Financial regulations are often enacted with little concrete definition, to say nothing of quantification, of their costs and benefits. Regulators and economists have little understanding of causal mechanisms that may provide benefits and incur costs. Worse, they often think they know cause and effect, either wrongly or with far more precision than they actually do, and enact regulation on the basis of unverified cause-and-effect speculation. Agencies and regulations often work at cross-purposes, one promoting what the other tries to reduce—lending to poorer and riskier borrowers, for example. Regulations stay in place long after everyone sees they are not working or are counterproductive. Regulators layer on additional rules to combat the consequences of the last round, which have their own adverse consequences. -John H. Cochrane
The past decade or so our elected officials have charted a course of adding rule upon regulation to our financial services industry. The combination of high profile fraud and the “Great Recession” created a perfect storm for policymakers to “fix” things and make the world a safer place for businesses and consumers. And why waste a crisis – right?
While no-one advocates on behalf of no regulation within the financial services industry getting the balance right is quite hard.
Members of Congress, empowered by the electorate, marched off to Washington, D.C. on a mission to address the challenges of the banking and financial services industry. What the public received was a hodgepodge of regulation like Dodd-Frank and Sarbanes-Oxley. Add this to the myriad of regulatory agencies and arcane mandates and too big to fail has now become institutionalized. Calling US financial services regulation Byzantine is a profound understatement.
All regulation should commence at the point of transparency and simplicity but it is far easier to craft hundred page rules and close your eyes to the long term ramifications. Compliance means that only the biggest firms have the financial wherewithal to manage the rules. Competition from smaller firms is almost impossible and, inevitably, it is the consumer who pays the price.
Jay Clayton will become the Chair of the most powerful securities regulator in the world at a challenging time. President-elect Trump has enlisted the corporate attorney, someone who is more prominent on Wall Street than F Street, to be the point of his spear in reforming the Securities and Exchange Commission. A tall task indeed.
Seeking additional perspective, Crowdfund Insider spoke with John Berlau from the Competitive Enterprise Insititute about what Clayton must do.
“Jay Clayton and anyone else serving on the Securities and Exchange Commission must advance the interests of both Main Street investors and entrepreneurs trying to raise capital. Congress has explicitly stated that both investor protection and facilitating capital formation form the dual mission of the SEC,” stated Berlau. “The best way to achieve both objectives is to cut the red tape from both the Barack Obama and George W. Bush administrations that led to an unprecedented decline in IPOs and public company listings, depriving entrepreneurs of the best method to raise capital and investors of an opportunity to grow wealthy with smaller companies. In particular, Clayton and his fellow commissioners should ease the Sarbanes-Oxley rules requiring audits of broadly defined “internal controls” and narrow Dodd-Frank rules requiring the documenting of items that have no relation to the accuracy of financial statements, such as a company’s use of ‘conflict minerals.’ Such regulations are not only crushing the economy, but they are distracting the SEC from its main duty to protect investors from fraud.”
Berlau is also of the opinion that Clayton should “broaden the exemption for equity crowdfunding from the bipartisan Jumpstart Our Business Startups (JOBS) Act signed by President Obama in 2012.”
“There is bipartisan recognition that small firms wanting to share their profits with the crowd should not be subject to the exact same regulations faced by big companies on NASDAQ or the New York Stock Exchange. Many SEC regulations have entrenched Wall Street banks and large companies by choking off competition from Main Street firms. It is past time for these rules to go,” said Berlau.
Sam Guzik, a securities attorney and Crowdfund Insider Senior Contributor, was optimistic about the selection of Clayton.
“The recently announced nomination of Jay Clayton to fill the position of Chair of the SEC is both timely and welcomed,” said Guzik. “Mr. Clayton comes with a distinguished record of achievement, reflecting a great deal of experience and credibility in the securities industry.”
Guzik referenced the fact the SEC has been operating two Commissioners short during recent months. President Obama attempted to fill these seats but was unexpectedly shot down by his own party.
“… there is currently a great deal of unfinished business before the Commission – with three of five seats at the Commission being vacant. My remaining hope is that Mr. Clayton will soon be seated at the Commission next to another highly qualified nominee, Hester Peirce, who has proven herself to be an outspoken and effective advocate for needed change at the SEC, very much in the mold of former SEC Commissioners’ Paul Atkins and Daniel M. Gallagher.”
Gallagher called Clayton the real deal after his appointment was announced.
Gallagher understands the challenge that Clayton faces. He is also no fan of misguided financial rules. Several years back the former SEC Commissioner created a diagram to “spark a much-needed debate about the regulatory burden that has been placed on our financial services industry”. Gallagher described the stakes as considerable:
“…regulatory burdens divert capital away from the real economy—this acts as a barrier to entry for new market participants and further entrenches those institutions that are increasingly “too big to fail.””
So if you have any doubt about the convoluted nature of financial services rules (since 2010!), you may view the nice explanatory graphic to help you figure it out. Good luck.
(click to enlarge)