NYSE Chief Outlines Plan for Corporate Structure

The man tapped to restore credibility at the New York Stock Exchange on Thursday sketched out plans and a rough timeline for revamping the NYSE’s corporate structure.

But in testimony before Congress, John S. Reed rejected the idea that the exchange should no longer function as a regulator as well as a market operator.

He also defended the “specialist” system that is the heart of the NYSE’s trading operation.

Reed, who became NYSE interim chairman after Richard Grasso’s resignation last month, told a House subcommittee that the exchange’s corporate structure has “fundamental flaws” and that Grasso’s compensation package of nearly $188 million was a symptom of them.

Reed, the retired chief executive of Citigroup Inc., said he wanted to shrink the exchange’s 27-member board and ensure that a majority of its future directors were independent of NYSE management, the broker-dealer industry and companies listed on the exchange.

“My hope is to create a board that is not made up of people who are regulated or who have a [financial] interest,” he said.

The NYSE board has been criticized for failing to challenge Grasso and for being dominated by the securities industry.

A list of potential candidates for the new board would be presented to NYSE members by November and Reed said he would expect them to hold a vote two weeks later. A permanent chairman and CEO would be named after that and Reed, without naming them, said he had two candidates in mind.

The hearing coincided with the NYSE’s announcement Thursday that it would discipline and fine five floor-trading firms for improper trading that may have cost investors millions.

Reed defended the NYSE’s reliance on these firms, or specialists, to oversee trading in listed stocks.

Critics have long argued that the NYSE should shift to an all-electronic marketplace, like Nasdaq, that allows computers to match buyers and sellers. But Reed said the specialist system “seems to rest on solid ground. I’m not worried that money is being creamed away from the American people, if you will.”

Some in Congress weren’t convinced. Rep. Spencer Bachus (R-Ala.) said the specialist system “sounds like a monopoly situation” in terms of the control the specialists exercise.

Rep. Richard H. Baker (R-La.) said the immediate task is to restore credibility to the NYSE, and he said that can’t begin until the exchange overhauls its governance in a way that puts in-house regulators “beyond the reach” of NYSE members.

Reed said he did not favor splitting off the exchange’s regulatory unit, which polices brokerages and sets governance standards for listed companies. But he said the unit “must have its budget set by, and must report to” directors who are largely independent of the exchange.

As for Grasso’s pay, Reed said he intends to call Grasso early next month to address “any unresolved claims or any problems I may have with what he has already received.” Grasso already has been paid $139.5 million of the package.