| Subject: Self-Governance Seen Key to NYSE Future |
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Date Posted: 11:38:08 10/04/03 Sat
Self-Governance Seen Key to NYSE Future
Sat October 4, 2003 12:03 PM ET
By Javier David
NEW YORK (Reuters) - Changes to the New York Stock Exchange's dual role as a regulator and a marketplace -- which critics call its fundamental flaw -- are seen by experts as critical to resolving the Big Board's perceived conflicts of interest.
Last month's furor over former New York Stock Exchange Chairman Richard Grasso's $140 million pay package exposed what observers say is the dichotomy of the two roles, which facilitated the outcry that led to Grasso's ouster.
In addition to being the world's No. 1 stock exchange, the NYSE is a self-regulatory organization (SRO) that polices itself. The exchange ensures listed members comply with its trading rules and do not run afoul of federal securities laws.
"The (SRO) structure is problematic and steps will be taken to at least insulate the enforcement/disciplinary side of the exchange from those it regulates," said Eugene Goldman, a partner at the law firm McDermott, Will & Emery in Washington and a former senior counsel with the U.S. Securities and Exchange Commission's Division of Enforcement.
"The commission is extremely interested and aggressive in what the exchange is going to come up with," Goldman said. "And if they are not satisfied, I don't think there's any question that the proposals will be modified or sent back to drawing board."
Unlike its closest competitor, the Nasdaq Stock Market Inc. NDAQ.QB , the NYSE has never formally separated its oversight functions from its role as a marketplace.
The Nasdaq operates as a hybrid that trades stocks but is regulated by a separate entity, its parent company NASD, formerly known as the National Association of Securities Dealers.
Some analysts suggest the Big Board should go public like the Nasdaq, requiring that the business and regulatory functions to be spliced definitively. It would also neutralize the perceived conflicts of interest, as well as minimize the possibility that the SEC would take a more dominant role in governance matters -- something the exchanges would like to avoid.
Indeed, at a conference in New York in September, Edward Kwalwasser, the NYSE's executive vice president responsible for regulatory matters, said that "if we want to remain an SRO, we have to fulfill our obligation to the SEC."
He said that flouting its regulatory requirements was "not in anyone's interest at the exchange, adding that "there are conflicts in the securities industry and you just have to learn to manage them."
DON'T SHOOT THE REGULATOR -- OR THE MARKET
Despite public skepticism that the Big Board can serve as both policeman and businessman, NYSE interim boss John Reed told reporters on Monday that he felt the exchange had done a good job policing itself.
"I view our regulatory capability as an asset," he said, even as he suggested that the exchange's regulatory arm could be altered during the reform process.
However, it was the NYSE's regulatory function that made many uncomfortable with the size of Grasso's compensation, and the manner in which it was approved by those overseen by Grasso.
And experts say relieving the NYSE of its regulatory function could have unintended ramifications.
Michael Molloy, a law professor at the University of the Pacific and a former special counsel to the SEC's enforcement division, said that doing away with the SRO model would fail to solve the problem that has made even the NYSE's incoming chairman uncomfortable.
"You've got somebody in-house paid by people he or she is regulating," Molloy said. But he adds, "there are some ... in favor of some form of an SRO model."
In addition, he argues that the financial and logistical burden of overseeing every aspect of the market's regulation could ultimately prove too heavy for federal regulators to bear.
"We've had a big bump-up in the SEC's budget in the post-Enron period, but anyone looking at this as a practical matter doesn't expect that to be maintained over time," said Molloy.
"We may end up losing not only the internal efficiencies, but we also may find that we end up with a very serious shortfall in terms of coverage," he added.
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