Latin American Capital Markets

DEMUTUALIZATION OF EXCHANGES 279is today.There would be fewer conflicts of interest in policing the markets if ownershipof these SROs were spread beyond those concerned with making markets. Nevertheless,some rearrangement of regulatory responsibilities might be appropriate inconnection with demutualization. For example, in the United States and Europe, insidertrading enforcement is a government responsibility. But in jurisdictions wherethis continues to be an SRO responsibility, would a for-profit exchange be a vigorousenforcer, especially if businessmen and academics viewed insider trading as normal?Self-regulation of the broker-customer relationship is another issue. Althoughjust and equitable principles of trade have long been a basis for policing sales practicesin the United States, aggressive government oversight and the threat of civil liability inactions by customers prod SRO effectiveness. Although exchanges are concernedabout their reputations as fair marketplaces, aggressive enforcement is costly, and thefair treatment of customers by members in such areas as suitability and sales practicesis only indirectly related to the fairness of an exchange's marketplace. A for-profit marketplacemight not be interested in devoting its resources to funding a rigorous enforcementprogram in this area, or it might decide to make enforcement penalties asource of its funding.Therefore changes in government oversight of the broker-dealercustomer relationship might be required.Regulatory SolutionsA variety of regulatory solutions can respond to the conflict of interest issues raisedby an exchange's demutualization. All of these solutions involve rebalancing governmentand self-regulatory standard setting and enforcementThe ability of an exchangeto continue to enforce listing standards, including disclosure standards for public companies,is of great importance in countries where government regulators do not determinewhat disclosure and other obligations public companies owe shareholders.Other types of regulatory challenges are generated with regard to SRO regulation ofmembers and markets, especially if demutualization is coincident with a switch fromfloor to electronic trading.Listing StandardsWhen the Australian Stock Exchange demutualized and self-listed, Australian law waschanged so that the Australian Securities and Investment Commission would act asthe listing authority for the Australian Stock Exchange, but the exchange continues toact as the listing authority for all other issuers (Segal 2001). By contrast, coincidentCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub