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In all the debate over governance changes at the New York Stock Exchange, which were overwhelmingly approved on Nov. 18, a pivotal issue has been submerged in the background: The fate of the Big Board's top managers. Acting Chairman John S. Reed has been mum on the subject. But behind the scenes, the most significant personnel change since the departure of disgraced CEO Richard A. Grasso is under way. The NYSE is quietly looking to replace its top regulator and third-highest executive, Edward A. Kwalwasser.BusinessWeek has learned that the exchange has hired an executive recruitment firm that is actively hunting for a new chief regulatory officer, replacing Kwalwasser. The NYSE calls this "succession planning," and says that -- even though replacements are being interviewed -- the 63-year-old NYSE veteran may stay on the payroll through next September. But sources familiar with the hiring process say that Kwalwasser, who declined to be interviewed for this article, may go much sooner, perhaps even before the hiring of a new CEO. "It's not surprising that they may do this as that would relieve the new CEO of having to make a tough decision," says one person close to the NYSE.
A fast replacement of Kwalwasser -- particularly by a tough securities-law cop -- might upset the NYSE's 1,366 members. But it could go a long way to satisfy the concerns of institutional investors, who have been sharply critical of the NYSE's internal regulation efforts. Kwalwasser, who holds the rank of group executive vice- president, has headed regulation and enforcement at a time when NYSE oversight of floor trading has come under sharp criticism. He also has been slammed for his high pay -- $1.6 million in salary and bonuses in 2002.
People who know him describe Kwalwasser as a cordial New York native and 19-year NYSE employee who was close to the departed Grasso. Under Kwalwasser, securities lawyers and institutional investors have complained, the exchange's enforcement division had a relaxed culture and tended to focus on minor infractions while overlooking systematic violations on the trading floor. The exchange has vigorously defended its enforcement record. But criticism has mounted in recent weeks, after news of a Securities & Exchange Commission report that severely criticized the NYSE's floor-trading oversight. The exchange, prodded by the SEC, is investigating allegedly widespread improper transactions by specialists, who manage stock trading there.LEADING CANDIDATES
The exchange is downplaying the hunt for Kwalwasser's successor. Spokesman Ray Pellechia confirmed that the Big Board has hired a firm to seek candidates for the post of chief regulatory officer, the new name for Kwalwasser's job following Reed's shake-up. He noted that when Kwalwasser's pay package was announced on Oct. 10, the exchange said it "desired to retain [Kwalwasser's] services" and would allow him to remain, without penalizing his retirement pay, until next Sept. 30. Pellechia, however, acknowledged that Kwalwasser may choose to retire sooner.
Those familiar with the hiring process say that people with SEC experience are being considered for the job. But securities lawyers say that a tough prosecutor or a regulator with a no-nonsense reputation, such as David E. Shellenberger, chief counsel for the NASD regional district based in New York City, might do a better job of restoring investor confidence. One problem: The "prestige of the the job is tarnished" because of the Big Board's well-publicized troubles, says a person familiar with the recruitment effort.
So the ball is in the NYSE's court. Will it choose a junkyard dog or a pussycat? Allow Kwalwasser to linger or show him to the door? The answer will signal whether the exchange is planning meaningful change -- or still more of the discredited status quo. By Gary Weiss in New York