SEC Seeks Tighter Rules for Markets

From Associated Press

Federal regulators on Tuesday proposed a plan to strengthen governance at the nation’s stock exchanges and move them toward separating their self-policing function from their business operations.

The Securities and Exchange Commission voted unanimously to open to public comment proposed new rules for the exchanges’ governance, ownership structure and required disclosures. The rules could eventually be formally adopted sometime after the 45-day comment period.

“Investors have a vital interest in these issues,” Commissioner Paul Atkins said.

Revelations of allegedly widespread violations by trading firms at the New York Stock Exchange, along with a scandal last year over the $188-million pay package of its former chairman, called into question the system of self-regulation by the exchanges. Under that system, they are responsible for policing their traders and the SEC oversees the exchanges themselves.


The SEC commissioners on Tuesday also opened the possibility of changes to the long-established system by issuing a “concept release” seeking comment on the subject. One of the questions it raises is whether a single regulator should be created to replace all the exchanges’ self-policing organizations.

“Broader questions remain as to whether the self-regulatory system, as currently structured, remains the best and most efficient model for overseeing markets and market participants,” SEC Chairman William H. Donaldson said.

He cited “inherent tensions” in the current system between the pressure on exchanges as they compete for trading business and their duty to protect investors.

Donaldson, who headed the NYSE in the early 1990s, told all the U.S. exchanges in March 2003 to review their boards of directors and management practices to ensure that they are behaving ethically and serving the public interest.


“We look forward to ... understanding the concerns behind the concept release on self-regulation,” NYSE spokesman Scott Peterson said Tuesday. “We believe that the most effective regulation occurs when the regulator is as close as possible to the regulated activity, thereby gaining detailed knowledge in overseeing market operations appropriate to that exchange.”

Under the rules proposed Tuesday, a majority of members of the exchanges’ boards would have to be independent of management. The boards’ committees, including those that set compensation for exchange officials, would have to be fully composed of independent members.

Brokerage firms could together own no more than 20% of the exchanges, which would have to disclose annually specific information regarding their operations, ownership structure and regulatory programs.

The exchanges would be required to take steps toward separating their self-regulation from their business operations. But they would not have to split the responsibilities of their chairman and chief executive -- as the NYSE did last year in the wake of the pay scandal for ex-chief Richard Grasso.