The Coming Regulatory Revolution
As participants in the banking, futures, securities and insurance industries know, traditional US administrative procedure is cumbersome, time-consuming, requires public notice and comment, and often results in complex, detailed, mandatory rules. Federalism often adds multiple state layers to any federal regulation. Critics of contemporary US regulation, especially in these industries, who lament complexity, rules, mandates, and anti-competitive effects, will welcome a revolutionary new approach that is simple, uses principles, makes compliance optional, and has built-in competitive edges.
In the new approach, Congress preempts all state laws and consolidates all power in a senior regulator in Washington. That regulator, in turn, delegates all its functions to self-regulatory organizations from the respective supervised industries. These, in turn, adopt their own regulations, self-certify them for speedy adoption, with limited public notice or comment, and use broad vague statements rather than detailed rules.
This approach, the philosophical heart of the US Treasury Department’s March 2008 blueprint for changing US financial regulation, is procedurally revolutionary and would no doubt revolutionize the substance of the law in these fields.
As a matter of procedure, no longer would the SEC develop or negotiate regulations governing securities markets. The stock exchanges and broker-dealers do so themselves. Nor will the CFTC assure that futures markets operate in an orderly fashion, letting the private National Futures Association do it alone. State banking and insurance regulators are out, a new federal supervisor is in for both, and banks and insurers form private associations to self-regulate. Public supervision, now solely federal, consists mostly of receiving information from participants and, when needed for systemic stability, publicizing this information to market participants so that markets can self-correct.
Substantively, numerous changes should be expected in such a regime. Take examples from the securities context. Restrictions against insider trading would be relaxed considerably or eliminated. Short-selling, a potential culprit in the demise of Bear Stearns, would no longer be seen as potential market manipulation but as a device to promote efficient markets. Laws requiring brokers to assure suitability of client investments could be eliminated. Disputes between investors and brokers or other service providers would be handled by binding arbitration rather than through traditional civil litigation. Investment companies could create and sell innovative kinds of securities quickly, not delayed by the SEC’s approval processes.
No doubt, many will applaud this streamlined approach to financial regulation and these substantive results. The model may even be embraced for the full range of traditional administrative practice with likewise revolutionary substantive change in various fields. Others will be more skeptical. Either way, the Treasury’s blueprint lays out a novel vision whose express focus on financial regulation should not obscure its broader potential significance.