Securities and Exchange Commission Historical Society

The Institution of Experience: Self-Regulatory Organizations in the Securities Industry, 1792-2010

A Quiet Revolution

Creation of FINRA

"I think it's quite important for an organization with the mandatory elements that FINRA has in place to have significant membership representation. And it's also quite important for an organization with that range of responsibilities to ensure that the majority of its board does not fear for its re-election by the membership, or that even a single majority of the membership can re-elect all the industry governors. I think that is a very significant evolution from legacy NASD to the structure that exists in FINRA."

- June 3, 2010 Richard Ketchum in "Self-Regulation in the Securities Industry"

While electronics swept through the markets, the quiet self-regulation revolution continued. NASD Regulation had begun, like the new NYSE Regulation, as an SRO subsidiary of a parent, regulating both its members and the affiliated market. But NASD Regulation had since moved beyond that to become what the SEC Concept Release had called a single member—or "hybrid"—SRO that would regulate a number of exchanges including Nasdaq, the AMEX and the ISE.

While the NYSE's creation of separate subsidiaries removed some conflicts, with a for-profit parent, there was still potential for market leaders to influence regulators. There also remained inefficient duplication of efforts between NASD Regulation and NYSE Regulation, and, on occasion, inconsistent rules regulating the conduct of their members. It was not surprising, therefore, when the two self-regulators began talks about consolidating NASD with the member firm, enforcement and arbitration divisions of NYSE Regulation. On July 30, 2007, with the SEC's approval, the non-profit Financial Industry Regulatory Authority (FINRA) was born.116

FINRA became by far the largest non-governmental regulatory organization for securities brokers and dealers in the United States. Its members included 5,000 firms, 666,000 registered representatives, and 3,000 employees. The structure and governance of FINRA was shaped out of recent experience. Power struggles between large and small firms had been endemic in the NASD. FINRA resolved them with a formula. Small firms and large firms could each vote for three special industry representatives on the Board of Governors. Mid-size firms could vote for one. In order to assure its independence, FINRA's public governors were appointed by the CEO after full review by the nominating committee.117

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(116.) Barron's, October 26, 2009.

(117.) FINRA News Release, July 30, 2007; Euroweek, August 3, 2007; Richard Ketchum, June 3, 2010 Self-Regulation in the Securities Industry

Related Museum Resources


July 26, 2007
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