The Well-Paid Regulator [WSJ 9/11/03]
AHEAD OF THE TAPE By JESSE EISINGER
Investors have had two major revelations in the past several weeks that suggest the stock market continues to be a rigged game.
Major mutual-fund companies were taking fees to allow hedge funds to make trades that stripped profits directly out of the pockets of their own retail-investor customers. And then there is the flap over Dick Grasso's pay.
While the stock rally has been strong this year, individual investors are only just getting back in. The scandals come at an inopportune time.
When the New York Stock Exchange last month sneezed out the $140 million compensation plan for its blessed chairman, we were told the controversy was put to rest. But then this week, Mr. Grasso and the NYSE were forced, only after pressure from the Securities and Exchange Commission, to reveal that indeed the blessings actually surpassed the original number. There was a heretofore undisclosed addition of $48 million. It's compensation enough to make the Simpsons' C. Montgomery Burns ashamed.
Sure, Mr. Grasso made a show of giving up this money, which nobody outside the NYSE knew he was entitled to in the first place. And then he declared: "I've put this issue behind me."
That's not good enough. That the NYSE said it had fully disclosed Mr. Grasso's pay package, when, in fact, it hadn't, is minor. The wider issue here is that the package smacks of a clandestine payback. Mr. Grasso is not just a CEO, he is a regulator. His paymasters are from the firms he is charged with regulating.
Mr. Grasso explained that there never was a "two-way" dialogue about his pay. Of course there wasn't. The regulated don't need such things explained to them. There is a reason that Merck and Pfizer don't set FDA's commissioner Mark McClellan's pay.
The NYSE supporters are right: Whatever the NYSE wants to pay its CEO is fine. But only if the NYSE is stripped of its regulatory authority. It's untenable for a regulator to simultaneously be running a business, especially one besieged by superior competition.
Investors need to trust that when those who run the markets throw out pieties about disclosure and fairness, they are sincere. The way to restore investor trust is not for Mr. Grasso to give back fractions of his wealth, but to give up a bit of his power.
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