NYSE – Euronext Merger and the Impact on Regulatory Oversight

This will be the last post for now on the reduction in board independence as a result of merger between Euronext and NYSE.

In a letter written to the Commission, the NYSE took the position that “ the proposed independence policy does not change, as Professor Brown suggests, the independence requirements for NYSE Regulation directors.”  My letter is here.

This is, in the end, a critical question. It is NYSE Regulation that has primary responsibility for overseeing the regulatory function of the NYSE. For example, although the Exchange is a self regulatory organization, most of its regulatory functions have been assigned to NYSE Regulation under a Delegation Agreement.  It is NYSE Regulation that oversees broker dealer regulation (for now) and enforces the listing requirements.

The altered independence policies for NYSE Euronext allow executive officers of some NYSE listed companies and directors of broker-dealer affiliates to sit on the board. Tacitly recognizing the non-independent nature of these categories of directors, the independence policy excludes them from the board of NYSE Regulation (and NYSE Market & the Exchange). The policy is here.  It is true, therefore, that these changes in the independence policy for NYSE Euronext will not directly alter the composition of the board of NYSE Regulation.

The perspective, however, is technically correct but wrong in principle. While the prior independence policy of NYSE Group did not, for example, explicitly exclude from the board of NYSE Regulation executive officers of companies listed in foreign markets, there was little likelihood any of these CEOs would actually be on the board.  NYSE Group had no jurisdiction over companies traded exclusively overseas.  

In the aftermath of the merger, however, this is no longer true. In fact, CEOs of Euronext listed companies are explicitly allowed on the board of NYSE Euronext and in fact are likely to actually serve on the board.  They may also sit on the board of NYSE Regulation (a minority of the board of NYSE Regulation must be directors from NYSE Euronext).  In other words, neither the SEC nor the NYSE took steps to ensure that, following the combination, representatives of listed companies (albeit companies listed on the Euronext exchanges) and broker dealers (albeit foreign broker dealers) would not be on the board of NYSE Regulation.

All of this can be summed up this way. Before the merger, the CEO of a public company or employee of a broker dealer would not have been on the board of NYSE Regulation. After the merger, that is no longer the case.  It will create the appearance of industry influence over the regulatory function of NYSE Regulation.  Moreover, foreign brokers and foreign companies interested in operating in the US have plenty of incentive to want to influence the direction of the regulatory mission of NYSE Regulation.  

The willingness of NYSE Euronext to allow for the erosion of the independence of NYSE Regulation indicates the fundamental incompatibility of a for profit company (NYSE Euronext) having responsibility for regulatory oversight (NYSE Regulation). It is an issue that ought to be revisited by the Commission.