The government should strip U.S. stock exchanges of the legal status that protects them from most lawsuits, a trade group for brokers said.

In a letter to the Securities and Exchange Commission, the Securities Industry and Financial Markets Association said the self-regulatory model of organizations such as the New York Stock Exchange and Nasdaq Stock Market is outdated. Though the SEC fined Nasdaq for mishandling Facebook Inc.’s initial public offering last year, the legal protections may shield the market operator from liabilities.

The Sifma letter is the latest salvo in the fight between brokers and exchanges, who in recent years have become competitors for stock transaction volume. The proliferation of trading venues such as dark pools at broker-dealers and the decline of the public exchanges’ market share has created tensions on Wall Street.

Exchanges’ status as self-regulatory organizations, or SROs, means “one group of businesses is empowered to oversee and regulate the business and activities of its competitors,” Theodore R. Lazo, associate general counsel at Sifma, wrote in the letter to the SEC. “Conflicts of interest in this model abound and only worsen as they are left unresolved.”

1929 Crash

The self-regulatory structure for U.S. exchanges dates to the aftermath of the 1929 stock market crash. Under that model, exchanges write and enforce rules of conduct for their members, including how they interact with customers.

In the last decade, the two biggest U.S. bourse operators – – NYSE Euronext and Nasdaq OMX Group Inc. — became shareholder- owned companies. At the same time, the brokerages they oversaw increasingly executed trades on venues they own.

Being an SRO brings both costs and benefits to exchanges. They are under more regulatory scrutiny than the broker-dealer venues, which are known as alternative trading systems. Joe Mecane, head of U.S. equities at NYSE Euronext, said in a December Senate hearing that ATSs “are able to employ different practices than exchanges with far less oversight and disclosure.”

Richard Adamonis, NYSE spokesman, said the proposal is motivated by the firms’ commercial interests.

‘Heavily Conflicted’

“We have long been supportive of a comprehensive review of the balance of benefits and obligations among exchanges and non- exchange trading venues, which we do not believe is accurately represented in the Sifma letter,” Adamonis said in an e-mail. “We also continue to be discouraged by the efforts by heavily conflicted brokers to reduce the influence of exchanges and interests of investors, further decrease transparency and price discovery in the equities marketplace, and generate additional profits for the broker community.”

Robert Madden, a spokesman for Nasdaq, and Randy Williams of Bats Global Markets Inc., another U.S. exchange owner, declined to comment on the letter. James Gorman, spokesman for bourse owner Direct Edge Inc., couldn’t be reached for comment.

The request from Sifma follows an escalation in the fight between U.S. exchanges and dark pools, the venues run by broker- dealers that don’t publicly post bids and offers. The chief executive officers of NYSE Euronext, Nasdaq OMX and Bats met with SEC officials on April 9 to discuss the migration of trading from their venues to dark pools. The meetings in Washington followed requests by the exchanges that regulators consider measures to introduce curbs on the venues.

Nasdaq Fine

In the letter, posted on Sifma’s website today, the trade group for securities firms argued that the exchanges’ SRO status works in their favor, in particular in limiting their liabilities. Nasdaq agreed to pay $10 million in May to settle SEC charges that its mishandling of Facebook’s IPO was a violation of securities laws.

“Exchanges have claimed a right to immunity even in connection with damages flowing from activities that appear to be commercial in nature,” Lazo wrote. “With exchanges seeking to engage in more broker-dealer-like activities, the risk grows that exchanges will claim that more of these commercial ventures are entitled to immunity based on some incidental regulatory aspect. A broker-dealer cannot fairly compete with a party that offers the same services but does not face the same risk of liability.”

New Market

The letter is part of a broad review of market structure, said Lazo in an interview, and Sifma isn’t suggesting one side is right or wrong.

“It’s about regulating who does what in a more rational manner,” he said in a phone interview. “You might see more exchanges — maybe make everyone exchanges with a more appropriate market structure around them, and then have one or more entities, such as the Financial Industry Regulatory Authority, fully dedicated to being the SRO.”

While the SEC can’t change the exchanges’ special status, it can support changing the rules, which could influence Congress, Lazo wrote in the letter. A change in the SEC’s position may also provide guidance for courts, he added.

“Because courts have based exchanges’ immunity on their SRO status, the commission’s support for an eventual legislative end to this status would undermine the basis for the doctrine,” Lazo wrote in the letter. He added that the SEC could also force exchanges to adopt rules that would strip immunity from their commercial offerings.

Sifma also argued that exchanges have too much authority in designing and implementing changes to market structure.

“Viewing exchanges as independent regulators that will design and implement the Commission’s market structure initiatives without considering their own competitive interests is no longer realistic,” Lazo said in the letter. “As for- profit businesses, exchanges should no longer be entrusted with such important public functions and expected to act as if they are disinterested parties acting in the public interest.”

With assistance from Dave Michaels in Washington. Editors: Nick Baker, Chris Nagi