Model For Effective Self-RegulationNovember 2002

Daniel M. SibearsSenior Vice President & DeputyMember Regulation, NASD

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Introduction

Self regulation typically involves a unique combination of private interests with

government oversight.

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Definition, Role & Current Assessment

Role of self-regulation & its existence differs country to country, across market sectors and across the developed and emerging markets.

Broad objectives of self-regulation are the same as those identified for government regulation of financial markets in the IOSCO Objectives & Principles of Securities Regulation: to preserve market integrity, financial integrity and protect investors.

Self-regulation encompasses the authority to create, amend, implement and enforce rules of conduct with respect to the entities subject to the SRO’s jurisdiction and to resolve disputes through arbitration or other means.

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Elements of Effective Self-Regulation

Industry Specialized Knowledge

Industry Motivation

Contractual Relationship

Transparency & Accountability

Flexible SRO Compliance Programs

Coordination & Information Sharing

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Regulatory Oversight of SRO Functions &Associated Relationship between Regulator & SRO

Effective self-regulation must be defined within the context of government oversight.

Government oversight of SRO activities ensures that all interests are given the proper consideration and voice in all regulatory activities.

Governing statute should clearly delineate the respective roles of the statutory regulators and the SROs.

Statutory regulator’s role should truly be an oversight role.

Effective regulatory framework should ensure that there is little or no duplication of the regulatory work performed by SROs and the statutory regulators.

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Application of a Self-Regulatory Model

Internal rulemaking procedures

Authorization & access to marketplace, including fitness/qualification standards for market intermediaries

Establishment & enforcement of financial, operational and sales practice standards

Surveillance of market activity

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Application of a Self-Regulatory Model (cont’d)

Investigation, prosecution & adjudication of rule violations

Administration of a dispute resolution forum

Development & implementation of education programs for market participants and public investors; and

Sharing information and cooperating with other SROs and statutory regulators

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Closing Remarks

Overall, self-regulation fosters integrity & ethics in the marketplace & among participants