What Is a Self-Regulatory Organization (SRO)?
A self-regulatory organization (henceforth referred to as SRO) is an entity that can create and enforce rules, regulations, and standards of procedures on its own. Although SROs are still subject to all applicable governmental laws and regulations, they have some power to influence industry regulations.
How SROs Work
An example of an SRO could be a non-governmental organization or a stock exchange. NGOs can strengthen upward and downward accountability by transferring the right to accountability to “stakeholders”, i.e. anyone that has been affected by the NGO’s policies. Voluntary codes of conduct are adopted after norms and standards have developed to dictate what accepted practice should be.
This makes it difficult to balance competing stakeholder claims is difficult. Donors’/governments’ claims and beneficiaries’ claims might compete, an issue NGOs can address by developing self-regulatory initiatives providing detailed guidelines.
Also, check out What is an Organization?
Examples of Self Regulatory Organization
SROs can be specific to the country they serve. An example of this is The Financial Industry Regulatory Authority (FINRA), which regulates brokerage firms and exchange markets in the United States.
The Children’s Advertising Review Unit (CARU) evaluates whether children’s advertisements are true, accurate, appropriate and sensitive enough for children. An SRO can serve as a watchdog to guard against fraud or unprofessional practices. An example of this is The Council of Better Business Bureau, which sets standards for marketplace trust.
Self Regulatory Organization can have regulatory influence over a profession. An example of this is The Georgian Charter of Journalistic Ethics, which decides whether journalists have violated any ethical principles when complaints are submitted against them. SROs can also operate as certification programs. An example of this is The International Cyanide Management Code, a voluntary program through which producers and transporters of cyanide can demonstrate their compliance with the Cyanide Code.
Industries can create SROs. An example of this is the American Bar Association, which sets of academic standards for law schools and formulates ethical codes related to the legal profession.
Authority of Self-Regulatory Organizations
Authority can come from internal mechanisms or external agreements. It is not conferred by a country’s government but it is important to remember that the laws of each country’s government will supersede any SRO-specific regulations. Once an SRO has determined the rules and regulations that will henceforth bind it, failure to follow them will carry consequences.
If a professional or business chooses to become a member, they must also abide by the rules and regulations. Additionally, SROs must also educate investors.
An effective SRO should possess the following characteristics:
- Authority & Enforcement: Each SRO must have the power to create and enforce a set of rules and regulations for itself.
- Conflict Management & Dispute Resolution: Each SRO must be able to resolve conflicts of interest as they arise between its various stakeholders, resolving disputes fairly and transparently.
- Governance and Innovation: Each SRO must have strong governance mechanisms but also the ability to develop innovative rules and policies.
- Recovery Procedures: Each SRO must have effective systems in place to aid disaster recovery.
- Regulatory Database: Each SRO must keep a record of data about regulated persons.
- Supervision: Each SRO must have a defined process for supervising the activities of members.
- Surveillance: Each SRO must keep pace with market developments through constant surveillance.
Advantages of Self Regulatory Organization
SROs were first created nearly a century ago and have since evolved beyond recognition. Many industries and professions can benefit from SROs. In the securities industry, for instance, SROs serve as market experts. This is needed as securities markets go through constant, rapid change and the specialized expertise that SROs can provide greatly benefits members.
Moreover, SROs raise the standard of conduct by establishing ethical requirements and a regulatory framework. Lastly, SROs do not rely on taxpayer dollars but on industry funding, which leads to more stringent member supervision. SROs can help industries maintain competitiveness and address safety concerns.
Key Challenges Faced by SROs
Critics of SROs have, since their inception, pointed out that the model’s inherent potential for self-interest might prove to be a major obstacle as it tries to serve public interest. An SRO might, for example, be so heavily influenced by an industry that it cannot adequately create or enforce rules or policies. It leading the interests of its members being put over the investing public’s interests.
In this case, stronger governance would be needed. On the other hand, SRO’s members might not be sufficiently involved in its affairs. Member perspectives must also be taken into account. The optimal balance can only be achieved by creating a system of checks and balances. An SRO must create many channels for industry input while protecting investors and promoting public interest.
External Government Oversight
The government has broad authority to add, delete or amend SRO rules, suspend or revoke registration, remove any SRO staff and impose other limitations on any SRO.
The Way Forward
While SROs provide many advantages, they also face many key challenges. And the way forward is to meaningfully engage with members, investors and other stakeholders. The regulatory framework must be constantly improved if the SRO model is to continue being beneficial as there are conflicts of interest inherent in the model. As each SRO tries to achieve its mission, it must be optimally designed to ensure that it remains an integral part of its industry’s regulatory framework in the years to come.
This means that each SRO must examine itself and make any necessary changes that can improve the SRO model. So it can better protect investors and promote safe markets. Each SRO must be open-minded and self-reflect in order to effectively self-regulate.
Although Self-Regulatory Organizations can set their own standards and policies, the government have authority over their policies. It allows the organizations to initiate a competition among them that helps the process of improvement.
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