M. Todd Henderson is Professor of Law and Aaron Director Teaching Scholar at the University of Chicago Law School, and William A. Birdthistle is Associate Professor of Law and Freehling Scholar at Chicago-Kent College of Law.
In our article Becoming the Fifth Branch, we argue that financial self-regulation has changed dramatically and problematically in the past few years. Financial self-regulatory organizations (SROs), such as FINRA and the Chicago Mercantile Exchange’s regulatory arm, are transforming from “self-regulatory” into “quasi-governmental” organizations. We believe this evolution, moreover, may become a serious problem for the stability and efficiency of our financial system.
To SEC Commissioner Daniel Gallagher’s question, “Is FINRA becoming a ‘deputy SEC?,’” we fear the answer is “yes.” We describe an array of forces that we believe may be driving this change, explain the implications of the loss of true self-regulation, and offer some options for restoring a healthier regulatory balance.
SROs are the primary legislators, regulators, and officers on the beat who monitor our financial system. While corporate theorists tend to focus on Congressional legislation and agency rulemaking, self-regulation is the form of financial governance that most directly governs the daily activities of our financial firms. Nearly one hundred and fifty years before the creation of federal and state securities authorities, the financial industry established its own self-regulatory organizations. The growth of private regulation was initially designed to fill a regulatory void that left brokers unable to signal quality and investors reluctant to participate in the market confidence.
