What Abandoning SRO Status Means to International Securities Competition and the Health of Corporate Governance
Publication date
Monday, 29.11.2004
Authors
Haim Zaltzman
Series
Writing Project for Harvard Law School
This paper looks at two possible policy ramifications of abandoning the self-regulatory organization (SRO) model that governs the New York Stock Exchange, Inc. (NYSE). In terms of overall impact on corporate governance, this Article asserts that stock exchanges are far better positioned to regulate securities, and thus it would be detrimental to the overall quality of corporate governance to force the NYSE or other exchanges to divorce their business function from their regulatory arm. This first part of this Article illustrates that the current SRO model (termed a “quasi-SRO”) is the best-case system, combining the benefits of a pure self-regulatory model while at the same time addressing the shortcomings of self-regulation. Some systemic enforcement biases nonetheless remain; biases that the quasi-SRO system cannot completely eliminate. This Paper argues that heightened competition in securities listings makes these inherent shortcomings of marginal importance. However, even if one believes that these biases are not marginal, a government regulator should at most only interfere in the enforcement of corporate governance rules, and not in the rulemaking and surveillance functions.
Contents
Introduction
Article Outline
Part I. What this paper is not about
Part II. Definitions and Assumptions
Part III. What Impact Would Abandoning the SRO have on Corporate Governance Overall?
III-A: Advantages of Self-Regulation
III-A-1: Market Flexibility
III-A-2: Shifting the Financial Burden to the Private Sector
III-A-3: Private Access to Regulatory Capital
III-A-4: Speed
III-A-5: Market Specialization
III-A-6: Access to Capital
III-A-7: Superior Market Price Discovery
III-A-8: No Private Causes of Action
III-B: Overall Impact of Government Regulation
III-B-1: Theoretical and Historical Discussion of Government Failures
III-B-2: Empirical Evidence of Government Failures in Securities
III-C: Shortcomings of Self-regulation
III-C-1: Lack of Competition
III-C-2: Financing Issues
III-C-3: Conflicts of Interests
III-D: The Best-Case Solution: the quasi-SRO
III-E: An Alternate Proposal
Part IV. Impact on Stock Exchange Competition
IV-A: Robust Competition Between Stock Exchanges
IV-B: NYSE’s Governance Premium and Its Importance to Competition
IV-B-1: NYSE’s Leadership Role and Its Reputational Capital
IV-C: Counterarguments
IV-D: Possible Policy Implications
Concluding Remarks
Haim Zaltzman,
Juris Doctorate Candidate, Harvard Law School, 2005.
Fulbright Scholar and Institute for the Economy in Transition (IET) Visiting Researcher, 2001-2002.
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