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.

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5 Responses

  1. Mark Seecof says:

    Perhaps you will recall something of the history of the 1933 National Industrial Recovery Act and the National Recovery Administration?

    We’ve tried your “delegate regulation to industry groups” scheme before. As you might expect, that just authorizes an orgy of anticompetitive, rent-seeking regulation by industry players eager to exclude new entrants, raise and fix prices, u.s.w..

    Before you burble gleefully over “a revolutionary new approach that is simple, uses principles, makes compliance optional, and has built-in competitive edges” you might want to spend five minutes thinking back to your high-school history lessons or make a cursory web search…

    (Oh, yeah. There’s never gonna be such a thing as “compliance optional” regulation.

    (Also, it’s no reply that “industries will capture government regulators anyway.” They certainly will, but not as swiftly or completely as they will corrupt “delegated” powers.)

  2. Elizabeth Brown says:

    AEI held a conference yesterday on “The Future of Insurance Regulation” in which participants discussed not only the costs and benefits of creating an Optional Federal Charter for insurance but the Treasury Blueprint. The papers from that conference are available here:,filter.all,type.upcoming/event_detail.asp

  3. Lawrence Cunningham says:

    Mark Seecof’s substantive jottings are good notes to Treasury and blueprint’s authors and devotees; the tenor and use of words “you” and “your” suggest that my post’s stylistic spirit may have been too subtle.

    Thanks to Elizabeth Brown for the conference reference.

  4. Mark Seecof says:

    Prof. Cunningham,

    I seem to have misunderstood the tone of your remarks and I regret that. I am pleased, in fact, to find that I got it wrong, because I have been happy to learn from your remarks on other topics.

    Now I suppose that you may have intended to faintly mock the “revolutionary” quality of some of the delegated-regulation proposals. I think the passage (beginning with “Critics of”) which I quoted partly before suggested that you really were an uncritical advocate for those ideas, however– so you may wish to write a little less subtly in future to help us poor slobs in the hinterland receive your message clearly.

    For what it’s worth, I think much more highly of deregulatory proposals than proposals merely to shift regulatory power to less accountable organs.

  5. A.J. Sutter says:

    A view from abroad: much as I cringe at the way “neoliberal” is flung indiscriminately as an epithet the way “fascist” used to be 30 or 40 years ago, I can’t help thinking that it’s sometimes pertinent. Stories like this make it seem as if US policymakers are truly getting sucked into some sort of ideological vortex.

    A benefit of moving overseas is that alternative points of view, e.g. from Europe, aren’t so easily obscured out as they are when living in the US. But rather than wholesale emigration, more comparativism among US policymakers — and among the scholars who aspire to be them or to influence them — might help to put America country onto a better track. Japan is hardly a country where regulatory transparency is a norm, and its current government more like a kangaroo baby than mere lap dog of the US, but even here people consult a wider range of models for reform.