees.
The NASD's next step will be to sell a minority block of NASDAQ stock and warrants to brokerages, companies and institutional investors by the end of May. A second sale, expected by the end of September, will complete NASDAQ's transformation into a private company. The sale will leave NASD with a 22 percent stake in the new NASDAQ firm.
Zarb said the NASDAQ Composite Index's plunge during the past month, including its 9.7 percent decline today, wouldn't affect the desirability of the NASDAQ stocks and warrants being sold.
"They're being sold to professionals who know that markets go up and markets go down," the NASD chairman said.
More than 1,000 member firms have committed to buying NASDAQ shares for $11 a share during the first private placement, he said.
The Nasdaq index fell 25 percent this week, its worst weekly performance ever. Since its March 10 record high, the index has lost 34 percent of its value as investors sold many of Nasdaq's technology stocks, judged overpriced by many analysts.
The Securities and Exchange Commission still needs to approve by-law changes for the new Nasdaq company, a process that Zarb said will take about two months. SEC Chairman Arthur Levitt has expressed support for the Nasdaq sale.
Nasdaq, which lists technology leaders such as the Microsoft Corp., Intel Corp., and Cisco Systems Inc., is facing competition from low-cost electronic trading networks such as Datek Online Holdings Corp.'s Island. These screen-based networks automatically match buyers and sellers.
Davidson's brokerage, Zeus Securities Inc. of Smithtown, New York, has filed a lawsuit seeking to halt today's election and the Nasdaq conversion in general. A New York state judge ruled Thursday that the election could go forward, while deferring to Monday a hearing on the overall plan.
Davidson, in campaigning against the Nasdaq plan, argued that the sale should be delayed until regulators can decide whether to form a single, self-policing industry organization. He has voiced concern that the large brokerages could come to dominate the regulatory process.
The NASD plans to continue to own its regulatory unit, headed by Mary Schapiro, which polices all 5,500 U.S. brokerages.
Zarb, whose chairmanship is set to expire next February, said today he was willing to serve beyond that time as interim chairman of the new Nasdaq company but not as a permanent chairman.
"Whether that means another nine, or 19 months, in the job is up to the board," he said. "But first, we need a visible, clearly determined succession in place."
Zarb, 65, said a new chairman of Nasdaq should be willing to serve in that post for at least five years. Two search committees have been appointed to recommend candidates for chairmen of Nasdaq and NASD.
Of the $1.5 billion to be generated by the stock sale, the NASD plans to use about $500 million to fund its regulatory unit, $215 million to pay for improvements at the American Stock Exchange, and most of the remainder to upgrade the Nasdaq. NASD also plans to reduce member fees by $114 million over seven years.
Under the planned allocation of Nasdaq shares, member firms would get as much as 28 percent of the total and possibly 33 percent if there's an IPO. Dealers would get as much as 32 percent of the stock and the largest companies listed on Nasdaq would get as much as 16 percent. Institutional investors would receive as much as 4 percent.