NEW YORK STOCK EXCHANGE
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REGULATING THE REGULATOR
GOVERNANCE STRUCTURE AT NYSE
THE ROLE OF SPECIALISTS
THE CLEAN UP EXERCISE
Gerald Manuel Levin, the CEO of Time Warner, was an “unprepossessing figure
stalking the hallways of the great empire”. He had ascended to the position of
CEO by staging a coup against his boss and benefactor Nick Nicholas, while
Nicholas was on a skiing vacation with his family. Levin was generally disliked
by the countless people he had fired, passed over, or ignored in his climb to
power. If the silent, stolid, Steve Case was called “The Wall”, Levin was
called Caligula.
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On November 5 2003, Reed announced his proposed
reforms in governance methods of the NYSE. It was proposed that the board
would have independent directors with responsibility of supervising
regulation, governance, compensation and internal administration. Reed
also announced that the BOD would be appointing an executive board (BOE)
comprising of representatives from broker/dealer members, listed companies
and the general public. Further, it was stated that BOE would be meeting
regularly to discuss issues related to marketplace operations, membership,
listed-companies, market structure and performance. The exchange would
also have a Chief Regulatory Officer who would be appointed by the board
of directors and he would be reporting to the Regulatory Oversight
Committee. |
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Under the proposed reforms, the
27-member board of NYSE would be reduced to 6-12 directors. It was also reported
that none of the directors would be from the securities industry or from the
listed companies on NYSE. However, it was stated that executives from securities
industry would be serving in advisory committees of the exchange.
The proposed changes received mixed reactions. While SEC reacted positively
saying that the proposed reforms were a step in the right direction, the US's
largest pension fund Calpers said that the proposed reforms were not enough for
regaining investor confidence and asked SEC to reject the proposals. Sean Harrigan (Harrigan), President - California Public Employees' Retirement System
Board said, "Our proposal at this point in time is just that the proposed
governance model that Mr. Reed has put forth be rejected by the Securities and
Exchange Commission. Self regulation, in my opinion is highly risky and simply
will not work."[3] Harrigan was of the opinion that the new proposals would not
bring in any changes in the governance system of the NYSE but just shuffling the
chairs.
Some were of the opinion that though Reed was expected to bring in drastic
changes in the NYSE working by abolishing the specialist system he was not in
favor of abolishing the specialist system as it would be difficult to get
approval of the exchange members when put for voting. They felt that being an
interim Chairman and CEO of the exchange, Reed might have concentrated only on
the board structure and governance practices rather than on the tricky issues
such as working of the specialist system. It was felt that by adopting moderate
approach, Reed successfully gained the support of the
floor members. The proposed reforms of the NYSE were held for voting on November
18, 2003 and gained acceptance of the members of the exchange. NYSE received a
set back in December 2003, when Calpers filed a suit against NYSE and specialist
trading firms in the US District Court, Southern District of New York alleging
fraud and negligence in regulatory function resulting in high costs for
investors. It was alleged that that "specialists, in conjunction with the NYSE
routinely engaged in 'wide-ranging manipulative, self-dealing, deceptive and
misleading conduct' that hurt public investors seeking to trade stocks."[4]
However the most important question was how far these reforms would ensure
transparency in the working of the board. And more importantly whether the new
board would be able to bring back the credibility to the exchange.
Sanjib Dutta, consulting editor, Effective Executive and Faculty Member ICMR Case Studies and Management Resources& K Subhadra, Faculty Associate, ICMR Case Studies and Management Resources.
[1] After various
scandals rocked NASDAQ in mid 1990s, NASDAQ separated its regulatory function
to totally independent body - NASD.
[2]
Liston, Broward, NYSE's Reed to Keep Specialist Trading,
www.washingtonpost.com, November 4, 2003.
[3]
CALPERS: NYSE Proposal Not Good Enough, www.money.cnn.com, November 6, 2003.
[4] Calpers sues NYSE,
alleges fraud, The Economic Times, December 18, 2003
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