WASHINGTON, D.C. – Speaking at the 49th annual Investment Company Institute general membership meeting, NASD Chairman Mary Shapiro told mutual fund executives she sees better regulation of investment products as a result of the expected merger of the NYSE and NASD regulatory bodies. While this potentially is better news for investors, purveyors of mutual funds may find themselves in the crosshairs when bringing more nuanced products to market.

“It’s my hope that consolidation will encourage more cooperation among regulators of all financial products,” she said during a keynote address Friday. “This cooperation will be critical to fixing what I consider the soft underbelly of regulation today: jurisdictional boundaries that focus on product rather than the investor.”

Given the glut of new investment products that have flooded the market in recent years, and the growing complexity of financial plans, there may be multiple regulators responsible for an individual investor's portfolio. For example, the SEC, CFTC, NASD, MSRB, 50 state insurance regulators and several banking authorities are “all looking at specific products within their jurisdiction, but rarely working in concert,” Shapiro said. “For the investor that’s a recipe for confusion.”

As one might expect, with different regulators come different rights. “Why should the protections that investors receive vary from product to product?” she asked the audience “The answer is: they shouldn’t – there is no excuse for offering investors second-class protection.”

But that is expected to change for the better under the new regulatory regime, Shapiro believes. And joint regulatory efforts such as the new rule established last week by NASD and insurance regulators in North Dakota, Iowa and Minnesota, which requires insurers to recommend only suitable annuity products to their customers, will help protect investors and alleviate some of the confusion

Shapiro noted that NASD has been conducting an ongoing review of new products and their potential negative effect on investors. “We focus on products that have exceptionally high fees or hard-to-understand risks, as well as investment fads, reincarnations of troublesome products from the past, and those that target vulnerable populations,” she said. From there, the NASD decides whether new rule promulgation is necessary or if there needs to be a notice to members about best practices related to the product.

The SEC is currently reviewing the merits of the previously announced SRO merger, which Shapiro expects to come to fruition this summer. The consolidation has drawn criticism from hundreds of small firms who allege that their voting rights have been compromised because it gives more influence to large dually-listed firms and because a $35,000 rebate on membership fees was used as leverage to convince firms to approve the deal.

One firm is even duking it out with regulators in court. Standard Investment Chartered, a privately held brokerage firm in Costa Mesa, Calif., sued both NASD and the NYSE in March alleging that the NASD’s proxy for the bylaw vote was incomplete and misleading. The lawsuit seeks to put a kibosh on the deal.

William Galvin, Massachusetts Secretary of the Commonwealth, has also been vocal in criticizing the transaction, saying that fewer regulators would mean less investor protection. In a comment letter to the SEC, he writes that multiple regulators serve as “an antidote to the problem of a regulator becoming accustomed to, and even tolerating, certain bad industry practices.”