Regulation in the United States: Too Much, Too Little, or Just Right?

Categories: Standards, Ethics and Regulations (SER), US SEC
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When it comes to the sentiments of CFA® charterholders about the regulation of the US financial markets, some could argue that not much has changed in the seven years since the end of the  financial crisis of 2009. In fact, a recent survey of a group of CFA Institute members in the United States returned results that are remarkably similar to results of surveys of the membership in 2009 and 2010, despite obvious changes in the markets and the economy.

Current Level of Regulation is Too Much

Of the respondents to the survey, 51% said that the current amount of regulation in the securities market is too much, with few (18%) believing that it is too little, and a substantial minority thinking it is about right (31%). Those in the too-much-regulation camp often cited the proliferation of regulations stemming from the post-crisis passage of the Dodd–Frank Act, noting that although the regulations have produced a few real benefits, they carry big costs. These costs come not only from the hard costs of compliance requirements, but also from the time and attention away from servicing clients. And that, say some, is undermining fundamental market functions.

Focus of Regulation

Sheer numbers of regulations alone may not always equate with being burdensome; a single, complex, and time-consuming regulation may in itself feel like “too much regulation.” Regulation may also seem irrelevant when it is not aimed at addressing major issues, further adding to the compliance burden. Survey respondents thought that in order to best accomplish its mission, the US SEC should concentrate its efforts on regulating fraud (51%) and enforcing the laws and regulations that already exist (39%). Not surprisingly, cybersecurity (with 24% of the vote) captured third place.

Biggest Threat to Our Capital Markets 

As an open-ended question, respondents were asked to state what they considered to be the greatest threat to the US financial markets. A combination of overregulation and governmental intervention came in first, with comments noting how the number and focus of regulations coupled with central bank policies and US Congressional policymaking undermine capital formation and innovation. In particular, commenters noted that legislators often do the financial markets a disservice by trying to pass post-crisis legislation when they lack a true understanding of how the markets actually work, resulting in regulations that are ineffectual and costly. Passage of the Dodd–Frank Act was often cited as an example of this type of legislation.

CFA Institute Members Speak to Regulation Over the Years  

Even with markets rebounding to record highs, sentiment about what has changed in the years following the greatest financial crisis that the United States has experienced since the Great Depression has not changed much. The big themes that came out of the survey focused on excessive regulation and the need to enforce existing regulations.

Polls of members conducted in 2009 and 2010 reflected similar concerns about the efficiency of the US regulatory system, including the need to enforce existing regulations (rather than create new ones). And what about government intervention in our securities markets? In one poll from that period, an overwhelming 74% of respondents disagreed/strongly disagreed that Congress should act quickly to reform the financial markets. Respondents to another poll seconded this sentiment, with 66% giving Congress’s regulatory reform efforts designed to prevent another crisis a grade of “D” or “F” and 76% indicating they did not believe that the Dodd–Frank Act would be effective in preventing another crisis.

We can take away at least two strong messages from these surveys when evaluating the current US system of securities regulation. First, the regulatory scheme is not as efficient as it needs to be. It needs to focus on enforcing existing regulations rather than creating new regulations, which many members believe will end up being duplicative, complex, and costly. Second, Congress and other governmental bodies should refrain from interfering with the functioning of the financial markets, whether it is through changing monetary policies or overly quick passage of reform legislation in response to a financial crisis.

One wonders if the next step is a return to more self-regulation in the securities market. But given today’s interrelated financial systems, that notion simply may be impossible.

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Photo Credit: ©Getty Images/Stefano Salvetti

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One comment on “Regulation in the United States: Too Much, Too Little, or Just Right?

  1. Nancy Townsend Rexford said:

    As a person who has had to deal with the mortgage area of Dodd-Frank we have continued to pile up additional regulations. The additional rules require training time that would have been better utilized in doing the actual work.
    I have worked on files from Failed banks sold by the FDIC. and then sold to servicing companies for collection.
    The problem started because regulators did not do their jobs, as a result of this the banks looked better on paper than they actually were. Instead of jailing the people responsible for the mess, we allowed legislators to create more law. Now with a new administration they are going to rewrite what they can’s get rid of. Requiring even more training.
    Meanwhile the big banks are the only place where loans are available and the poorer people are not going to be given a loan. Or if they are given a loan terms are set by the lender who either gets paid or gets the collateral.The majority of the companies targeted by CFPB are those who offer loans to the poor. Essentially sending these people back to the large companies who control things. Government regulations a wonderful thing.
    Sorry to be cynical but I believe I am also realistic in my assessment of the situation..

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