SIFMA Calls for Review of SRO Structure (with Lofchie Comment)

SIFMA sent a letter to the SEC to request a review of the regulatory structure of broker-dealers, exchanges, and the SRO model. SIFMA Executive Vice-President Randy Snook acknowledged that the current SRO structure "is widely viewed to be outdated and in need of reform." In its letter, SIFMA suggested the following key areas it believes the SEC should consider during its review:

• What is an exchange and why is it an SRO?;
• Examine the competition between exchanges and the broker-dealers they regulate;
• Competitive and regulatory disparities; and
• Funding of self-regulation

Lofchie Comment: The debate over the role of the exchanges in the regulatory structure is a recurring one in securities regulation, typically one that is fiercest when there is controversy over the fees that exchanges charge broker-dealers (as there has been lately). Lately, there has also been added controversy over the ability of exchanges to limit their liability to broker-dealers in situations where a trading problem on the exchanges causes injury to member broker-dealers (as was the case with the Facebook offering).The argument that regulatory power and the operation of markets should be separate functions was an important consideration in the separation of what had been the NASD into FINRA (a now purely self-regulatory authority) and NASDAQ. In effect, SIFMA seems to be advocating a self-regulatory structure where FINRA would become essentially the only self-regulatory organization, and the regulatory authority of the exchanges over broker-dealers would be materially diminished or even eliminated.As the SIFMA letter makes clear, a change in the regulatory position of the exchanges would likely have material consequences for rules relating to market structure - most significantly, Regulation NMS.Query: how does the SEC have the resources to take on such a big issue now, while it is dealing with Dodd-Frank and the implementation of the JOBS Act rules, as well as changes to the regulation of money market funds and increasing regulation in the municipal securities market? On the other hand, this is a long-term issue. If there is to be material change, the SEC would likely want to take a measured (and possibly drawn-out) approach, which argues for starting the process sooner rather than later.

See: SIFMA Press Release (which links to SIFMA Letter).