The Consequences of the NYSE-Deutsche Combination on Listing Standards (Part 1)

With Nasdaq and ICE havingbowed out (the antitrust concerns apparently insurmountable),  the combination between NYSE Euronext and Deutsche Borse looks like it will proceed.  The deal will ultimately be submitted to the SEC for approval.  For the proxy/registration statement on the transaction, go here. 

Ordinarily, the combining of two for profit companies wouldn't require SEC approval (although a stock deal may require a registration statement that must be declared effective by the agency).  What makes this acquisition different, however, is that NYSE Euronext is a for profit company with important regulatory responsibilities.

NYSE Euronext is a holding company that owns a variety of subsidiaries that perform regulatory functions.  Specifically, the Exchange (New York Stock Exchange LLC, a New York limited liability company) is a self regulatory organization subject to SEC oversight, as is Amex (NYSE Amex LLC, a Delaware limited liability company) and NYSE Arca (the old Pacific Stock Exchange, also a Delaware LLC).  

SROs in the form of national stock exchanges must register with the SEC and perform significant regulatory tasks.  See Exchange Act Release No. 62032 n. 115 (May 4, 2010) (“Specifically, an exchange must be able to enforce compliance by its members and persons associated with its members with federal securities laws and the rules of the exchange.”).

Regulation within the NYSE complex is mostly but not entirely handled by NYSE Regulation, a New York non-profit and a subsidiary of the Exchange.  The articles of incorporation for NYSE Regulation are here.  The SROs have executed servicing or delegation agreements that give to NYSE Regulation responsibility for most regulatory tasks.  See Exchange Act Release No. 53382 (Feb. 27, 2006) (“After the Merger, NYSE Regulation will hold all of the assets and liabilities related to the regulatory functions currently conducted by the NYSE.").  See also Exchange Act Release No. 62032 (May 4, 2010) (“NYSE [Amex] will enter into a regulatory contract with NYSE Regulation ("NYSE Regulation RSA"), under which NYSE [Amex] will contract with NYSE Regulation to perform all of NYSE Alternext US's regulatory functions on NYSE Alternext US's behalf.”). 

The authority delegated to NYSE Regulation is very broad.  The Exchange even delegated away the right to review disciplinary matters.  See Exchange Act Release No. 53382 n. 154 (Feb. 27, 2006) (“New York Stock Exchange LLC has delegated such authority to NYSE Regulation pursuant to the NYSE Delegation Agreement, and has explicitly stated in such agreement that action taken by NYSE Regulation shall be final action of the exchange. Thus, New York Stock Exchange LLC will not be able to review any disciplinary action taken by NYSE Regulation.”).

NYSE Regulation has, in turn, transferred most of its regulatory function to FINRA.  Much of the broker-dealer oversight function was transferred in the merger with the NASD, when FINRA was created.  In addition, as the prospectus-registration statement for the combination describes: "FINRA [in 2010] assumed these regulatory functions for NYSE Euronext’s U.S. equities and options markets, NYSE, NYSE Arca and NYSE Amex" and, as a result, "a substantial majority of the NYSE Regulation staff was transferred to FINRA." 

NYSE Regulation, however, retains some supervisory authority.  See Form F-4, at 60 ("NYSE Regulation ultimately remains responsible for overseeing FINRA’s performance of regulatory services for NYSE Euronext’s markets, and NYSE Regulation has retained staff associated with such responsibility, as well as for rule development and interpretations, oversight of listed issuers’ compliance with financial and corporate governance standards and real-time stockwatch reviews").  In addition, NYSE Regulation retains oversight of listing standards through its Listed Company Compliance division.  

The combination between NYSE Euronext and Deutsche Borse provides an opportunity to reexamine the regulatory role of NYSE Euronext.  At the time the NYSE became a for profit company back in 2006, the tension between the need to profit maximize and to fulfill regulatory responsibilities was much discussed.  See Exchange Act Release No. 53382 (February 27, 2006).  NYSE put in place a series of prophylactic mechanisms designed to insulate the regulatory function from the for profit influence. 

These protections will need to be carefully weighed by the Commission in approving the acquisition.  Moreover, unlike 2006, there are now five years of actual experience to be examined.  In addition, the SEC will need to consider the impact of a combination that will result in a board of directors dominated by non-US directors and the impact that this could have on the regulatory mission of NYSE Euronext. 

We will examine these issues in this series of posts.