The first regulators watching the securities industry were those within the industry itself. Securities firms have long demanded standards, supervision, and enforcement because dishonest firms profit at the expense of honest firms. What’s more, investors who distrust the markets are reluctant to invest, which means lower profits for the securities industry and less capital for corporations.
Today,
self-regulatory organizations (SROs)
set rules and supervise business practices for their members. Their rules supplement the SEC’s rules and federal laws, although they may differ in specifics and emphasis. Any rules that SROs pass must be reviewed and approved by the SEC, which has ultimate authority over the SROs.
Pros and cons
Self-regulation has its advocates and detractors. On the one hand, regulation can be most effective and most economical when it involves industry practitioners and when it occurs as close as possible to the activity it regulates — for example, directly on the trading room floor.
On the other hand, having industry professionals police themselves provokes questions about whose concerns take precedence. For example, if an exchange is both a regulator and the operator of a trading market, how would a conflict of interest between its regulatory duties and its business issues be resolved?
