Junius W. Peake
Monfort Distinguished Professor of Finance
Kenneth W. Monfort College of Business
University of Northern Colorado
Campus Box 128
Greeley CO 80639-0019
E-mail: junius.peake@unco.edu
Telephone: (970) 351-2737
FAX: (970) 351-1062
Home page: http://www.mcb.unco.edu/facultystaff/facstaffdir/peakej.htm

Sent electronically to: rule-comments@sec.gov

November 22, 2003

Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Subject: File No. SR-NYSE-2003-34

Notice of Filing of Proposed Rule Change by the New York Stock Exchange, Inc., Relating to the Amendment and Restatement of the Constitution of the Exchange to Reform the Governance and Management Architecture of the Exchange.

Dear Mr. Katz:

This letter contains my comments on the above-captioned rule change proposal by the New York Stock Exchange ("NYSE").


I have been involved with issues of market structure ever since the passage of the Securities Acts Amendments of 1975. In April 1976, together with two colleagues, I presented to the National Market Advisory Board of the Commission a proposal for an electronic auction market.

As the staff and members of the Commission are well aware, I have commented publicly in responses to Commission market structure releases ever since that date. In addition to proposing a visual, electronic market, I have ever since that time been advocating for a change from fractional price minimum increments to decimals, and have testified before Chairman Oxley's committee on that issue.

The Present Situation

The events of the past several months have overwhelmingly demonstrated the dysfunctionality of the NYSE and its governance structure to the American people and the world.

The proposal made by Mr. John Reed, Interim Chairman and CEO of the NYSE, which is the subject of this Release, has a number of serious flaws, and if implemented as proposed, will neither rectify the present regulatory problems at the NYSE, not solve its market structure deficiencies, which are severe.

I am troubled by published comments which suggest the Commission will go along with the proposals to give them a chance to see if they work.

A Few Problems with the Proposal

  1. Proposed board composition, size and the availability of the directors to commit the requisite time required to analyze, discuss and make appropriate policy decisions is not made. I applaud the superb list of accomplishments of the nominated board members, but look, as an example, to the résumé of but one person, Dr. Shirley Jackson, President of RPI, who also serves on the boards of eight listed corporations, is a trustee of two schools and several universities, and has other long term commitments. The other proposed directors also have multiple commitments, and two must presumably travel to board meetings from the United Kingdom, unless, as is proposed, board meetings will be held via conference telephone calls.
    The NYSE's proposal requires these eight members (in addition, presumably, to a full time chairman and CEO) to serve on numerous committees, hold at least four board meetings annually, and meet periodically with a 20 person Board of Executives they must interview and elect.
    To this interested observer, a director of the NYSE during this crucial period should be able to commit to what is nearly a full-time job, at least for six months to a year.
  2. As proposed, the board's continuity is self-perpetuating. There is no independent person on the nominating committee. All are board members, and it is well known that board members identify with people they know, and with whom they feel comfortable. While there is also a proposed cumbersome alternative for NYSE members to petition to nominate new board members, the likelihood of that occurring is very slim. The Exchange's present problems are also rooted in a self-perpetuating board structure.
  3. The most crucial part of the regulatory piece is market structure. Under the proposal, here are the NYSE's governance committees:
    "Those including directors only (Nominating & Governance, Audit, Regulatory Oversight, and Compensation); those drawn from both boards but with a voting majority of directors (Regulation, Enforcement & Listing Standards); and those drawn from both boards without designated composition (Market Structure & Strategy, Quality of Markets/Public Policy and Finance). All committees will report to the Board." (Emphasis added.)
    There is no requirement that board members hold a majority on the market structure committee. While full board approval is required for every committee's report, it was the defects in the NYSE's market structure that have been exposed so dramatically this fall, and the design, technology and enforcement of fair and efficient trading rules are the most important elements to be required to restore public confidence in the Exchange.

Other Observations

Traditionally, the most technical aspects of any enterprise are usually left to the experts. However, some of the NYSE's "experts," floor traders and specialists, have been the ones who have created the most serious problems to date. Given their economic self-interest, there is no reason to believe their remedies will serve the investing public alone, rather than their own.

In 1976 I, together with two others, performed a study for GNMA on regulatory alternatives. In our report, we pointed out that self-regulation is almost always "selfish-regulation."

In the early 1970s I served on the board of the National Association of Securities Dealers ("NASD"), and as Vice-Chairman. Looking back on my service on that board, I can see where, from time to time, decisions made by our board may have not solely been motivated to serve the public interest.

I believe regulation of the NYSE should be either by the Commission directly, or by merging the regulatory function of the Exchange with that of NASDR, which is today almost a completely divorced from the NASD, and is intended to become completely separate.

Unfortunately, history has already demonstrated self-regulatory problems at the NASD. Today we now have such problems at the NYSE. Any solution short of separation will fail, despite the good intentions of those who support such a route.

Members of the Commission, while I realize it will not be "politically correct" to make sweeping changes to the NYSE's proposal, I believe this is a golden opportunity to take the key steps needed to create the national market system the Commission was directed to "facilitate" in 1975, more than 28 years ago.

Enough time has been wasted. If the Commission fails to act appropriately, the Congress should take legislative steps to correct the problems. We all know Congress can move swiftly if it wishes. The problems with certain mutual funds, and the governance issues of the past few years were addressed quickly and forcefully by the House and Senate. The NYSE's problems have a similar dimension, and need to be fixed. I trust the Commission will be able to do the job without congressional prodding.

Once again, may I ask that all SRO rule change commentators be permitted to file them electronically; that all entities regulated by the Commission be required to submit their comments on proposed rules electronically; and that all electronic comments be made available on the Commission's web site, as well as listing the identities of those who reply only by regular mail. I am submitting these comments electronically.

Thank you for reading and best wishes for making the right decisions.

Very truly yours,