The head of the Securities and Exchange Commission, which is reviewing new governance changes at the New York Stock Exchange, said Thursday the proposed overhaul creating a board of independent directors was a “critical first step” toward reform of the exchange.

But officials of the biggest U.S. pension funds, controlling hundreds of billions of dollars in nine states, insisted that the proposed changes are insufficient to restore investors’ trust shattered by a scandal at the NYSE this summer sparked by the revelation of its former chairman’s lavish compensation.

SEC Chairman William Donaldson indicated that further reforms are needed, telling a Senate panel that the changes proposed by NYSE interim chairman John Reed and endorsed this week by 98 percent of the exchange’s members were a “substantial and critical first step toward revamping its governance structure.”

Donaldson and the other four SEC commissioners are expected to vote on whether to approve the proposals for overhaul of the nation’s biggest stock exchange as early as mid-December.

Sounding a similar note, Sen. Richard Shelby, R-Ala., chairman of the Senate Banking Committee, said at the hearing, “It seems to me that Mr. Reed’s proposals may be the first step in a more lengthy reform process.”

Final vote results released Wednesday showed that of 1,136 valid ballots received, 1,112 NYSE seatholders favored installing a new, independent board of directors unconnected to the securities industry to help reduce conflicts of interest. Seven NYSE members opposed Reed’s reforms and 17 abstained from Tuesday’s vote. A total of 1,365 regular members were eligible to cast ballots; of those, about half were affiliated with securities and trading firms.

In a letter Thursday, the state pension fund officials — including New York state Comptroller Alan Hevesi and California state Treasurer Phil Angelides — urged Donaldson “to take the necessary next steps to finish the job” of reforming the NYSE.

At a minimum, the officials said, the SEC should force the NYSE to make more far-reaching changes including “significant representation” on the board of the investing public and strict separation between the exchange’s self-regulatory and business functions.

The other officials signing the letter head pension funds in Connecticut, Kentucky, Iowa, Maine, Nevada, North Carolina and Oregon.

The proposed reforms follow the ouster in September of former NYSE chairman Dick Grasso, who left amid outrage over his $188 million compensation package.

At the center of Reed’s plan: replacing the current 27-member board with a slimmer board of six to 12 independent directors who will oversee regulation and compensation. A separate board-appointed executive panel — comprised of members of the securities industry, the specialist firms that trade on the NYSE floor and one representative each from public and private pension funds — will handle operations, such as listing standards for companies.

Reed, tapped as interim chairman and CEO in late September, is being paid a symbolic $1 to overhaul how the exchange governs itself. The retired Citigroup co-chief executive says he hopes to name a permanent chairman by year’s end.

Two of the directors nominated by Reed served on the previous board, but neither was involved in Grasso’s pay negotiations: former Secretary of State Madeleine Albright captured 1,063 votes, and Herb Allison, chairman of the teachers pension fund TIAA-CREF, received 1,104 votes.

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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