Highlights of the Financial Regulatory Week
Here are a few highlights from a busy first week of May in the financial regulatory world. On the personnel side, the Senate confirmed Jay Clayton on Tuesday, so the Securities and Exchange Commission has a new chairman. In that capacity, he will have a chance to reorient the agency, which has been so preoccupied in recent years with Dodd-Frank rulemaking. Clayton likely will spend considerable time on fundamental issues related to opening up companies’ access to capital and ensuring that investors are able to participate in companies’ growth. The SEC will benefit from having fresh eyes look at enforcement priorities, the effectiveness of the compliance program, the agency’s approach to new products, the regulation and supervision of broker-dealers and investment advisers, the structure of our equity and fixed income markets, and whether SEC disclosures are providing material information to investors. Given the breadth of the SEC’s responsibilities, the choices Clayton will soon make to lead each of the major divisions and offices are very important.
The House Financial Services Committee, after a dramatic staff reading of much of the legislative text of the Financial Choice Act and consideration of a slew of amendments, voted to approve the Choice Act yesterday.
Some commentators deem wrong any attempt to revisit the financial regulatory system Dodd-Frank gave us. Looking at the issue through the lens of my shoulder dislocation several weeks ago, I understand this fear. Even after my shoulder was back in its socket, my primary goal was to keep it in place at all costs. I was willing to take any measure to prevent reinjury. If that meant bundling my shoulder in a sling and not using it again, fine. If that meant never running again — yes, I managed to dislocate my shoulder while running — fine. Anything to keep my shoulder stable. After talking to a doctor and experiencing the ramifications of shoulder immobility, however, I realized that these rash decisions made from a place of pain and fear were not going to get me very far in the long-term. Even though my shoulder still hurts, it is time to reevaluate my initial shoulder stability plan and put my shoulder back to work.
Dodd-Frank, signed into law on the heels of a very painful financial crisis, also is due for reevaluation. Dodd-Frank sought to cover the financial system in regulatory bubble wrap — financial institutions have to run every decision by one or more regulators and regulators can jump in to bail them out if those decisions prove to be bad. The result has been a frustrating tangle of rules that gives us a false sense of security and stifles economic growth. People are focusing less on what customers and investors need and more on what regulatory checklists say. Financial markets are less resilient to stress because every large financial institution is on the same risk management plan. Market dynamism is sapped as regulators hesitate to allow new banks to start, new products to be sold, and investors to own anything other than Treasury securities. Just as it is time for me to use my shoulder again, it is time for the financial markets to be allowed to serve the rest of the economy. CHOICE Act provisions — including those that open up new avenues for capital raising, close avenues for bailouts, make financial institutions accountable for their own risk management decisions, and help regulators prioritize through new accountability and economic analysis measures — can support the financial markets’ return to health.
Regulators do not need to wait for Congress to make progress in this regard. The Commodity Futures Trading Commission asked for comment this week on how it could simplify and modernize its rules. The CFTC’s focus is on how it can apply existing regulations and practices more efficiently than it does now. Project KISS, as this initiative is known, is an opportunity for the CFTC to move away from its prescriptive approaches of recent years and embrace more flexible methods that allow for more experimentation by firms. It should also rethink the function and purpose of its no-action process, which it has used in recent years as a substitute for rulemaking. Other regulators should follow the CFTC’s lead.
