WASHINGTON - Federal regulators, responding to a pay scandal at the New York Stock Exchange, approved an overhaul of the exchange Wednesday after the NYSE agreed to split its top executive position in two to avoid massing excessive power in one person.
The Securities and Exchange Commission voted 5-0 at a public meeting to approve the overhaul plan proposed by the NYSE’s interim chairman, John Reed, and endorsed last month by 98 percent of the exchange’s members. The plan will establish a smaller and more independent board of directors to oversee regulation of the exchange and appointment of an autonomous chief regulatory officer.
The nation’s largest stock exchange is emerging from a scandal that erupted in September over its former chairman’s lavish pay, which raised the issue of an imperious chief executive. SEC approval was required for the reform plan to go forward.
Commission chairman William Donaldson announced that, in addition, the NYSE had decided to separate the chairman and chief executive officer positions — a change he had urged.
‘‘In this way, the NYSE should be in a better position to protect against the concentration of too much executive authority in one individual,’’ Donaldson said.
Reed had previously expressed opposition to the idea. But Donaldson told reporters after the meeting that ‘‘there was no armtwisting’’ by the SEC to convince Reed and the NYSE board members, who simply ‘‘decided that this was the way to go.’’ They made the decision and informed him of it several days ago, Donaldson said.
NYSE spokesmen in New York had no comment.
On Tuesday, the nation’s largest public pension fund, the $154 billion California Public Employees Retirement System, announced it is filing a class-action lawsuit against the NYSE and seven trading firms, alleging that fraudulent practices cost it millions of dollars. The pension fund is seeking an unspecified amount of money, but fund officials said it could add up to hundreds of millions of dollars if other parties join the suit.
The NYSE and the SEC have been investigating the alleged trading abuses. CalPERS officials said they decided to sue rather than rely on the SEC because the agency has not fulfilled its regulatory duties.
Donaldson dismissed that criticism Wednesday, saying, ‘‘We were on the scene immediately and have been on the scene ever since.’’
Officials of CalPERS and other huge public pension funds, controlling hundreds of billions of dollars in nine states, have insisted that the proposed NYSE reforms are insufficient to restore investors’ trust shattered by revelations of the $188 million pay package of then-chairman Dick Grasso. He was ousted in September.
‘‘We are very disappointed that the SEC has voted to approve the Reed plan without seeking further changes besides splitting the chair and CEO positions,’’ the fund officials said in a statement Wednesday.
And several lawmakers have questioned the adequacy of the NYSE proposal, noting that the board members supervising the exchange’s regulation would be up for election annually by the member firms being regulated.
Critics say that strict separation between the exchange’s self-regulation and commercial operations is needed.
But Donaldson, who headed the NYSE in the early 1990s, insisted that the reform plan marked a ‘‘very clear separation’’ of the two — a change he said should bolster ordinary investors’ confidence in the market’s integrity.
He called the exchange’s overhaul proposal ‘‘a significant step forward in meaningful reform’’ of its governance structure.
Other commissioners also indicated they would like to see further changes in the NYSE’s governance. ‘‘Much more may be needed,’’ said Harvey Goldschmid.
Despite lapses — notably trading abuses now under investigation — and potential conflicts of interest, the principle by which the NYSE polices itself is sound and should be maintained, Donaldson has said. He has rejected the notion that the SEC or another independent body should assume direct regulatory oversight of the exchange.