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Reed’s rejig
Nov 6th 2003
From The Economist Global Agenda Governance of the New York Stock Exchange is to change dramatically under plans unveiled by its interim boss, John Reed. But his proposal that the exchange keep its regulatory role will disappoint many JOHN REED, the interim chairman and chief executive of the New York Stock Exchange (NYSE), published his proposals for a revamp of the exchange’s governance on Wednesday November 5th. He hopes that the changes will rebuild confidence in the Big Board, which took a battering when his predecessor, Dick Grasso, was ousted after an outcry over his $187.5m pay package. Mr Reed is proposing to ensure that the exchange’s controversial regulatory functions are independent of the securities firms that trade on the exchange and the companies that list on it, while remaining under the exchange’s roof. But critics feel that the exchange has done such a poor job of regulating itself that the Securities and Exchange Commission (SEC), the main markets regulator, should get someone else to do the job. Mr Reed is proposing that the day-to-day operations of the exchange be separated from its governance and from the regulation of trading. For starters, the exchange’s 27-member board—stuffed, to date, with top officials from the securities firms and companies regulated by the NYSE—is to be slimmed down to one with no more than 12 directors, none of whom would be from the securities industry or a company listed on the exchange. Securities-industry executives would instead serve on various advisory committees. All regulation would be the responsibility of the board’s independent directors. The NYSE's troubles burst into the open late this summer, when details of Mr Grasso’s remarkable compensation deal were first disclosed. Since then, critics, including William Donaldson, the SEC’s chairman, have asked whether Mr Grasso’s pay may have diverted resources from the exchange’s all-important regulatory function. Such suspicions appear to have been given substance by an as-yet-unpublished SEC report into trading violations by the specialist firms that trade on the exchange. (The NYSE is the last big exchange to trade by “open outcry” rather than electronically.) According to the Wall Street Journal, the SEC probe found that improper trading in around 2.2 billion shares cost investors more than $150m. Even more worryingly, the report said, “the NYSE's disciplinary programme…does not adequately discipline or deter violative conduct.” These findings are so damning that they may be enough to sway Mr Donaldson. He told Congress in September that self-regulation had “worked pretty well” at the exchange, but he may have to revisit that opinion. The SEC has already been made to look flat-footed in its regulation of Wall Street investment banks and fund managers by the zealous campaigns of Eliot Sptizer, the New York attorney-general. When it comes to the NYSE, it may choose to be more proactive. for more great business coverage visit www.economist.com |