66 Pages Posted: 8 May 2008
Securities industry self-regulatory organizations (SROs) began as private sector membership organizations of securities industry professionals. This article addresses the questions of whether, and to what extent, securities industry SROs have become government agencies, and whether, and to what extent, they should be subject to constitutional and statutory controls on government agencies. It focuses principally on the Financial Industry Regulatory Agency (FINRA), a new entity which combined the National Association of Securities Dealers, Inc. (NASD) and the member regulation functions of NYSE Group, Inc. (NYSE).
The cases addressing these critical issues are contradictory, and generally not based on any overriding constitutional law principles. In some areas, the courts have just stated that an SRO is exercising delegated governmental power. In other areas, the courts have just stated that an SRO is a private membership organization. Sometimes, courts have distinguished between the commercial and regulatory functions of SROs, in order to draw lines separating the laws applicable to government agencies from private sector organizations.
The article will conclude that as long as the securities industry, rather than the SEC, controls the governance of FINRA and the selection of its Board of Governors, FINRA should not be held to be a government entity. This conclusion may be surprising to scholars and lawyers who have not considered the implications of changed SRO governance. Nevertheless, when FINRA is exercising investigative and disciplinary functions it should be treated like a government agency. Furthermore, to the extent practicable FINRA should operate according to transparency standards applicable to government bodies. Striking the right balance between private sector flexibility and constitutional and administrative law protections is critical to the future operation of FINRA and other securities industry SROs.
Keywords: NASD, NYSE, FINRA, self-regulating institution, administrative law
Suggested Citation: Suggested Citation
Karmel, Roberta S., Should Securities Industry Self-Regulatory Organizations be Considered Government Agencies?. Stanford Journal of Law, Business, and Finance, Forthcoming; Brooklyn Law School, Legal Studies Paper No. 86. Available at SSRN: https://ssrn.com/abstract=1128329