Latin American Capital Markets

278 ROBERTA S. KARMELissuers. It has also been argued in some circles that the benefits of increased capitalmobility would be better realized through regulatory decentralization—that is, moreself-regulation—than through greater centralization by way of more government regulation.Under a decentralized model, exchanges should be the primary writers andenforcers of rules relating to disclosure by listed companies, standards of conduct formember broker-dealers, and market structure (Mahoney 1997; Karmel 2001).When an exchange becomes a for-profit public company, some new conflicttcould call into question its regulatory role with regard to issuer corporate governance.If an exchange enters or considers entering a joint venture with a listed company,the exchange might be tempted to underregulate that company. Conversely, aexchange could behave in a discriminatory way toward a competitor For example, Instinet,a direct competitor of the NYSE and NASDAQ, is now a public issuer 1 ' It maybe concerned about whether it will be treated on an equal footing with other listedcompanies.Demutualization also raises several corporate governance questions relatedto contests for corporate control. Demutualized exchanges tend to have corporategovernance provisions to prevent shareholders from having more than a specifiedpercentage stock ownership, thus preventing them from taking complete control overthe exchange. Would such an issuer continue vigorously to enforce corporate governancestandards preventing companies from adopting certain poison pills in responseto a hostile takeover bid without shareholder approval? 12Exchange regulation of broker-dealers has its roots in efforts to assure thecreditworthiness of exchange members.This continues to be a significant issue and animportant aspect of SRO regulation. When exchanges go public, it is likely that clearingmember firms and listed companies will be large stockholders.This will give them an incentiveto maintain high standards of financial and operational capabilities for memberfirms in order to maintain the quality of the exchange's brand. The changing nature ofownership may create some new conflicts of interest, but others will be resolved becausemarket makers and floor members will have a diminished role in exchange governanceand will be less able to exert political influence on the exchange's board.The incentive of exchanges to police their markets for manipulation, and theireffectiveness in doing so, would probably be greater following a public offering than it1 ' On May 9, 2001, Instinet, a Delaware limited liability company, converted into a Delaware corporation, InstinetGroup Incorporated. On May 18, 2001, Instinet Group Incorporated announced that its shares commenced tradingon the NASDAQ stock market under the symbol "INET" after its registration statement relating to the initial publicoffering of 32 million newly issued shares of common stock was declared effective by the SEC. Instinet Group IntProspectus filed pursuant to Rule 424 on May 18, 2001, available at http://www.investor.instinet.com/edgarcfrn.12 See NYSE Listed Company Manual, §§ 308, 312.03 (1999), available at http://www.nyse.com/listed/listed.html.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub