Lieberman Says NYSE Cannot Regulate Itself

WASHINGTON – Responding to the announcement of the New York Stock Exchange’s proposed reforms, Governmental Affairs Committee Ranking Minority Member Joe Lieberman, D-Conn., said Thursday he was pleased the Exchange had taken steps to improve its corporate governance but he said the reforms fall far short of what is needed.

Following the scandal surrounding the excessive pay package for the NYSE’s former Chairman and CEO, Dick Grasso, the NYSE Board fired Mr. Grasso and asked John Reed, former head of Citigroup, to serve as the interim Chairman and develop and institute reforms to the governance structure of the NYSE. Mr. Reed proposed those changes Wednesday, including a smaller board of independent directors, which would work with a larger advisory board comprised of representatives from member firms and listed companies. Mr. Reed did not propose splitting off the NYSE’s regulatory function. The NASD split off its regulatory arm two years ago.

“A smaller board comprised of independent directors is a good first step,” said Lieberman. “But experience has shown that the NYSE does not and cannot effectively regulate itself from within. The regulatory arm should be separate.
“Given what seems like a complete breakdown in enforcement at the NYSE, I am disappointed that Mr. Reed is suggesting the exchange should continue to police itself.”

According to a recent Wall Street Journal account, the SEC blasted the NYSE in an October 10, 2003, confidential report that found that the exchange utterly failed to police the so-called “specialist” firms that trade the securities on the exchange. The report concluded that the NYSE ignored blatant violations by the specialist firms, failed to fully investigate improper conduct, and issued penalties that were so light that they had virtually no deterrence effect. The specialist firms have been accused of short-changing customers by self-interested and improper trading practices.

“The New York Stock Exchange is an icon, a symbol of the power and integrity of American capitalism,” Lieberman said. “Its watchdog must be ever-vigilant and beyond reproach, not a lapdog pampered by wealthy insiders.”

Lieberman has actively monitored and criticized the failures of market gatekeepers to protect the interests of the average investor. As Chairman of the Governmental Affairs Committee, he held a series of hearings in 2002 on the Enron scandal and issued two reports on the lapses of the federal government’s regulatory agencies in protecting investors and consumers from the losses associated with Enron’s collapse. More recently, he wrote Securities and Exchange Commission Chairman William Donaldson about the SEC’s failure to detect and prevent widespread malfeasance in the mutual fund industry. Lieberman has also cosponsored legislation to reform the industry.