Legislators scrutinise self- regulation at stock exchanges

NEW YORK --

The scandal in which the New York Stock Exchange (NYSE)’s former chairman and CEO Richard Grasso was awarded a $140 million pay package looks set to change the way US securities market-places are managed. Legislators scrutinised corporate governance practices at US stock exchanges at an October hearing of the House of Representatives’ Subcommittee on capital markets.

During the hearing -- Reviewing US capital market structure: the New York Stock Exchange and related issues -- the testimonies of participants questioned the securities industry officials’ domination of the compensation committee at the NYSE. They also queried the exchange’s effectiveness as a self-regulatory organisation, in which it performs both as a regulator and a provider of a market-place for securities trading.

The NYSE’s market structure also came in for criticism. Exchange officials have always robustly defended the NYSE’s open-outcry trading model, at a time when most other exchanges around the world have opted for electronic systems. A number of participants in the hearing said they felt the floor-based, single-specialist-per-stock model was monopolistic and harmful to investors. They advocated structural and technological improvements to the NYSE. "Highly publicised controversies have tarnished the image of the NYSE, and have led many to call for changes to the corporate governance of the exchange, its role as self-regulator, and also to its defining characteristic -- the auction market system," said Michael Oxley, chairman of the House of Representatives’ financial services committee.

Eight stakeholders testified in the hearing, including the interim chairman of the NYSE, John Reed, and CEOs of the Philadelphia Stock Exchange, the Cincinnati Stock Exchange, and the Securities Industry Association.

But the stock exchanges themselves wanted the self-regulation model preserved, citing specific advantages. "Self-regulation places the regulators close to the regulated, both physically and in terms of knowledge and experience", which is something the SEC lacks, said Reed.

John Coffee, director of the Centre on Corporate Governance at Columbia University in New York proposed that to improve governance at the NYSE, the exchange’s enforcement functions should be transferred to a subsidiary, which would have an independent -- non-securities industry -- board of directors. This means that the NYSE’s competitive role in marketing itself does not outweigh its regulatory responsibilities. Also, the exchange’s existing board would be replaced by one with a majority of non-industry directors, and all members of the compensation committee would come from outside the securities industry. OpRisk

Choongo Moonga