Securities and Exchange Commission Chairman Arthur Levitt Jr. told New York Stock Exchange officials yesterday that their plan to convert to a public corporation doesn't provide enough independence to the Big Board's self-policing unit.

"I have a lot of reservations about it, serious reservations about the conflicts that spring from their plan," Levitt said in an interview.

Misgivings at the SEC, whose approval is needed for the NYSE to go public, could delay the Big Board's plan to move quickly toward an initial public offering, perhaps as early as November. An NYSE spokesman declined to comment.

Both the NYSE, the world's largest stock exchange, and its chief rival, the National Association of Securities Dealers' Nasdaq Stock Market, have said they plan to convert their not-for-profit membership organizations into publicly traded companies.

Those plans have raised questions about potential conflicts of interest because the NYSE and NASD both operate regulatory units that can fine or discipline member firms and brokers that violate exchange or federal securities rules.

NYSE Chairman Richard Grasso said last month that the Big Board's plan calls for its regulatory unit to remain part of the new public corporation that would be formed. "I don't anticipate major restructuring of the regulatory unit," Grasso said at the time.

The NYSE chairman also said the regulatory unit's independence could be preserved by setting up an internal "fire wall" between the unit's operations and those of the exchange. This separation would be comparable to that set up in brokerage firms to protect against potential conflicts between their research and underwriting departments, Grasso said.

The Big Board's regulatory unit, headed by Edward Kwalwasser, polices compliance with rules that cover such areas as trading, sales practices, maintenance of books and records, and net capital adequacy.

The NYSE and Nasdaq both have said they plan to sell stock in themselves to member firms, corporations and investors. They want to do so to raise money more quickly and to respond more nimbly to competition from electronic trading networks such as Reuters Group PLC's Instinet Corp. These rapidly growing private systems, which electronically match buy and sell orders, account for about 30 percent of the stock changing hands on Nasdaq.

As an example of a potential conflict of interest that could arise after the NYSE becomes a for-profit company, Levitt cited a situation in which NYSE shareholders might come under investigation by the Big Board's regulatory unit. A brokerage that is a large NYSE shareholder might be perceived to have some influence over an investigation if the self-policing unit isn't sufficiently independent, Levitt said.

Levitt said he hasn't yet received a response from Grasso.

Grasso said last month that he expects the NYSE to convert to a public company by the end of November, though he since has backed off a bit from that timetable. The plan hinges in part on an Internal Revenue Service ruling that any NYSE member who exchanges his seat for Big Board shares doesn't have to pay capital gains tax on the deal. An NYSE spokesman said the exchange doesn't know when it might get a decision from the IRS.

NYSE board members will meet on Thursday to consider the proposal, and Grasso has said he expects them to approve it. The plan then would require the approval of NYSE members and ultimately the SEC.

CAPTION: Chairman Richard Grasso says a "fire wall" would preserve the independence of the NYSE's regulatory unit.