Levitt Warns NYSE, NASD to Maintain Oversight Integrity

The top U.S. securities regulator warned the heads of the New York Stock Exchange and Nasdaq Stock Market on Monday that their plans to convert to for-profit corporations--and sell stock to the public--must not jeopardize their oversight functions.

Securities and Exchange Commission Chairman Arthur Levitt said that any restructuring of the stock markets “must ensure that the self-regulatory role will continue to be zealous, adequately funded and imbued with the public interest.”

Levitt’s comments came in identical letters to Richard Grasso, chairman of the NYSE, and Frank Zarb, chairman of the National Assn. of Securities Dealers, parent of Nasdaq.

Last week, Grasso said the Big Board wants to convert from a member-owned, not-for-profit organization to a for-profit, publicly traded one. The process, known as demutualization, would result in an offering of NYSE stock to the public as early as this fall.

Nasdaq also is strongly considering such a move.

Such a conversion requires approval of the markets’ broker/trader members and the SEC.

The goal in going public would be to raise investment capital and gain flexibility by casting off the sometimes cumbersome member-owned structure.

Both the NYSE and Nasdaq have been losing business to electronic trading systems that are generally publicly traded themselves or owned by public companies. Proceeds from any public offerings would allow the NYSE and Nasdaq to purchase or develop such electronic networks for themselves.

Levitt said he recognizes the competitive reasons for the markets’ wanting to go public, but he does not want their oversight responsibilities diminished in the process.

Both the NYSE and NASD have divisions that monitor trading and other activities of their member firms to protect against fraud.

While offering no specifics, Levitt said, “We may want to begin considering alternatives, such as more formally separating the self-regulatory role from the role of exchanges as trading venues.”

Levitt also said that even as ownership passed from them to the public, exchange members must retain strong representation to ensure that disciplinary processes and other aspects of regulation are fair and equitable.

In the wake of allegations of stock price collusion among dealers, the NASD three years ago restructured itself to create a sharper separation between its trading market and its regulatory unit.

Grasso said he envisions keeping the self-regulatory apparatus within the publicly traded NYSE.