Regulation of the New York
and the New, New Thing
This is a good time to note that, during the
time the Grasso compensation was being vetted on Wall Street
and in Washington, the U.S. Congress passed the Sarbanes-Oxley
Act, effective in 2003, a significantly comprehensive corporate
reform package brought on by the financial scandals that had
already occurred in corporate America (such as Enron and WorldCom).
Not much of that touched Grasso and the not-for-profit NYSE,
but the simultaneous discussion compounded the public impression
of scandals throughout the country, especially relating to
excess executive compensation.
The NYSE is literally under the control of the
SEC but, with SEC permission and acceptance, operates as a
self-regulated organization (SRO), with a board -- consisting
primarily of individuals representing member firms -- and
a consulting board (see the annual
report in the eLibrary)
After somewhat lengthy discussion, on January
1, 2006, the NYSE and Archipelago Holdings, Inc.were formally
merged to continue business as NYSE Group, Inc. The NYSE became
a for-profit firm with a unanimous vote of its members. (In
February, the SEC approved these changes) Friday, December
30, 2005, was the last day that Big Board memberships could
be bought or sold. The memberships also called
seats because traders once sat in numbered seats
are no longer available.
Electronic trading began on October 3, 2006,
on the New York Stock Exchange, although not all stocks were
traded electronically. Under John Thains leadership,
the exchange began to shift. A headline in November 2006 noted
NYSE to Sweep Away 20% of Floor, suggesting a
smaller need for space.
The New, New Thing in the title
of this section refers to a new approach to regulation*. The
New York Stock Exchange was never to be the same. One thing
that changed was the way it would regulate as an SRO. But
has the world of financial securities changed significantly?
While Grasso was at the NYSE, there were two
parts of NYSE. One part handled the trading. The second part
was NYSE Regulation, Inc., also a not-for-profit corporation,
dedicated to strengthening market integrity and investor
protection. As such, it was permitted by the SEC to
provide regulation on the Exchange.
After the merger, when NYSE became NYSE Group,
a for-profit corporation, the regulation continued but the
organization was altered. The NYSE Group, Inc. operated then
with two wholly-owned subsidiaries: NYSE Market, Inc.,
a Delaware-registered corporation, and NYSE Regulation,
a New York Type A not-for-profit corporation.
The NYSE had been a not-for-profit organization
since its inception. In 2006, with the NYSE-Archipelago merger,
it became for-profit. It was listed on the NYSE as NYSE
Group, Inc. Archipelago Holdings had the capacity for
electronic trading and the NYSE began to combine that strength
with its own specialists trading system.
A NYSE Web site describes the structure of regulation
created when NYSE and Archipelago combined:
This organizational structure preserves
and extends the separation yet pervasive communication
between business and regulatory activities achieved
under the NYSEs previous governance architecture
that was comprehensively reformed in 2003. It
also seeks to insulate NYSE Regulation from the additional
crosscurrents created by public ownership.
The chief executive officer of NYSE Regulation
has primary responsibility for the regulatory oversight
of NYSE Group and its exchange subsidiaries, and reports
solely to the NYSE Regulation board of directors.
NYSE Regulations board of directors
is to be comprised of:
Five directors with no affiliation to
NYSE Group board nor any listed company or member organization;
Three directors who are also NYSE Group
And one management director who serves
as the chief executive officer of NYSE Regulation.
NYSE Groups chief executive officer
does not have a seat on the NYSE Regulation board, nor
will Regulation report to him.
NYSE Regulation employed over 700 people.
The organization was intended to perform regulatory
responsibilities for the New York Stock Exchange and
Regulation Inc. (of the NYSE) was intended
to be independent in its decision-making. It had a board of
directors comprised of a majority of directors unaffiliated
with any other NYSE board. Each director must also be independent
from member organizations and listed companies.
But, on November 28, 2006, the NYSE Group, Inc.
and NASD announced they had signed a letter of intent to consolidate
their member regulation operations into a new self-regulatory
organization (SRO). This consolidation is intended to create
a private sector regulator for all securities brokers and
dealers doing business in the United States.
NASD Chairman and CEO Mary L. Schapiro will
serve as CEO of the new combined organization, as yet unnamed,
which will be responsible for regulatory oversight of securities
firms, arbitration, and for, among other things, the professional
training, testing and licensing of registered representatives,
and of industry utilities like NASD's Alternative Display
Facility, OTC Bulletin Board, and Trade Reporting Facility.
Highlights of the SEC announcement on NYSE/NASD
regulatory organization include:
The new SRO** will be responsible for
all member examination, enforcement, arbitration and
mediation functions, as well as all other current NASD
responsibilities, including market regulation by contract
for NASDAQ, the American Stock Exchange, the International
Securities Exchange and the Chicago Climate Exchange.
