Self-Regulation in the United States

Finding Self-Regulation Materials

Note: Be sure to check the currency, coverage, and status (official or unofficial) of all sources.

Below is a list of some sources of helpful self-regulation materials, though it is not a comprehensive list.

Print Manuals: NASD Manual – CCH and MSRB Manual – CCH
SEC Web Page: SRO Rules and NMS Plans (see below)
Lexis: Combined NYSE & NASD materials database (FEDSEC; SRO)
West: see below
Stock Exchange Websites: see below

Westlaw:

NASD Final, Temporary and Proposed Regulations Combined (NASD-REG)
NASD Federal Register (NASD-FR)
NASD Code of Federal Regulations (NASD-CFR)
NASD Disciplinary Decisions (NASD-DISP)
NASD Arbitration Awards (NASD-ARB)
NASD Manual (NASD-MANUAL)
NYSE Arbitration Decisions (NYSE-ARB)
NYSE Constitution (NYSE-CONST)
NYSE Combined Material (NYSE)
NYSE Disciplinary Decisions (NYSE-DISP)
NYSE Information Memos (NYSE-INFOMEM)
NYSE Interpretation Handbook (NYSE-INTRP)
NYSE Interpretation Memos (NYSE-INTRPMEM)
NYSE Listed Company Manual (NYSE-LCM)

Select Stock Exchange Websites:

Self-Regulatory Organization (SRO) Rulemaking and National Market System (NMS) Plans

SEC invites comments on filings submitted by SROs during the comment period. Each SRO name below is linked to an index page with listings of specific filings and corresponding SEC releases.

American Stock Exchange (AMEX)
Board of Trade of the City of Chicago, Inc. (CBOT)
Boston Stock Exchange (BSE)
Boston Stock Exchange Clearing Corporation (BSECC)
CBOE Futures Exchange, LLC (CFE)
Chicago Board Options Exchange (CBOE)
Chicago Mercantile Exchange (CME)
Chicago Stock Exchange (CHX)
Depository Trust Company (DTC)
Emerging Markets Clearing Corporation (EMCC)
Financial Industry Regulatory Authority (FINRA)
Fixed Income Clearing Corporation (FICC)
(formerly: Government Securities Clearing Corporation)
International Securities Exchange (ISE)
Municipal Securities Rulemaking Board (MSRB)
NASD
NASDAQ Stock Market LLC (NASDAQ)
National Futures Association (NFA)
National Securities Clearing Corporation (NSCC)
National Stock Exchange (NSX) (formerly: Cincinnati Stock Exchange)
New York Stock Exchange (NYSE)
NQLX (formerly: Nasdaq Liffe Markets)
NYSE Arca, Inc. (NYSE Arca) (formerly Pacific Exchange, Inc.)
OneChicago LLC (OC)
Options Clearing Corporation (OCC)
Philadelphia Stock Exchange (Phlx)
Stock Clearing Corporation of Philadelphia (SCCP)

Role of Government in Corporate Governance

For the past century, self-regulatory institutions have played a central role in policing both corporate behavior and the behavior of the professionals involved in corporate transactions. Since the 1930s, the United States’ securities laws have expressly authorized self-regulatory organizations, such as the NYSE and the NASD, to assume primary responsibility for rulemaking and enforcement of securities violations. In addition, the actions of corporate accountants and lawyers have been subject to oversight by self-regulatory bodies.

In light of the recent series of corporate scandals, it is reasonable to ask whether the current structure of self-regulation is adequate. Deciding who should regulate corporate behavior
and securities transactions, though, is not merely a choice of either government or self-regulation. Rather, it is a question of when and how self-regulation should be used. What are the conditions under which self-regulation is appropriate? And when it is appropriate, how should self-regulation be structured to maximize its advantages and minimize its disadvantages?.

The Advantages and Disadvantages of Self-Regulation

To some, the term self-regulation is an oxymoron, or something akin to the fox guarding the chicken coop. But self-regulation may offer a number of potential advantages in the realm of corporate regulation. Among the potential advantages of self-regulation:

Proximity. Self-regulatory organizations are, by definition, closer to the industry being regulated. This proximity means that self-regulatory organizations will generally have more detailed and current information about the industry, something that is especially helpful in rapidly changing sectors. By comparison, government regulators are often playing “catch up.” Being closer to the action, self-regulators are better situated to identify potential problems more quickly.
Flexibility. Self-regulatory organizations can act with greater flexibility than government regulators. They are not subject to the same kinds of procedural and due process hurdles that government is, nor do they face the same political constraints. Governmental regulators do not relish dealing with politically unpopular or extremely complex issues, so these issues can be delegated to self-regulatory bodies.
Compliance. Self-regulation may generate a higher level of compliance.The greater the involvement of industry in setting the rules, the more those rules may appear reasonable
to individual firms. Self-regulation may also generate rules that solve regulatory problems in ways more sensitive to industry practices and constraints, and hence it may be easier for firms to comply with them.
Collective Interests of Industry. Self-regulation can harness the collective interests of the industry.This may be another way that self-regulation promotes compliance, as competitors can effectively “police” each other.
Resources. Self-regulatory bodies may have a better ability to secure needed resources. In addition, when regulatory funding is self-directed, the legislature cannot cut it off or use it as a leverage point over the selfregulatory body.

