In the latest of our conversations with compliance and governance officers, we catch up with Richard Ketchum, chief executive officer of NYSE Regulation. Readers can also visit our archive of Q&A interviews.

DETAILS

Ketchum

Richard Ketchum joined NYSE as its first chief regulatory officer in 2004. In 2006 he became CEO of NYSE Regulation, a not-for-profit subsidiary of NYSE Euronext, the owner of the New York Stock Exchange. NYSE Regulation’s role is to strengthen investor protection and market integrity by performing regulatory duties for the NYSE.

Ketchum has primary responsibility for the regulatory oversight of NYSE Euronext’s U.S. exchange subsidiaries and reports solely to the NYSE Regulation board of directors. Separately, NYSE broker oversight functions merged with the National Association of Securities Dealers to form the Financial Industry Regulatory Authority, a single self-regulatory organization examining all broker-dealers.

Related Resources

Ketchum’s Speech on Regulatory Operation (Sept. 28, 2007)

The compliance model for the New York Stock Exchange is still fairly new. How’s it going?

The theory is to have some clear, borderline decision-making processes to be sure that Regulation’s decisions are independent and not inappropriately impacted by the business. I think that is in place, and I’m quite comfortable with it. We’ve dramatically modernized the market surveillance environment, and we’ve improved the process by which we work closely with our listed companies when we identify problems with their compliance and listing standards.

A big change is the establishment of FINRA: putting together the exam teams and coming up with a single rulebook for brokers. There are a number of indicators that FINRA is well on its way. Broker-dealers now get a single exam report and a single exam team coming to the business when they have an examination, even while the final organizational efforts are occurring. The enforcement division of FINRA is now fully integrated.

The rulebook process is the biggest challenge because we’re looking at the subtle differences between NYSE rules and NASD rules, and we’re also looking to see whether there’s a third way. We’re constantly probing to see whether there’s an approach that incorporates the use of principles as well as specific rules and whether we can encourage prudential regulation through FINRA in a way that is more interactive with the firms. I’m confident that a year from now we will have a consolidated and more effective set of rules than we have today.

To what extent do you cooperate with or share information with other regulatory bodies?

We regularly cooperate with FINRA and with the other exchanges in looking at a variety of trading violations. We cooperate with the Securities and Exchange Commission in a variety of ways: on insider trading, trading before a secondary offering, and a variety of manipulation concerns. We also have an inter-market surveillance group, which allows for the electronic exchange of information and an electronic bulletin board to make sure that each market in the U.S. understands what other markets are looking at with respect to trading activity at a particular time.

In Europe, there’s not as much fragmentation of order flow since many securities are dually listed in the United States and Europe. They often are substantially traded in their home country, with much smaller order flow in another country’s marketplaces. There’s less consistent opportunity or need for exchange of information, but many of the European markets are part of the surveillance group so we have occasions to exchange information with them.

The number of common investigations tends to be more on the domestic side. But over time, with the increased dispersion of trading, the potential impacts of mutual recognition, and the operation of international exchanges, that’s going to result in more issues of coordinated regulation.

Do NYSE Regulation and Euronext investigate jointly, or just share information?

We would do joint investigations if it became appropriate at any time, but we don’t comment about any investigations in process. We have not done a joint investigation with Euronext in the past. In Europe, things like insider trading and market manipulation are referred to the government, so it’s a different environment as to the breadth of actions and investigations that are occurring at a Self-Regulatory Organization level in continental Europe compared with the United States.

What do you foresee in the way of mutual recognition among the SEC and its counterparts around the globe?

SEC officials have said they want to move toward mutual recognition, but it’s not clear when or how the SEC might move in that direction. At a minimum, we’ll see action with respect to the cumbersome way that foreign, non-registered brokers have to operate and interact with investors in the United States, even institutional investors.

Do you think regulators abroad are forceful enough for U.S. investors? We expect quite a lot.

Regulators are becoming increasingly sophisticated outside the United States, and in many places in Europe and Asia that sophistication has already existed. The standards of the International Organization of Securities Commissions have been quite helpful there. That’s not to say enforcements or systems are at the same level across all markets. I think the SEC will be looking at granting mutual recognition only where they see some convergence and some consistency—not the same regulatory program, but a solid program of integrity that’s regularly applied.

“Regulators are becoming increasingly sophisticated outside the United States … That’s not to say enforcements or systems are at the same level across all markets.”

I don’t think all regulation is sufficiently at U.S. levels, but I do think it’s dramatically improved and in some cases is perhaps better. So the standard for mutual recognition should be that the regulation is the same but that it’s a program of integrity that’s consistently and rigorously applied. There are a number of market and government programs where the SEC could justify mutual recognition.

What’s your take on the idea of using International Financial Reporting Standards in the United States?

We would like to see standards setters continue to build on the progress that’s been made to develop a single, common set of global accounting standards. The SEC’s decision to remove reconciliation requirements [for foreign private issuers reporting under IFRS as written by the International Accounting Standards Board] reflects a reality that U.S. investors are going to purchase foreign stocks. It isn’t difficult to do that anymore, and it isn’t that costly anymore. If the SEC had not taken this step, the United States would not be at the table in developing global accounting and auditing standards. It is very difficult for these standards to fully converge without the U.S. being effectively involved on an ongoing basis.

A lot of companies today would say the regulatory structure in the United States is complex and burdensome. Is there a way to streamline that?

We made some progress in that respect with the consolidation of broker-dealer examinations under FINRA. Public listed companies have a variety of concerns: litigation exposure, Sarbanes-Oxley compliance, and state regulatory decision making in 50 different states. Our listing program is meant not to duplicate efforts of the SEC, which is primarily focused on the quality of disclosure. Our focus is on ensuring investors that our companies meet rigorous listing standards.

Thanks, Richard.