Self-Regulatory Organizations Principles and Issues

1
Self-Regulatory OrganizationsPrinciples and
Issues

• Anjali Kumar
• World Bank

2
Self-Regulatory Organizationsand IOSCO
Principles (Sept. 98)

• IOSCO Principle 6
• Principle 6 The regulatory regime should make
  appropriate use of Self-Regulatory Organizations
  (SROs) that exercise some direct oversight
  responsibility for their respective areas of
  competence, to the extent appropriate to the size
  and complexity of their markets
• IOSCO Principle 7
• Principle 7 SROs should be subject to the
  oversight of the regulator and should observe
  standards of fairness and confidentiality when
  exercising powers and delegated responsibilities
  
• Underlying premises self interest (to attract
  capital and investors) competition (among
  intermediaries)

3
Self-Regulatory OrganizationsRecognized benefits

• Potentially valuable complement to regulator
• More depth and expertise on market operations /
  practices
• Potentially greater adaptability and flexibility
• Sometimes higher ethical standards than legal
  mandates
• Greater willingness of members to comply
  voluntarily
• Lower direct costs of regulation cost savings

4
Self-Regulatory Organizationspotential
limitations

• Conflicts of interest due to
• Conflicts between business and market development
  goals Examples - listing requirements
• Dangers of collusive behavior tendency to limit
  competition and protect members
• Access to valuable information about market
  participants
• Responsibility for both market segment regulation
  and member supervision industry interest first
  and public interest next.
• Avoid confrontations with members which affect
  business
• Costs may be especially important in emerging
  markets

5
Self-Regulatory OrganizationsThe Regulator
should require the SRO to

• Set standards and maintain ongoing scrutiny to
  ensure interests of public
• Ensure adequate enforcement authority
• Cooperate with regulator on investigations
• Ensure fair treatment for all members and avoid
  uncompetitive rules
• Maintain confidentiality
• Regardless of degree of self regulation the
  regulator should retain oversight and authority
  for direct intervention

6
Self-Regulatory OrganizationsPreconditions for
Success

• Accepted preconditions
• Strong overall legal and regulatory framework
  including enforcement and conflict resolution
  Appropriate contractual relationship with members
• Transparency, accountability, information sharing
  public awareness
• Debatable preconditions
• Size large but not too large? Externalities of
  bad behavior
• Motivation - Willingness to pay? Industry
  financing

7
Self-Regulatory Organizations Historical
Evolution in the USA

• Frequently true that self-regulation existed
  before statutory regulation major role in US
  and UK markets but precedence is not as
  important as maturity and relative roles
• NYSE already over 100 years old when SEC was
  established in 1934
• Consensus regarding need for oversight after
  market crash of 1929 - yet NYSE was allowed to
  maintain its own rules
• Exchange Act provided that SRO should meet a
  number of standards (Sections 6(b) and 15A)
• But SEC was given an important oversight role
• A disciplined member of an SRO can appeal to the
  SEC
• SEC can enforce rules if SRO is unable or
  unwilling
• SEC can also bring enforcement actions against
  SRO itself

8
Self-Regulatory OrganizationsApplicability to
Emerging Markets

• Limitations in competition can imply that SRO
  model cannot ensure fair and efficient markets
• Long term benefits of compliance with rules may
  conflict with short term costs
• Moral Hazard issues
• Need for parallel development in framework of
  accounting etc to ensure transparency
• Wide difference in approaches taken by various
  emerging markets

9
Self-Regulatory OrganizationsIn Latin America
themes to discuss

• SROs in Latin America may have greater role
  compared to many emerging markets eg East Asia
• In some cases, formal recognition of SRO may be
  accompanied by limited role sometimes due to
  for-profit nature eg of exchanges
• Consequently, role may be substantially
  promotional or informational, and supportive to
  regulator
• Secrecy provisions and limits to sharing of
  information
• Extending the role implies an examination of
  market conditions examine the extent to which
  preconditions are met are we ready?
• Examine also scope for formalizing the role of
  some trade associations into SROs