Wall Street’s SRO Police Take A Big Hit

Did you feel a sizable tremor running between Washington and Wall Street overnight? I did.

At the epicenter of this tremor was the first meaningful questioning of the practice of self-regulation on Wall Street by their governmental overseers at the SEC.

Securities and Exchange Commission Chairman Mary Jo White opened the door to a potential overhaul of financial-market oversight, saying the special regulatory status of U.S. exchanges may not best serve investors or public companies.

Wow. That simple statement may never lead anywhere but the mere fact that the SEC issued a statement of this sort is a tidal shift of epic proportions. Who else echoed the sentiments of this seismic activity?

None other than the longstanding regulatory lapdog and former SEC chairman Harvey Pitt had this to say on the topic of the SEC’s potential overhaul of self-regulation for our equity exchanges,

This is a big deal,” said Harvey Pitt, a former SEC chairman and now chief executive of consulting firm Kalorama Partners LLC. “The SRO [self-regulatory organization] function was once crucial, but in terms of exchanges it no longer is,” he said, adding that NYSE Euronext and Nasdaq GroupInc. have relegated their regulatory functions “to a back-burner.”

Yes indeed, this is a big deal.

But let’s be straight here, for those who have been watching closely the concept of self-regulation has always been a badly flawed model for Wall Street. To think that the industry — whether equity exchanges or the large banks themselves — might properly police themselves while looking to maximize revenue is a joke. But this joke and many iterations thereof have been played out on investors since Wall Street’s self-regulatory efforts were launched back in 1939.

Who ultimately pays? We all do.

The only reason I believe Ms. White is speaking out now is because the self-regulatory joke has become so egregious and the resulting lack of meaningful trust and confidence show no signs of abating.

Will Ms. White’s questioning of the self-regulatory model lead to meaningful changes in oversight on Wall Street?

We can only hope but I am not holding my breath.