Shirley Ann Jackson, Ph.D.
President, Rensselaer Polytechnic Institute
New York Stock Exchange Regulations Second Annual Securities Conference
Friday, June 9, 2006
It is my very great pleasure to welcome you to the second day of the Second Annual Securities Conference, hosted by New York Stock Exchange Regulation. I am Shirley Ann Jackson, Chairman of the New York Stock Exchange Regulation Board and President of Rensselaer Polytechnic Institute in Troy, New York.
I apologize for addressing you via this means I would much rather welcome you in person but, unfortunately, that is not possible. And, because "talking heads" are difficult to watch, I will keep this short.
Three years ago, John Reed, former chairman of the New York Stock Exchange, asked if I would serve on the Exchange's new Board of Directors, as part of the sweeping corporate governance reforms he was initiating at the Exchange. He asked me, as well, to be part of the Regulatory Oversight Committee of the board, whose mission would be to guide and oversee the activities of the regulatory arm of the Exchange.
It seemed a good fit. As former Chairman of U.S. Nuclear Regulatory Commission, I had plenty of experience leading a team of regulators committed to the public good in that case, nuclear safety and safeguards and environmental protection; in this case, market integrity and investor protection.
Under Mr. Reed's leadership, the NYSE created a structure in which members of the Board of Directors are independent of the interests of the NYSE member organizations which they regulate. This new structure separated market operations from regulation, assured the independence of regulatory decision-making, and established the first chief regulatory officer, who reported directly to the Board of Directors through the Board's Regulatory Oversight Committee.
In April, when the merger of the New York Stock Exchange and Archipelago was complete, the Regulatory Oversight Committee was replaced by the Board of Directors of NYSE Regulation, Inc. Richard Ketchum became chief executive officer of NYSE Regulation.
In this new structure, the independence of regulation has been further strengthened.
NYSE Regulation is a discrete, not-for-profit corporation. Every director of NYSE Regulation, except for Mr. Ketchum, is independent of broker-dealers, New York Stock Exchange-listed companies, and NYSE Group management. A majority of the directors of NYSE Regulation must be independent of NYSE Group.
The NYSE Regulation Board will oversee all compensation decisions for Regulation employees, and have sole responsibility for the nomination of new directors.
When it comes to disciplinary actions, the decisions of NYSE Regulation and its Board of Directors are final, and are not subject to review or approval, except by the SEC.
These requirements insulate NYSE Regulation from the for-profit interests of NYSE Group, of which it is a part, and from the interests of the other entities and persons that NYSE Regulation regulates.
Finally, neither the CEO of NYSE Regulation, nor any staff member, is permitted to own NYSE Group stock or options to eliminate potential conflicts of interest.
The new structure adheres to the principles which made our initial reforms three years ago effective proximity with independence.
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, our marketplace is evolving very fast.
The New York Stock Exchange has been and continues to be the largest equity organization listed, but the world of trading is changing in light of at least three trends:
- the ubiquitous distribution of technology,
- the diversification of trading modalities, and the proliferation of new financial instruments such as financial derivatives, options, and futures,
- and the advent of true globalization of trading.
These are the major global winds which are blowing in new directions.
These winds are blowing at the same time that those who are regulated want more efficiency and less duplication of regulation. The winds are blowing, also, when market integrity and investor trust require and demand higher degrees of vigilance and effectiveness on the part of the regulator.
All of these trends are converging as the NYSE Group is changing itself from the inside out, becoming a public company, expanding technology, and extending its global reach.
What is the New York Stock Exchange doing to address this coalescence of these trends?
- Because technology, more and more, has become the core facilitator of how an exchange conducts business, the NYSE Group is deploying technology to allow more automatic trades, while still preserving the value of the auction system and the liquidity of the NYSE model. It is deploying software and tools for risk assessment, trend analysis, and data mining, to better assist floor brokers and specialists by putting more knowledge into their hands.
- It is trading new instruments derivatives, options, and futures. The NYSE Group merger with Archipelago Holdings to form NYSE Group is a recent example of movement in this direction, creating a diverse platform for trading listed and over-the-counter equities, options, and other derivative products including ETFs.