NYSE Regulation will continue to oversee the NYSE market,
through its market surveillance division, related enforcement
functions, and listed company compliance.
A 23-person Board of Governors will oversee
the new SRO's activities with 11 seats held by Public
Governors. Large firms, consisting of 500 or more registered
persons, and small firms, consisting of 150 registered
persons or fewer, will each be guaranteed three seats
on the new SRO Board. Medium sized firms with 151-499
registered persons, NYSE floor members, independent
dealer/insurance affiliated firms, and investment companies
will each be guaranteed one seat on the new organization's
Board. The Chairman and the CEO will also serve on the
Upon closing of the transaction, each
NASD member firm will receive a one-time payment of
$35,000 in recognition of anticipated cost savings that
will result from the implementation of the plan. Certain
member fees also will be reduced for a period of five
This transaction is structured to be financially
neutral to NYSE Group shareholders.
"NASD and NYSE Regulation recognize
that world markets and regulation are changing,"
said Schapiro. "Rather than stand by and let events
overtake us, we have chosen to lead and help shape a
better system of regulation that is good for investors
and securities firms of all sizes will have the opportunity
to voice their opinions and make their concerns known.
The NASD-NYSE plan is a good one
on its own merits, and it offers the industry an important,
and perhaps its only, opportunity to shape its own future.
The SEC can't allow the current self-regulatory system
to continue as is. With the SROs and the industry taking
the lead, the need for a governmental solution is eliminated,
and that's always a preferable course.
WASHINGTON (MarketWatch) -- The chairman
of the Senate Banking Committee questioned Thursday
whether the new, for-profit New York Stock Exchange
will emphasize self regulation as much as profit making.
"While there have been changes in
the exchange's governance structure, questions remain
as to whether robust and vigorous self-regulation will
be subordinated to profit-making activities," Sen.
Richard Shelby, R-Ala., said in an opening statement
prepared for a committee hearing.
The hearing is a review of self-regulatory
organizations like the NYSE
.. The NYSE Group CEO John Thain and NASD Chairman
and CEO Robert Glauber are testifying.
Thain emphasized it's in the exchange's interest
to have a tough regulator.
"Those of us running the business side
of the exchange have every incentive to ensure that the regulatory
oversight of our listed companies, member organizations and
trading platforms is robust," he said in written testimony.
Shelby on Thursday also said he's concerned
about duplication of regulations on NYSE and NASD member firms.
Almost 200 firms are members of both, he said.
"That means two sets of rules, exams, interpretations,
enforcement, and fees," Shelby said. "This dual
structure for broker-dealers raises questions relating to
whether the higher regulatory costs can be justified."
Thain told committee members the NYSE and NASD
are planning to report to securities regulators within one
year about plans to eliminate inconsistent rules.
Meanwhile, Glauber told senators the NYSE and
NASD should jointly regulate firms that are members of both
organizations. Such an arrangement, he said, would lower compliance
costs for firms.
"These savings could then be passed on
to investors, while the regulation of these firms would be
more coherent, effective and efficient," he said.
The hearings came one day after the public-trading
debut of the NYSE Group. Shares surged 25% in the first day
of trading. The old NYSE regulation resulted in a good
deal of manipulation and favoritism during the Grasso days
and became a special concern of Attorney General Eliot Spitzer,
who has been quoted as saying: self-regulation is no
regulation at all.
If regulation at the NYSE has changed, it is
no longer officially under the control of the NYSE CEO (which
was Grasso). Still, it does not appear independent
of the NYSE nor has it changed the world (as a new new thing).
Look at the latest Annual Report of the NYSE
to see how Regulation Inc. is organized. Does it appear independent?
How would you change it? (Make a note of the definition of
independent you are using.)
A joint statement by William H. Donaldson and
Harvey L. Pitt, both former heads of the SEC, expressed their
opinions that, although self-regulation of the NYSE was a
good idea for some time, it had become outdated and
inefficient. Their explanation includes:
More than merely eliminating redundancy
and attendant costs, the new SRO structure will make meaningful
contributions to enhanced regulation. The significant knowledge,
experience and expertise of broker dealer regulation that
now resides in two separate organizations will be consolidated
and housed in one. Rule writing, examination and enforcement
will be enhanced, and information sharing, which is an important
factor in effective regulation, will be improved.
The plan also addresses the important
issue of governance. A majority of the new organization's
Board of Governors will be from outside the industry, a check
and balance critical to ensuring that investors' interests
will be protected. At the same time, the governance structure
of the new SRO also promises fair and balanced industry participation,
thus assuring that the board's decisions will be informed
by the views and insights of all segments of the industry.