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NEW YORK
STOCK EXCHANGE
Article
Sanjib Dutta,
Faculty Member,
K Subhadra,
Faculty Associate
ICMR Case Studies and Management Resources.
Regulating the Regulator
Abstract: The New
York Stock Exchange (NYSE) was in news recently for all wrong reasons. It was
criticized for its governance practices which led to the resignation of its
Chairman and CEO. The interim chairman and CEO took various steps to reform the
exchange. In this article the author explains the governance issues at NYSE and
the steps taken to reform the organization.
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On September 18, 2003 Richard Grasso (Grasso), chairman &
CEO of New York Stock Exchange (NYSE) resigned amidst widespread criticism
against his pay package and governance practices at NYSE. Earlier in August
2003, NYSE announced that Grasso received a lump sum amount of $140 million
from NYSE (covering two decades of deferred compensation, and retirement
benefits). The exchange also announced that Grasso's contract was extended up
to 2007 with an annual pay of $1.4 million and $1million annual bonus.
William Donaldson (Donaldson), Chief
of Securities and Exchange Commission (SEC)[1] commented that Grasso's compensation
details raised serious doubts about governance standards at the NYSE. Donaldson
sent a letter to the compensation committee head - Carl McCall (McCall) asking
for more details about how Grasso's compensation was decided.
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The mis-governance at NYSE came to light in August 2003 when 'The Council of
Institutional Investors (CII)[2] published a report in which it highlighted the
shortcomings in NYSE's governance practices. The Grasso episode provided more
ammunition to the critics of NYSE, who were demanding greater transparency in
its working.
In September 2003, former Citigroup Co-CEO, John Reed (Reed) was appointed the
new interim chairman and CEO of the exchange. Soon after taking over the charge,
Reed announced that his first priority would be to reform the working of the
exchange. On November 5, 2003, Reed announced proposed reforms in the governance
practices of NYSE. The media, general public and industry sources welcomed the
reforms saying that they were the step in the right direction. However, some
were of the opinion that more drastic changes should be bought in implemented to
ensure transparency in the operations of NYSE.
WORKING OF NYSE
NYSE was defined as "member-owned
co-operative and self regulatory organization that serves the public as the
nation's principal securities market, its principal self-regulator and its
principal source of governance standards."[3] It comprised of three constituencies,
viz., broker-dealer members, listed companies and the investing public. The
specialist firms, and floor brokers were grouped under broker-dealer members.
The specialist firms employed specialists, who specialized in the trading of
stocks of particular companies.
At NYSE trading took place at one central location - trading floor where both
buyers and sellers competed to get best price for their clients. Usually, each
stock was assigned a trading post, with specialists managing the auction
process.
NYSE had the authority to regulate securities firms in the US, dealing with
public accounts. The Enforcement Division oversaw the working of listed
companies. It was given powers to take disciplinary actions against the firms
violating the listing and disclosure rules of the exchange. Along with ensuring
transparent working of the listed companies, NYSE even oversaw the working of
broker-dealer members to ensure free and fair market.
GOVERNANCE STRUCTURE AT NYSE
THE ROLE OF SPECIALISTS
THE CLEAN UP EXERCISE
[1]Founded
in 1929 by the U.S. Congress to monitor the securities industry and enforce
punishments to those who violate the industry's regulations.
[2]Founded
in 1985, The Council of Institutional Investors with around 130 pension fund
members and more than $2 trillion assets seeks to address investment issues that
affect the size or security of plan assets. Its objectives are to encourage
member funds, as major shareholders, to take an active role in protecting plan
assets and to help members increase return on their investments as part of their
fiduciary obligations.
[3]www.nyse.com
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