Although self-regulation has these important advantages, it also has some noteworthy drawbacks. There are at least the following potential disadvantages of self-regulation:

Conflicts of Interest. The very proximity that can help the self-regulator acquire useful information can be a disadvantage because of conflicts of interest. Knowing an industry better does not mean that a self-regulator will have the proper incentives to regulate it more effectively. There is also the possibility that self-regulation will be used by older, more established entities simply to keep out market entrants.
Inadequate Sanctions. The greater flexibility afforded self-regulatory organizations also means they may have the discretion to mete out only modest sanctions against serious violators. Conference participants noted several instances of self-regulatory organizations imposing small sanctions for egregious malfeasance.
Underenforcement. Self-regulators’ conflicts of interest and flexibility may also make it more likely that compliance with rules will be insufficiently monitored. If industry’s interests are at variance with society’s interests, then enforcement by self-regulators might be less than optimal for the overall good of society.
Global Competition. In a global marketplace, an industry’s collective interest can be defined by competition with foreign markets. If foreign markets are not equally burdened with regulation, then aggressive self-regulation could put domestic firms at a serious disadvantage, providing yet another reason to question whether selfregulators will make socially optimal decisions.
Insufficient Resources. Although the funding of selfr-egulatory bodies may not be susceptible to the whims of legislatures, underlying conflicts of interest could leave self-regulatory bodies with less than sufficient funding.

Clearly, self-regulation has both advantages and disadvantages. It is neither an inherently good nor inherently bad way to regulate corporate conduct. The challenge, then, is to find the situations in which self-regulation is the most appropriate model.After that, the challenge is to find optimal ways of designing self-regulatory institutions.

Self-Regulatory Institutions

Even if existing self-regulatory institutions receive some of the blame for corporate goverance scandals, it does not follow that self-regulation should be abandoned entirely. Instead, the solution may be to change the internal governance structures of self-regulatory institutions, grant them new powers or increase their resources, or modify the degree and type of government oversight they receive.

Self-regulatory organizations can be designed in different ways. Some self-regulatory bodies are stronger and more effective than others.At the weakest end of the spectrum lies a voluntary industry code of conduct for which compliance is voluntary and the industry has little or no enforcement capability. For example, the Association of Investment Management and Research (now known as the CFA Institute) has the power simply to revoke individuals’ ability to refer to themselves as “chartered financial analysts.” At the other end of the spectrum lie self-regulatory bodies with greater powers both to make and to enforce binding rules. The traditional securities self-regulatory organizations, such as the NYSE and NASD, develop extensive sets of rules and can bar those who violate these rules from participating in the securities markets altogether. In between these poles lie organizations such as state bar associations that possess little regulatory authority but have the power to disbar or exclude, as well as selfregulatory bodies such as the Financial Accounting Standards Board (FASB) that have the power to adopt rules but have relatively little ability to enforce them.

In addition, some self-regulatory bodies are more closely connected with the industry’s self-interest than others. Institutions that share responsibilities for both creating markets
and regulating them will face an inherent conflict—whether real or apparent—that is absent from institutions that keep regulatory functions separate from market operations.The NASD and,more recently, the NYSE have taken steps to make their regulatory functions independent of their market operations, precisely to keep the regulatory side of their organizations less conflicted.

Finally, self-regulatory organizations can vary in terms of the amount of government oversight they receive. Some self-regulatory institutions are entirely separate from the government, while others, such as the NYSE and NASD, are overseen by the SEC. Government oversight can help overcome some of the limitations of self-regulation, counteracting potential bias while still securing the advantages of self-regulation.

Government officials need not know as much as the self-regulators do about the industry, since they are not the principal regulators; they simply need to be able to assess the quality and seriousness of a self-regulatory organization’s rulemaking and enforcement behavior. Moreover, by effectively delegating authority to self-regulatory institutions for routine regulatory functions, government agencies can then utilize their resources for detecting and responding to major rule violations and monitoring for systemic problems.