Becoming a Fifth Branch

70 Pages Posted: 9 Nov 2012 Last revised: 19 Nov 2013

See all articles by William A. Birdthistle

William A. Birdthistle

Chicago-Kent College of Law - Illinois Institute of Technology

M. Todd Henderson

University of Chicago - Law School

Date Written: October 8, 2012


Observers of our federal republic have long acknowledged that a fourth branch of government comprising administrative agencies has arisen to join the original three established by the Constitution. In this article, we focus our attention on the emergence of perhaps yet another, comprising financial self-regulatory organizations. In the late eighteenth century, long before the creation of state and federal securities authorities, the financial industry created its own self-regulatory organizations. These private institutions then coexisted with the public authorities for much of the past century in a complementary array of informal and formal policing mechanisms. That equilibrium, however, appears to be growing increasingly imbalanced, as financial SROs such as FINRA transform from “self-regulatory” into “quasigovernmental” organizations.

We describe this change through an account that describes how SROs are losing their independence, growing distant from their industry members, and accruing rulemaking, enforcement, and adjudicative powers that more closely resemble governmental agencies such as the Securities and Exchange Commission and the Commodity Futures Trading Commission. We then consider the confluence of forces that might be driving this increasingly governmental shift, including among others, demographic changes in the style and size of retail investments in the securities markets, the one-way ratchet effect of high-publicity failures and scandals, and the public choice incentives of regulators and the compliance industry.

The process by which such self-regulatory organizations shed their independence for an increasingly governmental role is an undesirable but largely inexorable development, and we offer some initial ideas for how to forestall it.

Suggested Citation

Birdthistle, William A. and Henderson, M. Todd, Becoming a Fifth Branch (October 8, 2012). Cornell Law Review, Vol. 99, 2013, University of Chicago Institute for Law & Economics Olin Research Paper No. 618, Available at SSRN: or

William A. Birdthistle

Chicago-Kent College of Law - Illinois Institute of Technology ( email )

565 W. Adams St.
Chicago, IL 60661-3691
United States

M. Todd Henderson (Contact Author)

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773-834-4168 (Phone)
773-702-0730 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics