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UPDATE 3-NYSE's Reed meets SEC chief, in 'listening mode'

(Updates with Reed comments, paragraphs 2-4, 9, 10, 13, 18, 19)

By Kevin Drawbaugh

WASHINGTON, Sept 29 (Reuters) - Interim New York Stock Exchange Chairman John Reed, called from retirement to reshape the world's largest bourse, said on Monday he has no immediate plans to ax NYSE board members.

Reed met for two hours with U.S. Securities and Exchange Commission Chairman William Donaldson and said he was in "listening mode" on how the exchange should mend its ways following the furor created by a $140 million pay package given to his predecessor, Richard Grasso.

Reed, 64, seemed relaxed and at ease at two press briefings on Monday -- the first in Washington and the second in New York after the markets closed.

The New York press conference lasted more than an hour, aclear change from Grasso, who very rarely dealt directly with members of the press and often kept those conversations extremely brief.

"I'm here to learn," said Reed, as he sat next to Donaldson at SEC headquarters in the morning. "A week ago, I was retired on an island somewhere."

The SEC chief has assumed a pivotal role in guiding the NYSE's reform efforts in response to criticism that its clubby management neglected investors. Donaldson himself was NYSE chairman from 1991 to 1995.

Surrounded by reporters and on Donaldson's turf, a tanned and fit-looking Reed, a former co-chief executive of Citigroup Inc. , bluntly parried questions about his agenda. He said it was "simply not true" that he had preconceptions about who should be on the NYSE board.

Since the Grasso flap, former lead NYSE director H. Carl McCall has quit, as has NYSE board member Juergen Schrempp, chairman of German auto giant DaimlerChrysler AG .

At the afternoon news conference in New York, Reed said he "regretted" both departures. He said he had "no reason" to believe other board members were planning to leave, but said he had not spoken with all board members.

"I have to take a responsibility to make sure that the governance reflects the problems that we went through most recently, and deals adequately with the underlying sources of that," he said.

Stanley O'Neal, chief executive of Wall Street banking giant Merrill Lynch & Co. , would leave the NYSE board if asked, a source told Reuters on Monday.

O'Neal is one of several Wall Street chief executives who sit on the board, including Morgan Stanley's Philip Purcell, J.P. Morgan Chase & Co.'s William Harrison and Goldman Sachs Group Inc.'s Henry Paulson.

Reed said it would be foolish to toss out board members before reviewing corporate governance issues.

"This idea that you should simply throw out everybody who's currently on the board from the financial community doesn't seem to me, on the surface, to be a particularly deep thought," he said.

OTHER DEPARTURES

Senior NYSE staff members have also quit since Grasso's resignation on Sept. 17 amid questions about how his pay package -- viewed as excessive by critics and even some friends -- came to be approved in the first place.

Georges Ugeux, a senior managing director at the NYSE, quit on Monday, in a move he said was not related to Grasso's departure. Frank Ashen, an executive vice president at the exchange who was closely involved with the details of Grasso's compensation package, is retiring as of Oct. 1.

The NYSE is still working on a comprehensive proposal on corporate governance reform. Sources have said Donaldson rejected initial approaches to the report as inadequate, and the proposal was delayed to give Reed a say in it.

"There will be profound changes in governance, but no changes in operations," he said. Reed said he expects Wall Street to continue to be represented on the board.

Reed dismissed reports that he is starting from scratch on the proposal. "That would be foolish," he said. "A lot of work has been done. One would be stupid beyond belief not to simply read what we have and take a look at it."

Whatever results from the exchange's continued efforts, Reed said, "it can't be something that's at odds with the Securities and Exchange Commission's views."

He said he viewed as inadequate some of the proposals he has seen so far for reforming the exchange.

A special NYSE committee reviewing exchange governance met on Monday to hear more testimony on what should be done.

The Council of Institutional Investors, a powerful pension fund group, told the committee in a letter that the exchange needs to replace board members and staff members "who are identified with the old ways of doing things." (Additional reporting by Javier David and Nicole Maestri in New York and Peter Ramjug in Washington)