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Two Plus Two Equals What?

The oversight body, dubbed NYSE Regulation, will get a long-term contract (perhaps seven to 10 years at a time) to provide regulatory services to the exchange and will be funded by the fees collected under the contract and for examinations, as well as by fines levied on rule violators.

But some question whether the parent company, under pressure to streamline costs and meet Wall Street earnings estimates, will be inclined to pay what it takes for the regulator to do a good job.

"The regulatory function has to have an unassailable funding source," said Barbara Roper, head of investor protection at the Consumer Federation of America. "And if you look at the directors of a for-profit exchange, they will have a fiduciary duty to shareholders to maximize value. So they would not only have the incentive but perhaps the obligation to give short shrift to any part of the operation that doesn't contribute to the bottom line."

Roper and others also said that both the NYSE and Nasdaq might be tempted to ease the standards they demand of companies whose shares are listed to trade on the exchange as their head-to-head battle to sign up new companies intensifies.

NYSE Chairman Carter acknowledged that his exchange would have to prove to the SEC and Congress that it will not relax standards to beef up the bottom line. "We will have to explain to the SEC and people on Capitol Hill that this structure is the right way to ensure independence and investor confidence, as well as our responsibilities as a regulator," he said. "We have to make sure that we will not go light on regulation as a for-profit organization."

The NYSE's new structure will be similar to Nasdaq's. Nasdaq currently contracts with the self-regulatory organization NASD for regulatory services. The NASD has been criticized in the past as a weak regulator, but its reputation has grown much stronger in recent years under vice chairman and regulatory chief Mary L. Schapiro.

Former SEC chairman Arthur Levitt said he thought the NYSE's new structure would improve the independence of its regulatory arm, not weaken it, by fully removing it from any influence by brokerage and trading firms.

"By breaking up the clublike atmosphere of the member organization and becoming a more democratic, publicly owned company, you take a great step toward more disclosure and greater investor protection," he said.

Several observers also said they did not expect a race to the bottom in standards for listings as competition to sign up new companies heats up between NYSE Group and Nasdaq. Instead, they said, a reputation as a home to well-run companies would be a competitive advantage.

"I don't think any market has ever benefited from a public perception of weak oversight or weak listing standards," said Brandon Becker, a securities lawyer at Wilmer Cutler Pickering Hale and Dorr in the District.

Levitt said the SEC would probably consider joining NYSE Regulation and the NASD to create one umbrella self-regulatory organization. Wall Street, which often complains about overlapping regulation, has lobbied for this change.

Folding all regulation into the SEC is not considered a viable option. The agency is viewed as too removed from day-to-day market operations and inadequately funded to hire the kind of skilled experts needed to keep an eye on sophisticated Wall Street traders.

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