The Securities and Exchange Commission unanimously proposed rules yesterday that would require a majority of board members at the nation's stock exchanges to be independent from management, and compel exchanges to disclose how much they pay their five top executives.
Citing the public outcry over the $139.5 million compensation package of former New York Stock Exchange chairman Dick Grasso, the SEC voted 5 to 0 to issue proposals that would strengthen governance and transparency at 10 stock markets, including the NYSE and the Nasdaq.
The public will have 45 days to comment on the proposals, which also include requirements that the exchanges share more information about their regulatory oversight functions and their financial condition, before the SEC votes on whether to adopt them.
"They say transparency is the great disinfectant," said Annette L. Nazareth, director of the SEC's division of market regulation. "There will be a lot of people looking at this data, comparing across markets . . . how their board is set up, what their costs are."
The proposal advances a broader effort by SEC Chairman William H. Donaldson, who once headed the NYSE, to ensure that stock exchanges follow the same governance guidelines as the companies that trade on them. Among the other proposals floated yesterday: that members of the audit, compensation, nominating, and regulatory board committees be independent of management; and that exchanges appoint a chief regulatory officer who reports to independent board members rather than to managers who control the exchange's business operations.
Under the SEC plan, at least 20 percent of the board would be selected by members of the exchange, at least one director would represent issuers and at least one other would represent the interests of investors.
The commission's plan would not force exchanges to separate the jobs of chief executive and chairman, an omission that two Democrats on the panel highlighted yesterday. They said enforcing the exchange's trading rules and building its business operations presents a possible conflict for an executive who fills both roles.
"If there is a separation of the chairman and the chief executive, a persuasive argument can be made that investors will tend to trust" the exchange even when things go wrong, said Commissioner Roel C. Campos.
The NYSE has already enacted many of the proposed new rules, and in some cases gone beyond them. After the Grasso controversy and allegations of improper trading on the exchange floor, the NYSE changed its governance structure, installing former Citigroup co-chief executive John S. Reed as chairman and former Goldman Sachs & Co. executive John A. Thain as chief executive officer.
Also yesterday, the SEC issued a broad request for public comments on the structure of the stock exchanges themselves -- asking whether too many of the exchanges had overlapping and conflicting authority over companies. The agency also asked for comments on whether the exchanges should continue to be allowed to police themselves. The agency will take comments on that plan for 90 days.
NYSE spokesman Scott Peterson said the exchange has taken significant steps to separate regulatory and business functions and suggested that the NYSE should not be stripped of its oversight role.
The NYSE recently hired Richard G. Ketchum, a former executive at the Nasdaq Stock Market, as chief regulatory officer. Ketchum, who oversees about 40 percent of the exchange's staff, reports directly to a committee of the board of directors.
"This structure provides numerous safeguards to ensure that what we are calling NYSE regulation is insulated from the influence of member firms and independent in its decision making from the business side," Peterson said. "We feel the new structure is working."
"It's clear the commission needs to take a more active role in oversight" of the exchanges, Commissioner Cynthia A. Glassman said. But, she said, the agency should first resolve broad structural issues about the exchanges' future before imposing new governance requirements on them.