Type A Regulation

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

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NY Sun
NEW YORK SUN CONTRIBUTOR

A week from Wednesday, New Yorkers will celebrate the 15-month anniversary of the filing of Eliot Spitzer’s lawsuit against the New York Stock Exchange and its former chief executive, Richard Grasso, over the size of Mr. Grasso’s compensation package. So now is as good a time as any to raise again the key question surrounding Mr. Grasso’s pay: Who cares?


Mr. Spitzer, New York’s crusading attorney general, does, but it’s hard to see why. Although the stock exchange is organized as a not-for-profit corporation under New York law – the legal justification for Mr. Spitzer’s suit, since he’s empowered to enforce that law – the exchange isn’t the type of charity one usually thinks of when one hears the words “not-for-profit.” It’s a membership organization that’s more analogous to a sports league or a trade association than to the United Way. That fact along with several peculiarities of the stock exchange muddy the legal waters Mr. Spitzer will have to navigate as he pursues his case. To make matters worse, the attorney general himself doesn’t help to clear things up in public.


New York law provides for two main categories of not-for-profit corporations: “Type A” and “Type B.” Type B organizations are true charities, entities that support themselves largely from grants and donations and engage in philanthropic activities. Type A not-for-profits are a different matter. This group includes the stock exchange and other “mutual benefit” nonprofits that serve as trade associations.


Although both fall under the not-for-profit law, there are some significant differences in how the law can be enforced in each case, according to James Fishman, a law professor at Pace University and coauthor of “New York Nonprofit Law and Practice.” The attorney general is effectively the only legal authority when it comes to charities, since it can be difficult to determine who is truly harmed when a charity runs afoul of the law. But there are other options with mutual benefit groups. If Mr. Grasso’s pay truly crossed the line from generous to outrageous, the exchange’s members would have standing to sue.


That none of the members has opted to take Mr. Grasso to court could suggest that they didn’t think his pay was too far out of line. There’s room for debate on that question, since it is hard to know to whom one would compare the chief executive of the stock exchange and thus with which companies – and salary offers – the exchange is competing when it tries to attract executive talent.


If one views the holder of Mr. Grasso’s position as a regulator, then one could weigh the pay scale at the exchange against the pay for the chairman of the Securities and Exchange Commission, which is in the low six-figures. If one uses compensation at other trade associations as the guidepost, the number would rise to the low seven-figures. A mild scandal erupted last year when word leaked that the Pharmaceutical Research and Manufacturers of America planned to pay its incoming chief, former Congressman W. J. Tauzin, close to $2 million. PhRMA doesn’t release details on executive compensation, but a spokesman, Kenneth Johnson, called the reports “wildly exaggerated.” If one opts, as did the exchange’s board, to compare its pay scale to large for-profits, the sky’s the limit.


Whatever the board’s decision, the exchange’s members are arguably more affected by it than the other citizens of the state of New York. As a Type A not-for-profit, the exchange exists primarily for the benefit of those members, rather than to serve the public good as a charity does. This is a distinction that often gets lost in the shuffle, even on the official Web site of the attorney general’s office, where the section on charities uses “not-for-profit” and “charitable organization” interchangeably, even though they aren’t strictly synonymous.


The stock exchange could have avoided this brouhaha by incorporating elsewhere, or under a different statute, or not at all. The National Football League is an unincorporated association of the member teams. The National Basketball Association is technically a for-profit joint venture of its members and doesn’t have to release its executive pay figures at all. Even if the stock exchange is a New York not-for-profit, Mr. Spitzer could be devoting his time and energy to pursuing waste that actually harms New Yorkers, such as large-scale Medicaid fraud, and leave the exchange’s sophisticated members to take care of themselves.

NY Sun
NEW YORK SUN CONTRIBUTOR

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.


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