Overhaul of NYSE Approved

The Securities and Exchange Commission approved an overhaul of the tradition-bound New York Stock Exchange on Wednesday after the Big Board pledged to split the jobs of chairman and chief executive to keep one boss from holding too much power.

In a unanimous vote, the SEC endorsed a set of reforms that interim NYSE head John S. Reed proposed in an attempt to repair an image battered by scandal and a furor over former Chairman Richard Grasso’s $188-million pay package.

Under the new governance plan, which will institute what officials described as the most sweeping set of changes at the NYSE in 32 years, there will be a smaller board, independent directors and the newly created job of chief regulatory officer.

Still, outside critics and even some SEC officials expressed doubt that the overhaul would fully protect the interests of investors or ensure that the NYSE would adequately regulate the 1,366 seat holders who actually own the exchange.

“I’m not sure that these changes will be enough, but we will watch them carefully,” SEC Commissioner Harvey J. Goldschmid said. “For me, everything is on the table.”

The push to reform the world’s largest stock exchange gained steam after revelations of the lavish pay deal for former chairman Grasso -- which led to his ouster in September -- and trading abuses that are under investigation. In particular, Grasso’s pay package reinforced notions that the 211-year-old stock exchange was an insiders’ club overdue for management reforms and public scrutiny.

The governance plan OKd Wednesday by the SEC was overwhelmingly approved last month by the NYSE membership.

The decision to split the positions of chairman and chief executive -- Grasso had held both jobs -- is separate from the management overhauls approved by the SEC. NYSE officials agreed to uncouple the positions if the SEC approved the package of governance reforms, according to SEC Chairman William H. Donaldson.

“In this way, the NYSE should be in a better position to protect against the concentration of too much executive authority in one individual,” said Donaldson, who chaired the stock exchange in the early 1990s.

The reforms, he said, represented “a significant step forward” in improving how the Big Board is run and in making its management practices more visible to the public.

“There can be little doubt the NYSE proposal is far-reaching both in its purpose and scope and, in my opinion, the reforms proposed should be given a chance to work,” Donaldson said.

Under the reform plan, the stock exchange’s board of directors will be reduced from 27 members to six to 12.

With the exception of the chief executive, the new directors will be free of ties to the exchange’s management, its members or listed companies. In addition, the NYSE will set up a 20- to 25-member board of executives that will include the exchange chairman and representatives of Wall Street firms and NYSE-listed companies. The panel will serve as an advisor to the board of directors.

The NYSE’s regulatory duties will be supervised by a new “autonomous regulatory office,” which will report directly to an independent board committee.

While expressing their approval of the decision to split Grasso’s old job in two, critics, including a coalition of state treasurers, urged greater oversight of the stock exchange by shareholders. They also said the exchange’s role as a market regulator should be separated more clearly from its role as a market operator.

“In particular, we still believe that the NYSE main board should have public investor representation and that regulation should be meaningfully strengthened by being separated from operations,” the National Coalition for Corporate Reform, which includes financial officials from California, New York and other states, said in a statement.

This week, the California Public Employees’ Retirement System sued the NYSE and seven specialist firms, alleging that trading abuses have cost investors more than $150 million over the last three years.

CalPERS spokesman Brad Pacheco said Wednesday that the agency viewed the reform plan “as a positive step, but it doesn’t change our lawsuit in any way. We continue to be concerned about the specialists’ trading practices and feel there is a need to separate the [NYSE’s] regulatory function.”

Barbara Roper, director of investor protection at the Consumer Federation of America, said investors would be better off with more advocacy at the board level: “We don’t consider it a long-term solution,” she said.

Donaldson acknowledged that questions have been raised about how Reed’s reform plan addressed the Big Board’s regulatory responsibilities. But Donaldson defended the plan, noting that NYSE regulatory activities would be supervised by board members who are independent of the stock market.

Yet it appeared the SEC was far from certain that Wednesday’s vote was the last word on governance of the exchange.

The action was “the start of the beginning of serious reform and change for the New York Stock Exchange,” Commissioner Roel C. Campos said.

The SEC is expected to revisit Reed’s governance plan next year as part of a broader review of U.S. markets that will include an appraisal of the NYSE’s specialist-based trading system.

“The commission must be especially diligent in assuring that the proposed reforms achieve their intended results,” Donaldson said.