The Dark Side of Self-Regulation

Abstract

The financial services industry indirectly regulates itself through littlediscussed, scandal-prone, and structurally-entrenched self-regulatory organizations. FINRA, the most prominent of these self-regulatory organizations, makes regulations and sets enforcement policy that directly affect public welfare.As with other self-regulatory organizations, FINRA's structure poses a continual risk that industry members will subvert its processes to act like a cartel, promoting industry interests at the expense of the public and contributing to the excessive rents collected by financial intermediaries. Although this dark side to self-regulation poses a constant danger, structural reforms may increase the likelihood that FINRA and other self-regulatory organizations will take the public's interests into account. While others have discussed how self-regulatory organizations increasingly resemble afifth branch of the federal government, this article shifts the focus to how the public actually exercises its voice within FINRA and other self-regulatory organizations. This Article examines the purportedly public representatives serving on FINRA's Board of Governors.It finds that these public representatives often simultaneously serve on the boards of corporate financial intermediaries, giving rise to conflicts of interest between loyalties to market participants and industry lobbying groups and their roles as protectors of the public interest. To amplify the public's voice within these organizations, this Article proposes a different appointment process for the public representatives serving within self-regulatory organizations and calls for increased transparency and improved oversight.

Does technology really outpace policy, and does it matter? A primer for technical experts and others

“…For a discussion of the problems of industry self-regulation, see (selected from a large literature) Maitland (1985), Lennox and Nash (2003), Omarova (2010), Garvin (1983), Lagace (2007), Levin (1967), Ogus and Carbonara (2000), Kusano (2005), Kappas (1997), Gupta and Lad (1983), Price et al (2005), Edwards (2017), and Bartle and Vass (2005). 3 We use the term "technocrat" here, without any intended positive or negative connotation, but rather as a simple way to identify technical experts of various kinds, particularly those who support the primacy of technological change as a singular and obvious social good.…”

“…Some of the dire predictions of social harm by the cypherpunks did not come to be. But with the continued rapid technological change, as well as some implementations of technology self‐regulation such as digital rights management and self‐regulatory privacy features in computing technologies, the number of people advocating technology self‐regulation is wider, for example, McCullagh (2001) about technology as security. For a discussion of the problems of industry self‐regulation, see (selected from a large literature) Maitland (1985), Lennox and Nash (2003), Omarova (2010), Garvin (1983), Lagace (2007), Levin (1967), Ogus and Carbonara (2000), Kusano (2005), Kappas (1997), Gupta and Lad (1983), Price et al (2005), Edwards (2017), and Bartle and Vass (2005).…”

“…For a discussion of the problems of industry self‐regulation, see (selected from a large literature) Maitland (1985), Lennox and Nash (2003), Omarova (2010), Garvin (1983), Lagace (2007), Levin (1967), Ogus and Carbonara (2000), Kusano (2005), Kappas (1997), Gupta and Lad (1983), Price et al (2005), Edwards (2017), and Bartle and Vass (2005).…”