Critics of Financial Reform Sing Same Tired Tune

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.

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