Looking Forward: Professor Roberta Karmel\u27s Prescient Views on the Transformation of Self-Regulatory Organizations and of the Securities Market Structure at the Turn of the Last Century

This essay examines Professor Roberta Karmel’s scholarship on the transformation of self-regulatory organizations (SROs) and the securities market structure, a transformation that occurred at the turn of the last century. It explains how she examined the events from the perspective of a lawyer who had a rich knowledge of the history of the SROs, the securities markets, and their regulation and how she provided a practical understanding of the way these markets worked. It points out that, rather than offering an overarching theory that would explain all of these developments and that would guide regulators and legislators in SRO and securities market structure reforms, she pointed out problems and contradictions in the developments that, in her view, would have to be faced and addressed by both Congress and the SEC. The essay first sets out briefly the background to and a timeline for the SRO and securities market transformation and describes how that transformation closely intersects with Roberta’s career as a legal practitioner, a regulator, and a legal academic. It then looks at her scholarly discussion on how the self-regulatory functions of the stock exchanges became the Financial Industry Regulatory Authority (FINRA), where she raised the important question whether self-regulation by broker-dealers continued to exist post-FINRA. The essay explores a possible answer to this question, which Roberta has acknowledged, in a new form of self-regulation—the collaboration between FINRA and those officers in broker-dealers who are responsible for ensuring that they and their employees follow law and regulation, the compliance officers. It next looks at Roberta’s insights on the related subject of the transformation of the stock exchanges and its overall effects upon securities market structure, explaining how she identified for the legal academic audience the forces, including the regulatory ones, that were pushing the exchanges to become public companies and the market fragmentation that resulted from the proliferation of trading venues. It then explains that Roberta took a “wait and see” approach to problems in securities market structure, recommending that securities markets be allowed to develop with their new forms and technology before Congress and the SEC apply to them a major new regulatory framework and that the SEC regulate with a light hand, correcting market problems where necessary, while the outline of a new market structure emerged. The essay concludes by briefly looking at the current securities market from Roberta’s perspective

Dashboard Compliance: Benefit, Threat, or Both?

This Article poses the basic question that is reflected in its title and that was the subject of the conference where the Article was initially presented: whether technology poses any threats to the mission of compliance and the position of compliance officers, whether it is just another useful tool for them, or whether it is something of both. It begins by explaining the origin of compliance in broker-dealers and investment advisers and its important current position in those firms. It then discusses why compliance officers have always been drawn to technology, particularly to keep up with the business sides of the firms for which they work—a need made more acute because of technological developments in the securities industry. After setting forth the question inspiring the conference, chiefly, what will be the effect of the use of new technology on compliance, the Article next articulates the following hypothesis: that more use of this technology in compliance—termed “dashboard compliance”—will increase the productivity of compliance officers, decrease their numbers, emphasize “legal” compliance, which is designed to ensure that the firm and its employees comply with the law, and diminish “values” compliance, which encourages conduct in line with firm and industry values. It then looks at the preliminary evidence, drawn from industry reports and enforcement actions of the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), as to whether this hypothesis is supported. It observes that compliance officers are finding it necessary to use dashboard compliance, and that the SEC and FINRA are encouraging this use. It also finds that dashboard compliance is making compliance officers more productive and suggests, albeit weakly, that this enhanced productivity might result in a loss of compliance officer positions, as firms make investments in technology at the expense of hiring or retaining human compliance officers. Finally, the Article observes that there is little evidence so far about a negative effect on “values” compliance from the use of dashboard compliance. Indeed, other outcomes are possible, such as dashboard compliance liberating compliance officers from many mundane tasks of legal compliance and giving them more time for values compliance. The Article concludes by recommending that, while the final outcome for dashboard compliance is unclear, in coming years compliance practitioners should remain alert to its possible effects to ensure that they try to maintain all that is valuable about compliance