Views on improving the integrity of global capital markets
21 January 2011

Critics of Financial Reform Sing Same Tired Tune

Posted In: Uncategorized

Yale Law Professor Jonathan Macey’s tired lament in the Wall Street Journal about his perceived shortcomings of U.S. financial regulation is, well, tiresome.

If you will recall, this was the mantra du jour leading up to the financial crisis — that dastardly Sarbanes–Oxley Act and various and sundry regulations were driving our capital markets overseas. Amid arguments that our regulations went far beyond what was needed to protect investors, the oft-referred-to “regulatory pendulum” had arced its way into the danger zone of global market competition.

A 2007 report by the Committee on Capital Markets Regulation, in part, helped fuel discussion that over-regulation was rapidly leading the U.S. to second-class status among world capital markets. Macey, in his recent Wall Street Journal piece, reiterates this point, arguing that the days of U.S. market primacy are long gone and that regulatory zeal is the culprit.

If we have learned nothing at all from the financial crisis — the Madoff debacle, recent insider-trading scandals, and collateralized debt obligations (CDOs) — then shame on us. In reality, we are all for strong, competitive capital markets. Indeed, the U.S financial services industry strives daily to innovate and adapt as other jurisdictions around the world up their game to compete.

The real problem is that regulation has failed miserably to keep pace with these innovations. The very serious gaps revealed during the financial crisis only reinforce the need to respond to changes in our marketplace and remain at least one step ahead.

The Dodd–Frank Wall Street Reform and Consumer Protection Act is only the beginning of a longer-term effort to update and refine the U.S. regulatory framework. The Investors Working Group of experts convened by CFA Institute in 2009 identified the gaps (PDF) in regulation that merited attention. Dodd-Frank addresses some of these issues, but progress so far has been slow. The ebb and flow of politics as well as the persistent efforts of commercial lobbyists threaten to scuttle the entire process. What’s more, it is amazing the complacency that 24 months of relative market calm and 5,000 points on the Dow can foment.

Contrary to concerns expressed by Professor Macey, we face a potentially bigger risk — regulation will fall even farther behind market innovation. First and foremost, the focus of Dodd-Frank implementation and refinement in the coming months is not about more regulation but rather efficient and effective reforms. Most importantly, the Dodd-Frank process must not fall victim to the tired premise that “light touch” regulation is our best hope for competing in the global capital markets. That would be the real fiasco.

We welcome your views.

About the Author(s)
Kurt Schacht, JD, CFA

Kurt Schacht, JD, CFA, is the Senior Head, Advocacy Advisor, Capital Markets Policy at CFA Institute, where he oversees advocacy efforts and the development, maintenance, and promotion of the highest ethical standards of practice for the global investment management industry.

3 thoughts on “Critics of Financial Reform Sing Same Tired Tune”

  1. x3er says:

    I think it was Rahm Emanuel who said that you should never let a good crisis go to waste. Unfortunately, it seems that even a crisis of this magnitude was not good enough not to be wasted. It only takes a carefully administered Brave New Cycle.

  2. Samuel B. Jones, Jr. CFA says:

    Dodd-Frank takes a leaf out of the SarbOx book by requiring financial institution top managements to personally sign off on publicly disclosed financial statements. What could be wrong with that given the high level C Suite failures of last decade to adequately control risk? Yet we already hear about push-back. And now many Congressional leaders are trying to handicap the SEC by not only disallowing budget requests to hire qualified new staff to set and uphold new regulations, but also backhandedly forcing the SEC to leave unfilled those slots vacated by staffers who leave the agency. With the watchdog apparently on life support systems, it’s no wonder the investing public is frustrated and feels disenfranchised by their under protective elected officials. Take away the intended oversight and enforcement, is it any wonder that the public worries that history is doomed to repeat itself?

  3. Bob Dannhauser, CFA says:

    Thanks x3er for your comment – crises don’t get much bigger than this past one (I hope) so maybe it is more a matter of craving optimism after the depths of the economic downturn – i.e. the “Brave New Cycle” you refer to! – that makes for such short-sightedness.And Sam, certainly agree that the SEC’s budget situation puts them in a tough spot in terms of fulfilling their many mandates. The question remains whether the risks you suggest of (recent) history repeating itself capture the public’s imagination in the same way that the fiscal crisis apparently is.

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