Henderson Discusses His Paper "Becoming the Fifth Branch"

Becoming the Fifth Branch
M. Todd. Henderson and William A. Birdthistle
The Harvard Law School Forum on Corporate Governance and Financial Regulation
April 2, 2013

In our article Becoming the Fifth Branch, we argue that financial self-regulation has changed dramatically and problematically in the past few years. Financial self-regulatory organizations (SROs), such as FINRA and the Chicago Mercantile Exchange’s regulatory arm, are transforming from “self-regulatory” into “quasi-governmental” organizations. We believe this evolution, moreover, may become a serious problem for the stability and efficiency of our financial system.

To SEC Commissioner Daniel Gallagher’s question, “Is FINRA becoming a ‘deputy SEC?,’” we fear the answer is “yes.” We describe an array of forces that we believe may be driving this change, explain the implications of the loss of true self-regulation, and offer some options for restoring a healthier regulatory balance.

SROs are the primary legislators, regulators, and officers on the beat who monitor our financia