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Introduction
Securities industry self-regulatory organizations ("SROs") began as private sector membership organizations of securities industry professionals. They set standards of conduct for their members and disciplined errant members. Securities industry SROs existed before the federal securities laws were enacted in 1933 and 1934, and important concepts of federal law were taken from SRO regulation and became an added layer of regulation on top of SRO regulation.1 Over the last seventy-five years, SROs have grown in membership and become more powerful organizations, but they also have become integrated into the scheme of federal statutory regulation, and now operate subject to Securities and Exchange Commission ("SEC") oversight of all of their activities. Moreover, as SROs have proliferated, some new SROs have been created by amendments to the securities laws. They are thus a peculiar mix of private sector self-regulation and delegated governmental regulation.
This article addresses the questions of whether, and to what extent, securities industry SROs have become government agencies, and whether, and to what extent, they should be subject to constitutional and statutory controls on government agencies, focusing principally on the Financial Industry Regulatory Agency ("FINRA"), a new entity which combined the National Association of Securities Dealers, Inc. ("NASD") and the member regulatory functions of NYSE Group, Inc. ("NYSE").2 The cases addressing these issues are contradictory, and generally not based on any overriding constitutional law principles. In some areas, the courts have just stated that an SRO is exercising delegated governmental power. In other areas, the courts have stated that an SRO is a private membership organization. Sometimes, courts have distinguished between the commercial and regulatory functions of SROs, in order to draw lines separating the laws applicable to government agencies from those applicable to private sector organizations. However, it should be noted at the outset that FINRA, unlike a stock exchange, has no commercial activities. The author's conclusion is that categorizing FINRA as a government agency, at this time, would not necessarily be useful, since FINRA is able to operate with more flexibility than a government agency, but when FINRA is exercising investigative and disciplinary functions it should be treated like a government agency. Furthermore, to the extent practicable FINRA should operate according to transparency standards applicable to government agencies.
The stated purpose...