There are several standard arguments against increasing the role of exchanges in setting disclosure and governance rules. One is that exchanges have market power, which dulls their incentive to set optimal rules. Another is that competition for listings will make exchanges reluctant to enforce their rules. A third is that disclosure rules have external effects that an exchange cannot internalize. Finally, it is argued that exchanges may lack sufficiently varied enforcement tools to ensure compliance with their rules. Under current practice, the primary threat exchanges can hold over listed companies is delisting, which may be too large a penalty for some violations and too slight for others.
Only the last of those is a significant obstacle, and even that can be resolved contractually to some extent. Listing agreements could call for fines and other penalties for violation of rules. Nevertheless, government agencies have a clear advantage in investigating and punishing wrong-doing. A natural solution, then, would be to maintain the Securities and Exchange Commission as an enforcement agency but cede much of its rule-making authority to the exchanges.
The Cato Institute
November 13, 2003