Reinventing Self-Regulation
SIFMA Legacy SIA* White Paper – Reinventing Self-Regulation
*SIFMA is a product of a merger between the Securities Industry Association and The Bond Market Association in 2006.
Excerpt
Introduction
Sweeping changes are taking place in the securities industry. Technological developments have challenged many of the fundamental assumptions about how markets work and facilitated the creation of new competitive structures. Legislative and regulatory changes have broadened the options available to the market participants and these participants have taken advantage of these new opportunities. Alternative trading system (“ATS”) and electronic communication networks (“ECNs”) have proliferated, offering significant competition to traditional marketplaces. To respond to the increased competition, certain exchanges are considering plans to demutualize and become for- profit enterprises, while the National Association of Securities Dealers, Inc. (“NASD”) declared its intent to spin-off and privatize the Nasdaq Stock Market (“Nasdaq”).
In addition to technological change, investor confidence has been shaken by many events over the past three years, including the collapse of the “high tech” bubble, failures of corporate governance, and misconduct by some market participants. Important changes have been implemented to address these problems, most notably the Sarbanes-Oxley Act of 2002. Recently, fresh questions have been raised about the governance and oversight of the New York Stock Exchange, raising broader issues about the regulatory framework of market self-regulation and pressures to re-examine that framework.[1]
SIA believes that increased competition and additional opportunities for innovation lowers costs and otherwise benefits investors, issuers and the securities industry alike. The rise of the ATSs and conversions to for-profit structures, however, raise concerns regarding the markets’ status as self-regulatory organizations (“SROs”).[2]/ Specifically, the combined roles of SROs as market overseers and as competitors may affect the SROs’ ability and willingness to perform all their functions adequately, fairly and efficiently.[3]/ The Securities Exchange Act of 1934 (“Exchange Act”) requires SROs to act as quasi-governmental bodies in implementing the federal securities laws as well as their own rules. Yet SROs also are membership organizations and as such represent the economic interests of their members. In addition, SROs are marketplaces concerned with preserving and enhancing their competitive positions. As competition increases among marketplaces and SROs aggressively pursue strategies to increase their market share, it is possible that both the relationship of SROs with their members and the SROs’ ability to carry out their self-regulatory duties impartially will be strained.
In light of these market changes, this paper examines the benefits and drawbacks of the current self-regulatory structure as well as a variety of possible alternatives to the status quo. Specifically, Section II of the paper describes various guiding principles which should be integral considerations in any attempt to streamline the current regulatory regime. Section III describes the status quo and several regulatory alternatives to the status quo. For each alternative, the paper explores the questions of whether the concept is technically and practically feasible and whether the concept would benefit the investing public.