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McCall to Face Nervous NYSE Board Friday

It follows a meeting in which the interim head was urged by the SEC to find a new chairman from the outside.

Updated from 7:37 a.m. EDT

The board of directors of the

New York Stock Exchange

will meet Friday afternoon for a briefing by Carl McCall amid mounting pressure for further change in the wake of Richard Grasso's resignation as chairman.

McCall, the head of the board's compensation committee when it awarded a $140 million deferred pay package to Grasso, was named interim head of the panel Thursday while a more permanent chairman is sought. He met Thursday with

Securities and Exchange Commission

Chairman William Donaldson and was reportedly urged to pick someone from outside the exchange to clean up the mess.

Asked at a news conference Thursday whether more heads would roll on the board, McCall said it was "a good question" and "something the board will have to wrestle with."

McCall said the board hopes to unveil its new corporate governance reforms at an Oct. 2 meeting. One thing the board is considering is separating the jobs of chairman and CEO now that Grasso is gone.

Also, McCall suggested the NYSE is once again considering an initial public offering, something that would enable the exchange to raise enough money to spin off its regulatory division as a separate and self-sufficient organization. The Grasso pay debacle has led to a debate about whether it makes sense for the NYSE's top executive to get paid by the brokerage firms he's responsible for regulating.

For now, the NYSE is filling the leadership gap by turning to two of Grasso's deputies: Catherine Kinney and Robert Britz, co-chief operating officers of the NYSE and members of the board. They'll manage the exchange's day-to-day affairs.

The board initially asked California corporate lawyer Larry Sonsini, chief executive of Wilson Sonsini Goodrich & Rosati, to serve as interim chairman, but the high-powered Silicon Valley attorney, who joined the NYSE board in 2001, turned it down. Also rejecting the job was board member Herbert Allison Jr., chairman of TIAA-CREF, the teachers investment fund.

The director most likely to follow Grasso out the door is Kenneth Langone, the former chairman's most vocal booster on the panel and the one with the most obvious conflicts of interest. Langone is a director on the

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board where Grasso sits on the compensation committee.

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But there's growing speculation the NYSE board could see a broad overhaul that removes, at the very least, executives from the financial firms the exchange is supposed to regulate. Some of those executives were said to be driving forces behind Grasso's outster, including

Goldman Sachs

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CEO Henry Paulson,

J.P. Morgan Chase

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CEO William Harrison,

Credit Suisse First Boston

CEO John Mack and

Morgan Stanley

(MWD)

CEO Philip Purcell.

Indeed, on Friday the board may hear a controversial proposal from Paulson that would bar any officer at a securities firm from serving on the NYSE board. Paulson sits on NYSE board's compensation committee and was a critic of Grasso's pay package. The 27-member NYSE board currently has 12 seats reserved for securities industry representatives.

Grasso's $139.5 million package represented deferred compensation Grasso earned during his 36-year career at the NYSE, but much of that money was awarded to him by the NYSE during the past five years.

Under his new employment contract, Grasso could receive millions more in severance. He may be entitled to collect his unpaid salary for his contract, which expires in 2007. His base salary is $1.4 million, and that means he could be entitled to an additional $7 million. The contract also granted him $28.4 million in supplemental retirement benefits. From the contract, it appears Grasso would be entitled to some, but not all, of this money. A lot of Grasso's severance package will depend on whether his leaving is deemed for "cause," or a voluntary event.

The 27-member NYSE board also faces a difficult succession issue because there is no obvious internal candidate for chairman. Most critics think the board almost certainly will look outside the institution for a new leader to help restore its reputation after this incident.

The SEC has publicly indicated it doesn't think Grasso's departure ends governance issues at the exchange.

"The SEC will continue its review of governance standards and will work closely with the new leadership at the exchange to put an appropriate structure in place that will ensure the credibility and integrity of the governance of the exchange," the agency said in a statement.

Already people are beginning to speculate about some possible successors. The names include former

Federal Reserve

Chairman Paul Volcker and former New York Fed President William McDonough. Another possibility is former SEC Chairman Arthur Levitt.

A darkhouse candidate might be former Secretary of State and current NYSE board member Madeline Albright. Sources say she is well liked by other board members and would help the institution by making it the first U.S. stock exchange to be led by a woman.