Ask the Expert: What Regulatory Role Does the NYSE Play?

Editor's note: Got a question you'd like to ask about sectors, companies and issues affecting the markets? Email us at [e-mail], and one of our reporters will track down an expert. In today's "Ask the Expert," securities industry reporter Matthew Goldstein explains what regulatory role the NYSE actually plays and examines whether it could lead to conflicts of interest.

Now that Richard Grasso is out at the New York Stock Exchange because of the controversy over his eye-popping $139.5 million pay package, the next issue of debate may well be the Big Board's ability to police its members and itself.

The NYSE's role as regulator is fairly simple: watch out for unusual trading activity in the 2,700 listed stocks on the Big Board, make sure NYSE firms play by the rules and, most important, bring disciplinary actions against market wrongdoers.

The biggest category of enforcement action the exchange takes involves allegations of sales-practice violations on the part of member firms. Other areas include insider trading, the conduct of floor brokers and allegations of stock manipulation. (A comprehensive discussion of the enforcement role can be found here.)

But Grasso's big payday raised serious questions about his ability -- or anyone else's -- to serve in the dual role of stock market cheerleader and regulator. His most vocal critics had contended it's impossible for the NYSE's chairman and CEO to wear a regulator's cap, especially when the people he is supposed to regulate are the ones paying his huge salary.

Buying In

In the eyes of his critics, Grasso's megacompensation package was nothing more than an opportunity for Wall Street's heavy rollers -- many of whom sit on the NYSE's 27-member board -- to curry favor with a top regulator who technically is an employee of the Big Board's 336 member firms.

Jeffery Liddle, a New York securities lawyer who often represents Wall Street employees in regulatory hearings before the NYSE, said the news of Grasso's pay package can't help but leave people wondering "what the people on the NYSE board got" in return.

To be fair, there's no evidence that Grasso's compensation package was a reward for soft-pedaling his duties as regulator. In fact, enforcement actions brought by NYSE prosecutors against Wall Street firms and brokers has steadily risen over the past five years, with 225 cases being filed last year, from 150 in 1998.

But the truth is that the NYSE has never been a trailblazer in prosecuting Wall Street's sins before or since Grasso took the Big Board's top job in 1995. That's true even though the NYSE's enforcement division accounts for roughly a quarter of its 1,500 employees and is one of the Big Board's primary responsibilities.