Oversight of the Regulatory Function at the NYSE (Part 3)

The proposal submitted by the NYSE provided that the board would no longer rely on NYSE Regulation to perform oversight of the regulatory functions of the Exchange.  Instead, the functions would be overseen by a a regulatory oversight committee (ROC) created by the board of the exchange.  Pursuant to delegated authority, the staff approved the revisions

The proposal contemplated that the regulatory function would be overseen by a committee of the board conisting entirely of independent directors (albeit directors who could all serve on the board of the holding company).  Thus, the structure promised some separation between the ROC and the entire board.  Only the actual authority of the ROC, as stated in the proposed language, included no substantive authority except for the power to set goals.  As the proposed amendment provided:  

  • The ROC shall oversee the Company’s regulatory and self-regulatory organization responsibilities and evaluate the adequacy and effectiveness of the Company’s regulatory and self-regulatory organization responsibilities; assess the Company’s regulatory performance; and advise and make recommendations to the Board or other committees of the Board about the Company’s regulatory compliance, effectiveness and plans.  

Thus, the ROC had the authority to oversee, evaulate, assess, advise, and make recommendations. None of this, however provides that the ROC actually has final authority to act.  Instead, final actions are presumably left with the Board of the Exchange, the same Board that could be dominated by directors of the holding company.  

The proposed language to the Operating Agreement also provided that the ROC shall: 

  • (A) review the regulatory budget of the Company and specifically inquire into the adequacy of resources available in the budget for regulatory activities; (B) meet regularly with the Chief Regulatory Officer in executive session; (C) in consultation with the Chief Executive Officer of the Company, establish the goals, assess the performance, and recommend the compensation of the Chief Regulatory Officer; and (D) keep the Board informed with respect to the foregoing.  

Thus the power of the ROC over the budget was to review and inquire but not make final decisions.  The power with respect to the compensation of the Chief Regulatory Officer was to recommend, but only in consultation with the CEO of the Exchange.  

The ROC does, apparently, have the authority to hire and fire the CRO but this was not set out in the proposal. According to the Letter from the NYSE: 

  • Moreover, given that the CRO reports to the ROC, the ROC clearly has the power to retain or dismiss the CRO, only it must do so in consultation with the Exchange’s Chief Executive Officer as part of the process of establishing the goals, assessing the performance, and recommending the CRO’s compensation.  

Thus, even if the ROC consisted of independent directors who were also not directors of the holding company, the final decisions for many functions such as the regulatory budget or the CEO's compensation would be made by the full Board (which could have a supermajority of directors from the holding company) or the CEO (which could have been appointed by a board consiting of a supermajority of directors from the holding company).  

So how did the staff react to the proposal?  That will be in the next post.

The exchange of letters discussing this proposal, including the letter from the NYSE, can be found here.


J Robert Brown Jr.