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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