The Consequences of the NYSE-Deutsche Combination on Listing Standards (Ensuring Regulatory Independence) (Part 2)

We are discussing the impending combination between NYSE Euronext and Deutsche Börse AG.  

As we noted, the NYSE demutualized and became a for profit company back in 2006.  Demutualization raised concerns that the status could conflict with the regulatory mission of the Exchange.  As part of the SEC approval process, the holding company (then NYSE Group) took a number of steps to ensure the independence of the regulatory function.  (They are described on the NYSE web site here). 

The main (but not the only) mechanism for doing so was the creation of a separate entity, NYSE Regulation, to perform most of the regulatory functions.  NYSE Regulation is a New York non-profit.  See Exchange Act Release No. 53073 (Jan. 6, 2006) ("NYSE Regulation, a New York Type A not-for-profit corporation, will perform the regulatory responsibilities currently conducted by NYSE for New York Stock Exchange LLC and will contract to perform many of the regulatory functions of the Pacific Exchange for Archipelago."). 

Simply creating a non-profit to perform regulatory functions did not guarantee freedom from "for profit" influence.  Instead, efforts were made to protect the regulatory function by providing for an independent board of directors.  The board of NYSE Regulation, as the  bylaws provide, can only include independent directors, with the exception of the executive director of NYSE Regulation. 

The applicable definition of independent for NYSE Regulation is the one used by the holding company and essentially excludes anyone who is affiliated with a member of the exchange or a listed company.  See Exchange Act Release No. 53382 (Feb. 27, 2006) (“Each member of the NYSE Group board of directors, other than the chief executive officer, must be independent from (i) NYSE Group and its subsidiaries, (ii) any member or member organization of New York Stock Exchange LLC or the Pacific Exchange, and (iii) any company whose securities are listed on New York Stock Exchange LLC or the Pacific Exchange.”).  The independence policy for the NYSE Euronext board is here. 

The effort to insulate NYSE Regulation from for profit influence, however, went further.  The board of NYSE Regulation can include directors from the holding company but these directors cannot constitute a majority of the NYSE Regulation board.  See Exchange Act Release No. 53382 n. 64 (Feb. 27, 2006) (“The chief executive officer of NYSE Regulation will be a director of NYSE Regulation and a majority of the directors of NYSE Regulation will be persons who are not NYSE Group directors, but who otherwise qualify as independent under the independence policy of the NYSE Group board of directors”).

Moreover, NYSE Regulation has considerable influence over the selection of the remaining directors (non-affiliated directors).  Under the NYSE Regulation bylaws, the Nominating and Governance Committee nominates the non-affiliated directors and the Exchange (the only member of NYSE Regulation) must elect them.  See NYSE Regulation Bylaws  ("The member of the Corporation shall appoint or elect as Non-Affiliated Directors the candidates nominated by the Nominating and Governance Committee of the Corporation").  Two of the directors must, however, be selected by a committee designed to allow for industry input.  See also NYSE Regulation Bylaws, Article III, Section 5 (describing system for nominating fair representation directors).  See also Exchange Act Release No. 53382 (Feb. 27, 2006) (“The Fair Representation Directors will compose part of the majority that are Non-Affiliated Regulation Directors. . .").    

In addition to an independent board of directors, the board of NYSE Regulation has its own compensation committee, allowing greater independence in resolving compensation matters for NYSE Regulation.  Both the nominating and the compensation committee may include directors appointed by the holding company but they may not comprise a majority.  See Exchange Act Release No. 53382 n. 64 (Feb. 27, 2006) (“It will create a nominating and governance committee and a compensation committee, each of which will be comprised of a majority of Non-Affiliated Regulation Directors. The compensation committee will be responsible for setting the compensation for NYSE Regulation employees. The nominating and governance committee will bear responsibility for nominating Non-Affiliated Regulation Director candidates.”). 

In other words, NYSE Regulation has considerable independence from the holding company.  Many of these protections were only added after the SEC review process  began back in 2006.  Currently, NYSE Regulation has eight directors.  One of the directors is the CEO of the non-profit.  Six others are independent of the holding company.  Only one, Ellyn Brown, also sits on the board of NYSE-Euronext (as well as the Board of Governors of FINRA; see Form F-4 at 332).  She also sits on three NYSE Regulation committees, including compensation, nomination, and review.