April 02, 2008
The Fed Goes to the Hill, The SEC and SIFMA think about regulatory reform
Posted by David Zaring

We'll be interested to see how the Fed and New York Fed chairs handle inquiries about Bear Stearns during two days of testimony on the Hill.  They may not be able to avoid saying something substantive about the bailout, but if the SEC is any guide, they'll opine inscrutably about the wisdom of the regulatory reform proposals that followed it.  SEC Commissioner Atkins said yesterday

Treasury is proposing .... the unification of the SEC and CFTC and a shift towards principles-based regulation. The latter would require radical adjustments by regulators and industry alike. The SEC would have to depart from its often very prescriptive approach to rulemaking. The financial industry would have to be weaned from its tendency to seek the protection that specific rules afford from later second-guessing and — if the rules serve as barriers to competition — from would-be competitors.

As to a possible merger between the SEC and the CFTC, ...[i]t is not surprising, then, that calls for a consolidation of the agencies have increased. Whether a merger ought to happen is a question for Congress and the Administration — it is certainly beyond my power as a Commissioner.

Hmmmm.  It's not exactly a bottom line, but it is not uninteresting, particularly because of Atkins' view on the low-cost merits of principles-based regulation.  Does principles-based regulation has lower barriers to entry than does rules-based regulation?  Much depends on how it is done.  The former can be administered in quite a clubby, exclusive way, after all, and affords regulators a lot of discretion as to who they pick on.   I'd be interested to know if, say, the German financial industry thinks that its regulators have helped to create open and vigorous competition in Frankfurt through their principles approach.

For its part, SIFMA sounded vaguely supportive of the reorg, calling it a "thoughtful and sweeping plan which should provoke intense discussion, debate and potential legislative changes." Christopher Dodd, chair of the relevant Senate regulatory committee, called it a "wild pitch."  So which is it?  Expect Bernanke, if he says anything about the plan, to veer towards the former account.

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