All of this carries with it challenges for NYSE Regulation vis-a-vis market integrity and investor protection.
- It challenges us in areas such as market surveillance, and raises questions over the limits to national regulation in a truly globally traded environment.
- Diversity of instruments requires more sophistication on the regulatory side.
- The use of more technology requires the ability to anticipate, and drives the organization itself towards transparency, clarity of jurisdiction, and harmony of regulations. In this regard, NYSE Regulation is working with other regulatory agencies most notably with NASD on regulatory harmonization and on eliminating duplication in structuring a common rule book for member firm regulation.
Working with NASD, we have already achieved some significant results. We have a Memorandum of Understanding with the NASD that assures firms that if they request a consolidated oversight exam, they will get it.
We have developed a coordinated plan of examination which divides responsibilities for each firm visited by both regulators in a give year. Building on that success and others, this year, we have committed to the SEC that we will identify inconsistencies between NYSE and NASD rules and interpretations and will propose revisions to harmonize them by the first quarter of next year. In order to accomplish this, we have solicited volunteers from our member organizations to work with us in fleshing out the differences and in recommending changes toward harmonization.
The speed of the market, the complexity of instruments, and the new technological tools require NYSE Regulation to become a more effective regulator. It is an exciting time, offering a complex picture whose complexity is enhanced by global technological trading.
In this vein, therefore, I thought it would be useful to review a selection of financial risks to the global economy proffered by the Brookings Institution and a coterie of top flight economists from around the world as a filter for your deliberations today. It is likely you are familiar with all of them, but taken together, they provide a useful context.
- The global economy continues to expand but unevenly both between nations and within nations. The imbalance fuels instability, which ultimately could threaten continued global economic growth. Both national reforms and international cooperation could help to mitigate this imbalance.
- With global trade historically a growth engine, failure of the Doha round of trade talks could further balkanize world trade and undermine the legitimacy of the World Trade Organization.
- The United States, again, has large twin deficits federal budget and current account deficits which are projected to increase, and which are unsustainable. It could mean a "hard landing" for the U.S. dollar, for the economy, and for world trade. We have been able to sustain ourselves by borrowing from foreign central banks, but an overvalued dollar could increase protectionism.
- Despite differing approaches to the issue, global warming, will have costs at least for managing uncertainty, and possibly for abatement. Proposals include higher energy prices to encourage conservation, long-term markets for carbon rights, annual, and long-run emissions permits. Such proposals may lend yet more complexity to financial markets.
- With a strong correlation between health and economic conditions, poor health, disease, and potential pandemics pose global economic threats. The Spanish flu killed 50 million people worldwide, in 1918-19, and 675,000 in the United States. With today's extensive air travel, an outbreak of people-to-people transmitted flu would bring air traffic to a halt and with it, trade.
This is the briefest of summaries and, I have skipped other critical risks including geopolitical conflicts, global energy security, and the impact of large, swiftly-developing economies. This is intended merely to provide a context.
Again, welcome to the New York Stock Exchange Regulation Second Annual Securities Conference. We, on the Board of NYSE Regulation will continue to make sure that Mr. Ketchum and his team have the resources to build a regulatory program which is second to none, and in so doing, to ensure that regulation does enhance market integrity and investor protection, while being as effective and efficient as possible.
Market integrity and investor protection are not the tasks of NYSE Regulation alone. They require the regulator, and those who are regulated, to work cooperatively, each from their own ends, toward these goals. That is why this conference is so important.
And, the fact that you are here today speaks of your commitment to build an effective compliance environment. I know I speak for NYSE Regulation staff and the Board when I say that we are committed to working closely with you.
Today, the New York Stock Exchange remains at the center of the world's equities markets. By strengthening our unique expertise and continuing to build our organization, we are well positioned to be the world's leader well into the future. I feel fortunate to have been part of the revitalization of NYSE Regulation. I am excited about the future of this great organization. We look forward to working with you.
Source citations are available from the division of Strategic Communications and External Relations, Rensselaer Polytechnic Institute. Statistical data contained herein were factually accurate at the time it was delivered. Rensselaer Polytechnic Institute assumes no duty to change it to reflect new developments.