The Future of Regulation

Well, it’s now late June and quite frankly, not a lot is happening in the regulatory world. Sure, the usual Spring conferences were held March-May, but with many of the same old topics – cybersecurity, conflicts of interest, and Dodd-Frank. We hear the SEC has been too busy with its own in-fighting to actually push out new final rules. A hot new proposal (Rel. IA-4091) came out recently for funds and advisers regarding proposed new reporting requirements, but hey, it’s just a proposal. Any experienced compliance professional knows that a proposal with significant new reporting obligations will face much push-back from the industry and take a very long time to finalize.  Don’t hold your breath on this one….

Is it the summer doldrums already? Or is the next financial crisis on the horizon? Word on the street says the next crisis will come from lack of liquidity in the bond market since banks are hording cash and bonds to meet new capital requirements. Perhaps there is something to this; however, if traditional economics plays out then a frozen bond market should not terribly affect the stock market. The problem is…traditional economics are out the window. Bonds and stocks are now more correlated than ever. Traditional investor safe havens do not exist.  So what is a regulator to do to prevent the next crisis?

It’s time for regulation to catch up to the markets. Our markets are advancing at a torrid pace that is leaving regulators gasping for air. Advisers are rapidly growing while broker-dealers shrink. Algorithmic trading is quickly replacing traditional trading venues. Fixed income markets are becoming more complex in spite of attempts to add transparency. Technology is king and the markets feed on it. A never ending hunger exists.

The poorly armed regulators are so far behind the markets that playing catch-up is taking its toll. They simply don’t have the systems and infrastructure in place to properly monitor the markets or the firms they govern. Unless the regulators receive the congressional funding they need or are allowed to begin charging new fees to the industry, they will continue to lag behind and may never catch up. Whether you are pro- or anti-regulation, efficient regulation supports the markets and keeps our economy healthy. Unfortunately, today we do not have efficient regulation. It’s time our regulators had the means and leadership to make significant changes instead of simply fixing “broken windows.”