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SEC chief says NYSE role must be examined

| Wednesday, Oct. 1, 2003

WASHINGTON -- The New York Stock Exchange's combined roles of regulator and competitive business must be questioned as part of a reform process for the NYSE, the head of the Securities and Exchange Commission said Tuesday.

SEC Chairman William Donaldson's remark in congressional testimony was his strongest statement on specific changes for the world's biggest stock exchange since a crisis erupted in late August over its former chairman's pay package.

"We are at a stage now, in my view, where we really have to re-examine the locus of the regulatory mechanism" at the NYSE, Donaldson said at a hearing by the Senate Banking Committee.

"I think there are a number of different approaches to this," Donaldson said, noting that he had discussed the issue Monday with John S. Reed, the NYSE's new temporary leader.

In the aftermath of the corporate scandals and with new allegations surfacing of widespread fraud in the mutual fund industry, senators for the first time showed impatience toward Donaldson with the pace of SEC actions they said were needed to shore up investors' confidence.

"We've got to get this thing up and going," declared Sen. Paul Sarbanes, of Maryland, the panel's senior Democrat and co-author of last year's sweeping legislation to combat corporate fraud.

Sarbanes described the SEC as "this perhaps semi-slumbering lion ... having been fed a very good meal" when Congress nearly doubled its budget earlier this year.

Donaldson, acknowledging that investor confidence is at a low point, promised: "We're on the job."

The SEC chief was asked about one of the biggest recent accounting cases, involving government-sponsored mortgage giant Freddie Mac, which has ousted two chief executives since June. The SEC and the Justice Department are investigating.

If evidence of fraud emerges, "We would have a role there," Donaldson said. "We're looking at that right now. ... We're in touch with any evidences of fraud there might be, there might not be."

Regarding the NYSE debacle, Donaldson said the first step is for the exchange "to get at" its structure of governing itself and devise an overhaul plan.

The issue of whether the NYSE's self-regulatory and enforcement function should be split from its exchange business has been a key element in the debate over reforming the 200-year-old exchange. About half the NYSE board's seats are assigned to executives of large investment banks, floor trading firms and brokerage houses -- the very businesses the NYSE is charged with regulating.

On his first day in the job Monday, Reed said he has an open mind about how the NYSE's board should be structured and is eager to start reforms. He signaled that he wasn't rushing to remove Wall Street executives from the 27-member board or scrap its own reform plan outright.

Reed, who met with Donaldson Monday at SEC headquarters, insisted that the exchange's management practices should be overhauled before the makeup of its board is altered.

He denied a news report that he might seek the removal of Wall Street executives from the board to mitigate potential conflicts of interest. Any changes in board membership "should follow from the governance changes" in how the NYSE conducts itself, Reed said before the two-hour meeting with Donaldson, a former NYSE chairman who has been pushing for reform.

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