Interim Chief Wants Brokerages, Trading Firms Off Board of Directors
John S. Reed on Wednesday will propose taking authority over the New York Stock Exchange away from Wall Street brokerage and trading firms and handing it to an independent board of directors from outside the securities industry.
Reed, the NYSE's interim chairman, plans to announce his reform plan before the market opens Wednesday. The independent board would have eight members and final authority over all NYSE operations, including regulation and executive compensation.
Reed will also recommend creating a separate executive board with 12 to 18 members who could be employed in the securities industry. The executive board would offer advice to the independent directors on issues affecting the exchange's ability to compete with other markets.
The NYSE is the world's largest exchange and controls 80 percent of the trading in its 2,800 listed firms, a roster of the nation's biggest public companies. The structural changes are aimed at addressing criticism that the exchange has been run for 200 years like a private club for the benefit of its members, resulting in numerous conflicts of interest that hurt investors.
Despite calls from some big pension and mutual funds, Reed will not propose moving the NYSE's regulatory function outside of the exchange, either to the Securities and Exchange Commission or to NASD, the other industry self-regulatory body.
Nor will he recommend separating the chairman and chief executive positions, according to sources familiar with Reed's proposal. One structure that Reed has been discussing would put the chairman in charge of the smaller independent board, and the chief executive in charge of the larger executive board.
But sources said Reed, a former co-chief executive of Citigroup Inc. who came out of retirement to temporarily lead the NYSE after chairman and chief executive Dick Grasso was forced to resign, wants to give the new board flexibility as it searches for a new leader. Reed said Tuesday after a speech in Orlando that he has no plans to serve on the new board and that he hopes to step down by the end of the year, according to Bloomberg News.
Reed will submit his proposal for ratification by the NYSE's 1,366 members. The proposal is expected to easily win the majority needed for passage.
The proposal would also need the approval of the SEC. A senior SEC official said Chairman William H. Donaldson views the proposal as a "good first step" that may require some revisions. The official dismissed a published report saying that Donaldson now favors formally separating the exchange's regulatory and business functions, something Reed is not recommending.
Reed will recommend candidates for the first independent board. Sources said he might suggest keeping two current directors: Herbert M. Allison Jr., chief executive of the TIAA-CREF pension fund, and former secretary of state Madeleine K. Albright.
In the future, a nominating committee of the independent board would select new directors, under the proposal.
Criticisms of the NYSE came to a head in September when the exchange disclosed that Grasso's compensation package, mostly covering his eight years as chairman and chief executive, totaled $187.5 million. The pay was awarded by a board dominated by executives from firms the NYSE regulates.
The exchange also has been buffeted recently by charges that it failed to police improper trading that hurt investors and that it missed other abuses, such as alleged market-timing and after-hours trading in mutual fund shares.
In his speech in Florida, Reed reiterated his belief that with the proper governance structure, the regulatory arm of the exchange can operate without conflicts of interest. Calls to separate the regulatory function grew this week after the disclosure of a confidential SEC report sharply critical of the "specialists" who conduct trading on the NYSE floor. The report concluded that specialists improperly traded 2.2 billion shares over a three-year period, costing investors $155 million. The improper transactions involved less than 1 percent of shares traded over the time period.
The report, disclosed by the Wall Street Journal and confirmed by two sources who read it, also sharply criticized the NYSE as a regulator, saying exchange officials largely ignored trading abuses, assessing only minor penalties on offenders.
Specialist firm executives take sharp issue with the report, saying it describes many legitimate trades as improper and vastly overstates the damage done to investors.
John S. Reed on Wednesday will propose taking authority over the New York Stock Exchange away from Wall Street brokerage and trading firms and handing it to an independent board of directors from outside the securities industry.
Reed, the NYSE's interim chairman, plans to announce his reform plan before the market opens Wednesday. The independent board would have eight members and final authority over all NYSE operations, including regulation and executive compensation.
Reed will also recommend creating a separate executive board with 12 to 18 members who could be employed in the securities industry. The executive board would offer advice to the independent directors on issues affecting the exchange's ability to compete with other markets.
The NYSE is the world's largest exchange and controls 80 percent of the trading in its 2,800 listed firms, a roster of the nation's biggest public companies. The structural changes are aimed at addressing criticism that the exchange has been run for 200 years like a private club for the benefit of its members, resulting in numerous conflicts of interest that hurt investors.
Despite calls from some big pension and mutual funds, Reed will not propose moving the NYSE's regulatory function outside of the exchange, either to the Securities and Exchange Commission or to NASD, the other industry self-regulatory body.
Nor will he recommend separating the chairman and chief executive positions, according to sources familiar with Reed's proposal. One structure that Reed has been discussing would put the chairman in charge of the smaller independent board, and the chief executive in charge of the larger executive board.
But sources said Reed, a former co-chief executive of Citigroup Inc. who came out of retirement to temporarily lead the NYSE after chairman and chief executive Dick Grasso was forced to resign, wants to give the new board flexibility as it searches for a new leader. Reed said Tuesday after a speech in Orlando that he has no plans to serve on the new board and that he hopes to step down by the end of the year, according to Bloomberg News.
Reed will submit his proposal for ratification by the NYSE's 1,366 members. The proposal is expected to easily win the majority needed for passage.
The proposal would also need the approval of the SEC. A senior SEC official said Chairman William H. Donaldson views the proposal as a "good first step" that may require some revisions. The official dismissed a published report saying that Donaldson now favors formally separating the exchange's regulatory and business functions, something Reed is not recommending.
Reed will recommend candidates for the first independent board. Sources said he might suggest keeping two current directors: Herbert M. Allison Jr., chief executive of the TIAA-CREF pension fund, and former secretary of state Madeleine K. Albright.
In the future, a nominating committee of the independent board would select new directors, under the proposal.
Criticisms of the NYSE came to a head in September when the exchange disclosed that Grasso's compensation package, mostly covering his eight years as chairman and chief executive, totaled $187.5 million. The pay was awarded by a board dominated by executives from firms the NYSE regulates.
The exchange also has been buffeted recently by charges that it failed to police improper trading that hurt investors and that it missed other abuses, such as alleged market-timing and after-hours trading in mutual fund shares.
In his speech in Florida, Reed reiterated his belief that with the proper governance structure, the regulatory arm of the exchange can operate without conflicts of interest. Calls to separate the regulatory function grew this week after the disclosure of a confidential SEC report sharply critical of the "specialists" who conduct trading on the NYSE floor. The report concluded that specialists improperly traded 2.2 billion shares over a three-year period, costing investors $155 million. The improper transactions involved less than 1 percent of shares traded over the time period.
The report, disclosed by the Wall Street Journal and confirmed by two sources who read it, also sharply criticized the NYSE as a regulator, saying exchange officials largely ignored trading abuses, assessing only minor penalties on offenders.
Specialist firm executives take sharp issue with the report, saying it describes many legitimate trades as improper and vastly overstates the damage done to investors.
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