(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

SEC Questions NYSE Chairman's Pay Package

Citing "serious questions regarding the effectiveness of the NYSE's current governance structure," SEC Chairman William Donaldson asked the New York Stock Exchange to review its corporate governance structure and to answer several specific questions posed by the Commission. The SEC action was prompted by the NYSE board's unanimous approval of a new contract for Richard Grasso, its chairman and CEO. The NYSE also announced that, as part of the new contract, the exchange restructured the deferred compensation and savings and retirement plan benefits previously earned by Mr. Grasso and that it distributed to Mr. Grasso benefits from three plans totaling $139.5 million.

Chairman Donaldson expressed concern that the pay package was awarded before the exchange completed its governance review, which has been pending since March 2003. In his letter to the NYSE board's compensation and corporate governance committees, he emphasized that "self-regulatory organizations must be models of good governance" and asserted that the New York Stock Exchange "must demand of itself the same high standards of governance that the exchange has proposed for its own listed companies."

Initially, the Commission requested a copy of the meeting minutes of any relevant committees and the full board dealing with the new contract, the benefits payout or any prior employment contracts or benefits for Mr. Grasso. The agency also requested copies of any consultant reports or other materials related to those decisions.

The chairman also asked for an explanation of the role of the board and any exchange committees in determining benefits provided under NYSE plans, including a list of all board members who served on these committees since Mr. Grasso assumed his current position. The exchange was asked to describe the process by which these members were chosen and to include a description of any member's business or financial relationships with Mr. Grasso or the exchange.

Mr. Donaldson also asked for a description of Mr. Grasso's deferred compensation, savings and retirement plans, including a discussion of whether such benefits were only available to NYSE executives. In particular, he asked for an explanation of the guaranteed eight percent return on the deferred compensation. In general, the SEC chairman asked the exchange to discuss the impact of the pay package on the NYSE's operating revenues and net earnings, including the revenue sources used to fund the payout. He also questioned whether the amount of the benefits paid to Mr. Grasso would impact in any way the funding or operation of the NYSE's regulatory program or other programs.