Oversight of the Regulatory Function at the NYSE (Part 4)

The debate notwithstanding, the staff, by delegated authority, approved the NYSE proposals without significant change.  See Exchange Act Release No. 75991 (Sept. 28, 2015).  

The concerns with the structure?  Dismissed.  The reason?  The approach was consistent with other exchanges.  As the staff wrote: 

  • As a preliminary matter, the Commission notes that several concerns raised by the commenter relate to the fact that the Exchange is part of a holding company structure. In that regard, the commenter suggests that the replacement of NYSE Regulation with the ROC would not provide sufficient insulation of the Exchange's regulatory functions from the commercial interests of the holding company. The Commission notes that, although the Exchange may be part of a holding company structure, the Exchange is obligated to satisfy its self-regulatory obligations under the Act and rules and regulations thereunder. The Commission believes that the regulatory structure proposed by the Exchange is consistent with the Act and the rules and regulations thereunder, and is substantially similar to regulatory structures that were approved by the Commission for other exchanges.  

With respect to the lack of authority by the ROC over the regulatory mission of the exchange, the staff did not address the issue in any detail but simply concluded that the NYSE approach was adequate. 

  • The commenter expresses the view that the ROC would not have sufficient substantive authority over the Exchange's regulatory program. In response, the Exchange states that the ROC was modeled on the NASDAQ ROC and has the same powers, including the power to review the regulatory budget and inquire about available regulatory resources. The Commission believes that the Exchange's proposal to establish a ROC, as an independent committee of the Exchange to oversee the adequacy and effectiveness of the Exchange's regulatory operations, should help the Exchange to fulfill its statutory obligation to comply, and to enforce compliance by its members and persons associated with its members, with the Act, the rules and regulations thereunder, and the rules of the Exchange. In addition, the Commission believes that the composition of the ROC, which would consist of at least three members of the Board that satisfy the Company Director Independence Policy, should help ensure the independence of the regulatory function of the ROC. 

The influence of the holding company with respect to the regulatory mission was more or less ignored.  The fact that the structure could have been modestly changed to significantly reduce this potential influence (by for example requiring that a majority of the directors of the ROC not also be directors of the holding company) was ignored.

There is a great ongoing debate about whether exchanges should retain their SRO status.  SIFMA, for example, has criticized the regulatory differences between SROs and ATSs.  Certainly as a matter of optics and likely as a matter of substance, the new structure adopted by the NYSE makes it harder to argue that the regulatory function is anything more than another functional aspect of its business.  The changes add to the weight of those arguing that the NYSE and the other exchanges, as for profit companies, should no longer has any regulatory responsibility.  

For my first letter critiquing the NYSE proposal, go  here.  

J Robert Brown Jr.