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Enforcing Self-Regulatory Organization's Penalties and the Nature of Self-Regulation (with Caroline Novogrod), 40 Hofstra Law Review 963 (2012)


Few issues are as poorly understood and under-theorized as the

concept of "industry self-regulation." The Second Circuit recently raised

important issues about the nature of such self-regulations when it held

that the industry's self-regulatory agency, the Financial Industry

Regulatory Authority ("FINRA"), lacked the authority to judicially

enforce the fines it levies against member broker-dealers.

In this Article we provide a theoretical framework for

understanding the nature of self-regulation and then discuss the role of

courts in effectuating the self-regulatory process. Our thesis is simple:

the success of industry self-regulation critically depends on the market

power of the firms in the self-regulatory organization ("SRO"). If the

firms have market power, then as long as the industry generates profits

for members, self-regulation can work. But if either profitability or

market power decline, self-regulation will fail. We believe that our

analysis leads to a deeper understanding of the appropriate relationship

between self-regulatory agencies and the judiciary, where the issue is

whether and to what extent a self-regulatory organization can invoke the

power of the courts to enforce its rules and disciplinary decisions.

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