The Dark Side of Self-Regulation

The financial services industry indirectly regulates itself through little discussed, 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\u27s 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\u27s interests into account. While others have discussed how self-regulatory organizations increasingly resemble a fifth 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. In this Article, Professor Benjamin Edwards examines the purportedly public representatives serving on FINRA\u27s Board of Governors. He 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\u27s 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 oversigh