NYSE's top regulator talks tough on Wall Street wrongdoing

By GASTON F. CERON
November 4, 2004

NEW YORK (Dow Jones/AP) _ The New York Stock Exchange's new top cop says the Big Board will use stiffer financial penalties to keep the heat on Wall Street wrongdoing, and pointed to potentially worrisome sales and stock-trading practices as among the areas of concern for NYSE regulators.

In another step taken after chief regulatory officer Richard Ketchum's arrival in March, the NYSE has handed to his unit the responsibility for monitoring listed companies' compliance with exchange standards. Those duties were previously handled by the NYSE's corporate-client group.

Nearly eight months after taking the regulatory reins at the 212-year-old NYSE, Ketchum says progress has been made but more needs to be done to strengthen regulation.

"The ingredients were there for a terrific regulatory program at the exchange," but "it needed leadership, it needed more resources," Ketchum told Dow Jones Newswires in an interview this week. "I think you judge this program with how it does in 2005."

When Ketchum joined the exchange, the NYSE was looking to regain its footing after it was shaken by the compensation flap that led to the ouster of chairman Dick Grasso and investigations into the specialist firms that trade stocks on the NYSE floor. The NYSE's regulatory arm came under fire as ineffective, and some critics questioned whether the Big Board could be trusted to police themselves.

Enter Ketchum, a veteran regulator and former official at Citigroup Inc., the National Association of Securities Dealers, Nasdaq Stock Market Inc. and the Securities and Exchange Commission. He was hired under a new arrangement intended to buttress the independence of NYSE self-regulation, in which the regulatory head reports to a committee of independent directors rather than the exchange's chief executive.

Among Ketchum's priorities is making sure breaking the rules isn't cheap for Wall Street firms.

"We're determined to have penalties that ensure that failure to comply is not looked at as a cost of doing business," Ketchum said.

Ketchum said the NYSE's regulators are scrutinizing areas such as the sales practices of brokerage firms, naming the suitability of fee-based accounts as one issue that may warrant a closer look. More generally, Ketchum said he wasn't satisfied that the punishments levied on individual stockbrokers who break industry rules "are as tough as they ought to be."

The NYSE also is keeping its eye on trading practices. For example, Ketchum said the exchange could take action against parties involved in potentially manipulative trading at the close of market hours. The exchange has seen instances of "troubling" trading around the close related to changes in stock indexes, Ketchum said.

Also, the exchange still must move beyond the specialist scandal. Specialists are auctioneer stock traders who oversee a group of assigned stocks and are supposed to maintain the market in those securities in a fair and orderly manner. But earlier this year, the NYSE and SEC said they found instances at all seven NYSE specialists in which the firms put their own trading interests ahead of those of their customers.

Without admitting wrongdoing, the firms agreed to pay a combined $247 million to settle the investigations. The NYSE also has installed software aimed at preventing similar problems in the future. So far, regulators haven't punished individual traders, but Ketchum said "there will be actions" against such individuals.

A spokesman for the SEC didn't immediately return a call seeking comment.

To meet his goals, Ketchum is seeking to expand the regulatory group. It now has about 700 positions, including 67 that were recently added. Ketchum said he wants to add more staff, especially in the unit's market-surveillance team.

"Our budget will go up, regulation will continue to grow," he said. But growth comes at a cost, and the fees the exchange charges members may go up in some cases. Over time, the regulatory arm should become "more self-supportive," Ketchum said.

NYSE-listed companies, which must meet financial and other standards to remain on the exchange, are now overseen by its regulators. The companies were previously policed by the NYSE unit that also solicits listings. Ketchum said it's preferable that the people who decide to kick a company off the exchange don't have to worry about the Big Board's business interests.

Wall Street observers are taking a wait-and-see attitude on Ketchum's changes. Norman Poser, professor at Brooklyn Law School and a former SEC and American Stock Exchange official, said the NYSE has pledged in the past to stop acting like "a private club," only to see more problems surface.

"There's a culture that is very, very hard to change," Poser said. "One has to be skeptical. I'm sure Ketchum is trying to do a good job, but I guess we have to see."

More Financial News