Self regulation predates the adoption of the securities laws and has long been a component of the system of oversight for the capital markets.  There has always been problems with the approach, most noticeably concerns over adequate enforcement.  Particularly with respect to the exchanges, there has been the potential of capture by the industry being regulated and the possibility that requirements designed to protect investors would remain unenforced.  The SEC's actions against the the Boston Stock Exchange for failing to police the activities of the specialists is a good example.

The problems have only been exacerbated in recent years.  Nasdaq and the NYSE have tranformed into "for profit" organizations.  As a result, they have the additional burden of profit maximization, something that did not exist before.  Profit maximization and strong enforcement do not always go hand in hand.  As a result of this change, pressure has already been brought to bear to weaken aspects of exchange behavior designed to protect investors. 

The NYSE reduced its regulatory role when it transferred broker-dealer oversight to FINRA.  Nonetheless, the exchanges retain two important regulatory aspects.  They retain the authority to write and enforce listing standards.  In addition, they retain market surveillance functions.

The Commission recently took steps to centralize the monitoring function.  In Exchange Act Release No. 58350 (August 13, 2008), it approved a plan to centralize "surveillance, investigation, and enforcement of common insider trading rules" in the hands of the NYSE and FINRA.  The NYSE gets responsibility for companies traded on its exchange, all the rest fall to FINRA.  In short, this approach removes surveillance functions from all other exchanges, including Nasdaq and the Amex.  All of the participating entities have entered into a cost sharing arrangement and have agreed to meet periodically "to discuss the conduct of regulatory responsibilities, identify issue or concerns, and receive and review reports." 

There are several interesting observations to make about this approach.  Centralization has its benefits, including the concentration of resources and improved expertise.  But of great interest, the SEC has effectively removed most of the surveillance function from entities that operate on a for profit basis, having transferred much of the surveillance function to FINRA, a private, non-profit organization.  That leaves Nasdaq and the Amex with little more than enforcement of listing standards as the exclusive regulatory function.

The NYSE becomes the only "for profit" organization to continue to have surveillance functions.  In any for profit organization, pressure always exists to cut overhead (and increase profits), with surveillance falling into the overhead category.  It may well be the case that the NYSE will eventually give up the surveillance function, allowing FINRA to do all of it.  This is in fact what happened with broker-dealer oversight, a function already moved from the NYSE to FINRA.

This will leave the "for profit" exchanges with one primary regulatory function, the drafting and enforcement of listing standards.  This is another area that may suffer in a "for profit" environment.