Richard Ferlauto, director of pension and investment policy, American Federation of State, County and Municipal Employees, Washington, in a separate statement, testified that NYSE Group's retention and financing of its regulatory unit "poses a significant danger to investors."
Mr. Ferlauto said Congress should work with the Securities and Exchange Commission "with the goal of eliminating self-regulation by the exchanges. The commission should set timelines for pursuing reform goals and open the process through public roundtables and other forums allowing investor participation and public engagement." he testified.
"The NYSE cannot, in any reasonable person's mind, be both a for-profit entity whose critical success is tied to growing revenues, including from listing fees, and at the same time be expected to take actions that would result in a negative impact on those fees."
Robert Glauber, chairman and chief executive officer of the National Association of Securities Dealers Inc., Washington, told the committee: "Interestingly, among competing for-profit exchanges in this country, the NYSE proposes to be the only one that will have comprehensive regulatory authority over the firms that are or would be its customers.
"Thus, absent complete separation of a for-profit exchange and regulation of member conduct, there is the unavoidable inherent conflict that regulation of member conduct may be influenced by the commercial, financial and stock price impact of such regulation on the affiliated exchange."
Mr. Glauber further said the "NYSE model is unavoidably embedded with these conflicts because of its shareholder-owned, publicly held, for-profit structure."
But in his testimony, John A. Thain, chief executive officer, NYSE Group, supported the company's retention of self-regulatory functions.
"I believe a regulator with a real-time understanding of how the marketplace is evolving in the face of competitive forces has a better chance of keeping ahead of the curve and being integrally involved in shaping marketplace evolution to ameliorate any regulatory concerns," Mr. Thain testified.
A "regulator who is proximate to the market is more likely to devise the optimal solution to a regulatory challenge or problem — one that is cost-effective and minimizes regulatory interference with sensitive market mechanisms," Mr. Thain testified. "Proximity also reduces the risk of misaligning the performance incentives of regulatory personnel. … Affiliation also creates a regulator with market sensitivity and a businessperson who understands regulation. Finally, the affiliation of a regulator with an exchange focuses accountability for the direct and indirect costs that regulatory activities impose on the market."