SRO = Crap Regulatory History

A couple of weeks ago, I was attempting to help a librarian research the history of an NASD rule. I was attempting to help because I couldn't actually help. While some of this may be chalked up to my own research skills, some blame must be laid at the door of the NASD. Researching rules promulgated by self-regulatory organizations is monumentally unpleasant. While I'm not able to offer a research panacea, I offer the following information to either (a) make such research easier or (b) help manage the expectations of your customers.

The first US stock exchange was organized in Philadelphia in 1790. The early exchanges were organized as private associations and were not subject to government regulation. So, when Congress was debating the Securities Exchange Act of 1934, the exchanges lobbied hard to keep their self-regulatory status. A compromise was reached. The exchanges had to register with the SEC, but their self-regulatory powers were enshrined in law. They became quasi-governmental actors and custodians of the goals of the Exchange Act.

Section 19(b) of the Exchange Act also gave the SEC the power to abrogate SRO rules when necessary to further the Act's goals, but the SROs were not required to submit their rules for SEC approval. In the early days, the SEC took a "collaborative" approach to SRO regulation - they raised questions and conducted negotiations in secret. But, starting in the 1960's pressure began building to give the SEC more power to control exchange activities.

The Securities Act Amendments of 1975 required SROs to get SEC approval for any proposed rule change. It articulated the somewhat contradictory goals of "preserving" self-regulation while "the SEC ... play(ed) a much larger role ... to ensure there is no gap between self-regulatory preference and regulatory need."

What this means in practice is that any pre-1976 rule change is lost in the mists of time, but from 1976 forward, all SRO rules had to pass under the eyes of the SEC before taking effect.

There are two SRO rule approval processes - rules that articulate stated policies, fee changes, or SRO administrative procedures become effective immediately under section 19(b)(3)(A) of the Exchange Act. Other rules are reviewed by the SEC, usually by the Division of Trading and Markets, but in the case of "controversial" rules, by the full Commission. This second process, under section 19(b)(2) of the Exchange Act, requires publication, a comment period, and a notice of adoption in accordance with the Administrative Procedure Act.

That's the good news. The bad news is that the SEC often publishes a summary of the amendment in lieu of the full text. So, even though that rule change you're looking for is probably somewhere in the Federal Register there is no guarantee it uses any of the key words in your search.

The SRO's themselves have made no attempt to create an historical record of rulemaking. Their idea of an annotation often starts with "amended by." They also have a tendency to reformat their rules without warning. For instance, the NASD rule I was "helping" with began its life as a "policy statement." In my experience, the only source for the history of an SRO rule is often an out-dated copy of the SRO's manual. If you haven't held on to those, its too late to start.

I'm talking about the past, of course, these days, SRO rulemaking looks much more like other kinds of administrative rulemaking. Also, much SRO rulemaking is now done by a new, joint NYSE-NASD regulatory body called FINRA.