- The Washington Times - Tuesday, November 9, 2004


The nation’s stock exchanges would be forced to tighten their governance and move toward separating their self-policing function from their business operations under a plan proposed by federal regulators yesterday.

The Securities and Exchange Commission voted, 5-0, to open to public comment proposed new rules for the exchanges’ governance, ownership structure and required disclosures. They could be formally adopted sometime after the 45-day comment period.

The reform plan proposed by the SEC does not go as far as the sweeping overhaul of the New York Stock Exchange last year after a scandal over the $188 million pay package of its former chairman. But the SEC proposal makes the significant move of requiring the exchanges to take steps to separate their self-regulation from their commercial operations.

The NYSE, which is the nation’s largest stock exchange, made that separation as part of its overhaul — which the SEC approved in December 2003.

The scandal over the pay of former NYSE Chairman Dick Grasso, along with revelations of suspected widespread violations by trading firms at the exchange, called into question the system of self-regulation by the exchanges. Under that long-established system, they are responsible for policing their traders while the SEC oversees the exchanges themselves.

The SEC commissioners yesterday also opened the possibility of future changes to the system by issuing a “concept release” seeking comment on the subject. One of the questions it raises is whether a new single regulator should be created to replace 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 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.

Mr. 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 they are behaving ethically and serving the public interest.

“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,” NYSE spokesman Scott Peterson said.

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