Securities and Exchange Commission Chairman Arthur Levitt Jr. voiced strong support yesterday for plans by the New York Stock Exchange to offer its shares to the public, warning that the United States is in danger of losing business to overseas markets if the exchange does not change.
If the NYSE "has to rely on the status quo, in my judgment they won't be here in five years," Levitt said in testimony before the Senate Banking Committee's subcommittee on securities. "I would go further and say that if they don't change their method of governance, they won't be here five years from now."
The NYSE is contemplating a major change in how it is governed--converting from a membership organization to a for-profit group. The current structure requires time-consuming votes of the members on any major changes, while a shareholder structure would enable the chief executive to respond more swiftly to competitive challenges.
Over the summer, the Big Board announced plans to go public before Thanksgiving, but that step was delayed for at least a year after the idea ran into substantial problems. Industry officials say the public offering faces considerable hurdles, including questions about how the transaction would be taxed and how the shares would be valued, given the rapidly changing nature of exchanges.
The issue of self-regulation has also been a stumbling block. The New York Stock Exchange monitors the business practices of its members. But some major Wall Street firms have said they are opposed to being regulated by a for-profit entity and potential competitor.
One alternative under consideration by the SEC is a hybrid self-regulator, where some market-monitoring functions would stay with the NYSE while others would go to a national self-regulator that would also oversee the Nasdaq Stock Market and regional exchanges. The NYSE, however, has fought that idea.
In an interview yesterday, Levitt said the issue of self-regulation is a concern but added that "I think we could work with the New York Stock Exchange to come up with a regulatory structure" that is acceptable. He said he is "solidly in favor" of the NYSE changing to a for-profit company.
But he said the NYSE also will have to eliminate anti-competitive rules to keep business from fleeing overseas. He singled out Rule 390, which prevents competitors such as Nasdaq from trading some key NYSE-listed stocks. The NYSE has fought to keep the rule.
Nevertheless Levitt said he is hopeful that the NYSE will eliminate the rule itself, without SEC intervention, because the major Wall Street firms--customers of the NYSE--don't like it. He added that if the exchange does not abolish it, the SEC has the power to act on the issue.
In response, the NYSE yesterday issued a statement that said, "We look forward to working with the SEC to address its concerns about Rule 390 in a manner that as always will best serve the interest of public investors."
Levitt noted that the United Kingdom and other countries were developing a strong set of securities regulations, an equity culture and pools of capital that also make them increasingly attractive. And they do not face the hurdles presented by anti-competitive regulations such as Rule 390, he said.
"Business is more likely to migrate today than before because systems are developing internationally which make it just as easy to transact business in the U.K." as in New York City," Levitt warned Congress. "We can no longer take for granted the preeminence of our capital markets."
CAPTION: Arthur Levitt Jr.: "We can no longer take for granted the preeminence of our capital markets."