Excerpts from a Securities and Exchange Commission concept release, soliciting views from the public through March 8 on reforming the self-regulatory system of the securities industry:
… Inherent in self-regulation is the conflict of interest that exists when an organization both serves the commercial interests of and regulates its members or users. …
The economic importance of certain SRO members may create particularly acute conflicts, especially in light of the consolidation of some of the largest securities firms. For example, the number of (New York Stock Exchange) specialist firms … has dropped from 27 in 1999 to 7 in 2002. One NYSE specialist firm in 2003 accounted for over 28% of total NYSE trading volume …
Thus, the current situation appears to be one in which a declining number of member firms are increasingly important to the business interests of their regulator SROs. The anecdotal evidence … could indicate that SROs have become more dependent on large members for their funding, potentially enabling those members to wield significant influence with respect to their regulator SROs. This creates the potential for failures by SROs to enforce rules against these members …
