Latin American Capital Markets

378 A. M. CORCORAN, R. B. HOBSON, G. J. KUSERK, K. K. WUERTZ, AND D. WESTOversight of FunctionsEffective self-regulation must be defined within the context of government oversight,which is an essential element in the self-regulatory structure. Government oversightof SRO activities ensures that, among other things, all interests are given the properconsideration and voice in all regulatory activities, and self-regulators do not act in ananticompetitive way by positing standards that are inappropriate or create inappropriatebarriers to entry.That self-regulation is subject to oversight provides a systemof checks and balances.The governing statute should clearly delineate the respectiveroles of the statutory regulators and the SROs.In addition to the natural checks and balances of market forces, the ovearsightframework should address the potential for conflicts of interest to occur where industryparticipants may favor their interests over those of the investing public. Thestatutory regulator can, and should, verify that the processes and programs executedby the SROs are, in fact, effective in meeting the established regulatory objectivesthrough spot-checking or other types of periodic review.In most cases, statutory regulators perform inspections of SROs and evaluatetheir performance of regulatory responsibilities. SROs may also be required to reportregularly on compliance with the statutory requirements and provide special reports,if needed. Because government regulators ultimately retain jurisdiction over theactivities of an SRO, statutory regulators may be willing to delegate responsibilities toSROs where the requisite expertise and governance protections exist (see Principle7inlOSCO 1998).Relationship with the RegulatorBecause derivatives markets, in particular require direct surveillance, self-regulationis a valuable augmentation of regulatory powers and capability. Regulators in LatinAmerica have found that a regulatory framework can warrant establishing SROswhere no self-regulatory organizations exist At the same time, the securities regulatorsrecognize that government oversight of self-regulatory organizations is criticalto guard against the potential conflicts between industry self-interest and the publicinterest.The Council of Securities Regulators of the Americas (COSRA) offers eightprinciples of market oversight (see box I I-I). 55 In any event, the statutory regula-55 Self-regulation, subject to appropriate government oversight, can provide an effective means for overseeing the activitiesof market intermediaries and market operators. An illustration of effective market oversight can be found inthe U.S. futures industry. Since the National Futures Association began operations in 1982, trading volume has increasedby 284 percent, while customer complaints have dropped by 72 percentCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub