WASHINGTON — Federal regulators, responding to a pay scandal at the New York Stock Exchange, approved an overhaul of the exchange Wednesday after the NYSE agreed to split its top executive positions to avoid concentrating excessive power in one person.
The Securities and Exchange Commission voted, 5-0, at a public meeting to approve the plan proposed by the NYSE’s interim chairman, John Reed, and endorsed last month by 98 percent of the exchange’s members. The plan would establish a smaller and more independent board of directors to oversee regulation of the exchange and appointment of an autonomous chief regulatory officer.
The nation’s largest stock exchange is emerging from a scandal prompted by its former chairman’s lavish pay, which raised the issue of an imperious chief executive.
SEC chairman William Donaldson announced that the NYSE had decided to separate the chairman and CEO positions — a change he had urged.
“In this way, the NYSE should be in a better position to protect against the concentration of too much executive authority in one individual,” Donaldson said.
Reed had previously expressed opposition to the idea. But Donaldson told reporters after the meeting that “there was no arm-twisting” by the SEC of Reed and the NYSE board members, who simply “decided that this was the way to go.” They made the decision and informed him of it several days ago, Donaldson said.
In New York, NYSE spokesmen had no comment.
Donaldson, who headed the NYSE in the early 1990s, called the exchange’s overhaul proposal “a significant step forward in meaningful reform” of its governance structure.
Despite lapses — notably trading abuses now under investigation — and potential conflicts of interest, the principle by which the NYSE polices itself is sound and should be maintained, Donaldson has said. He has rejected the notion that the SEC or another independent body should assume direct regulatory oversight of the exchange.
Officials of the biggest U.S. public pension funds, controlling hundreds of billions of dollars in nine states, have insisted that the proposed reforms are insufficient to restore investors’ trust shattered by revelations this summer of the $188 million pay package of then-chairman Dick Grasso. He was ousted in September.
Several lawmakers have questioned the adequacy of the NYSE proposal, noting that the board members supervising the exchange’s regulation would be up for election annually by the member firms being regulated.
“The SEC is falling short,” Sen. John Edwards, D-N.C., a candidate for the Democratic presidential nomination, said Tuesday. Strict separation between the exchange’s regulation and commercial operations is needed, he said.
The largest pension fund, the $154 billion California Public Employees Retirement System, announced Tuesday it is filing a class-action lawsuit against the NYSE and seven trading firms, alleging that fraudulent practices cost it millions of dollars in recent years. The pension fund is seeking an unspecified amount of money, but fund officials said it could add up to hundreds of millions of dollars if other parties join the suit.
Law professor John Coffee, director of Columbia University’s Center on Corporate Governance, suggested that the timing of news of the CalPERS suit, a day before the SEC’s vote on the exchange’s reform plan, had been no coincidence.
“I read this complaint as much more a political act to implement a political strategy than litigation,” Coffee said Tuesday. “I think CalPERS wanted to make it very clear to the SEC that they would be coming in for criticism if they approve modest reforms” for the exchange.
The suit names seven specialist trading firms that CalPERS says defrauded the fund, which has $60 billion invested on Wall Street. Specialist firms make a market in stocks assigned to them by matching buyers and sellers on the NYSE trading floor.
The exchange has said it is examining nearly 1 million trades over a three-year period and has found substantial evidence that specialists may have improperly intervened in transactions.