by Dr. David E. McClean
Regulatory Affairs
Manhattan Alternative Investment Network
MAIN is interested in regulation. Good regulation. Regulation that serves the public interest as well as the interests of the industry, without undue burdens.
As you may have gathered from news reports, there is a lot going on in the area of regulation – or perhaps better put, “deregulation.” There seems to be a growing consensus that the regulatory regime in the United States has gotten too difficult to navigate, especially for small firms (investment managers and broker-dealers). This regime, which is partly the result of Congress delegating too much non-specific authority to various regulatory agencies, has created moving goalposts and attendant uncertainties about the rules of the road with which businesses must comply. This has led to a regulatory labyrinth, with worries about infractions leading to increased costs across industries, fines, and damaged careers.
The problems are not faced by the financial services industry alone. Many tech companies have expressed concerns about the cost and complexity of compliance with data protection laws, such as the General Data Protection Regulation (“GDPR”) in the EU and the California Consumer Privacy Act (“CCPA”). (It is difficult to know whether EU or US regulation has become the most baroque; the competition is fierce.) As is often the case with new rules, smaller firms with limited resources have argued that these privacy regulations disproportionately affect them, compared to larger businesses with more resources, although even larger firms have balked at the complexities, uncertainties, and costs.
Car companies have had to deal with stricter fuel efficiency standards and emissions regulations and have pushed back, arguing that these standards and regulations have increased production costs and could lead to higher prices for consumers and to lost market share.
The oil and gas industries have lobbied against limits on drilling, hydraulic fracturing (“fracking”), and methane emissions, claiming they threaten jobs and energy independence.
Manufacturers of single-use plastics have opposed bans or taxes on plastic bags and other products, claiming they hurt business profitability and overlooked the economic cost to consumers.
Hospitals and pharmaceutical companies have opposed regulations requiring them to disclose prices, arguing this could lead to price fixing and consumer confusion.
Tobacco and vaping companies have resisted regulations limiting the sale of flavored products, claiming they hinder innovation and legitimate adult use (the “nanny state” argument) while fueling a black market.
Of course, to be clear, pushback and complaint don’t necessarily mean an industry is correct in its assessment of the need for proposed regulation. In fact, we can sympathize with some regulatory actions concerning environmental protection and the need to transition to cleaner energy sources. Indeed, some regulatory efforts may not be muscular enough. I will have more to say about this shortly.
In the financial services industry, which is the focus of MAIN’s programs and initiatives, the baroque nature of securities and investment management regulation has been resisted strenuously, including in the courts, especially in recent years. MAIN joins other voices, from the LSTA to SIFMA and small-firm groups and councils embedded in or otherwise working with FINRA, the NFA, and other regulators, in resisting some of the rules that have been proposed over the past several years.
The grounds for such resistance? They are several – 1. The rules seem arbitrary and capricious; 2. The rules are unnecessary; 3. The rules do little to protect the public while creating serious burdens on firms; and, last but certainly not least, 4. The regulators have exceeded their authority.
It is important that we always bear in mind that regulation is necessary for economic growth, for investor and consumer protection, and for the attractiveness of US markets. It is not an accident that the US has a ~ $29 trillion GDP and that US businesses are considered among the safest in the world in which to invest. But regulatory creep and overregulation are by no means virtues of the capitalist system. Regulatory creep and overregulation (including regulation by enforcement) seem to have become the norm, especially, many would argue, under outgoing SEC Chairman Gary Gensler.
But the financial services industry has been less than timid in taking on this regulatory overreach. For example, the very existence of FINRA has been challenged in the courts, on Constitutional grounds (Alpine Securities v. FINRA). While legal theorists, working in the esoterica of regulatory theory, may have seen the possibility for such a claim, most ordinary market participants were stunned that a cogent constitutional argument could be made that would upend a central pillar of securities regulation. The challenges to FINRA are ongoing.
While not affecting only the financial services industry, implementation of The Corporate Transparency Act (“CTA”) has been halted by a federal court injunction. The CTA, as written, requires hundreds of thousands of businesses to file with the federal government information about their beneficial owners. Many regulated businesses, such as broker-dealers, would have been largely exempt – largely, not totally, because these regulated businesses often utilize non-regulated entities for a variety of business purposes, and many of those entities may have been required to comply). The injunction has been appealed by the government, and it remains to be seen whether the CTA will be enforced (although there has been a back-and-forth, because of court actions, concerning when enforcement can proceed).
The “new dealer rule,” which would have deemed certain investment funds (and similarly situated entities) to be broker-dealers, has been, substantially, vacated by another federal court in litigation brought against the SEC by the Managed Funds Association. A few funds were already caught in the snare of the new dealer rule and have had to pay substantial fines and have had their reputations tarnished by SEC orders.
The new “private fund adviser rule” has, as well, been vacated in its entirety in another court action, on the grounds of SEC overreach. Among other things, this rule would have reached through registered investment advisers to impose certain regulatory burdens on funds that they manage and that are otherwise unregulated by the SEC.
The SEC’s skepticism of crypto has been challenged vigorously, with large players such as Blackrock and VanEck jumping in with both feet.
Recently, Jamie Dimon, apparently fed up with the constant tweaking of commercial banking rules, made it clear that he has had enough. The compliance costs on commercial banks have gone through the roof, and Dimon thought it time to “punch back.”
In September of 2024, the SEC approved FINRA’s and the MSRB’s request to change the 15-minute reporting time for TRACE and RTRS from 15 minutes to just 1 minute. The new rule, though approved by the SEC, is being criticized, and those criticisms may lead to a spate of court challenges. Many argue that while transparency in the bond market is a worthy goal, the manner in which the market works doesn’t really permit such a short reporting window, and that it will only lead to numerous reporting infractions and disciplinary actions against otherwise compliant firms.
In June 2024, the Supreme Court declared that SEC’s use of administrative law judges in cases involving allegations of fraud may be violative of the rights of the accused. The decision was the result of SEC v. Jarkesy, challenging the SEC’s practice of using administrative law judges, or specialized judges within federal agencies who decide legal disputes outside of the typical judicial system. The court concluded that defendants facing penalties for securities fraud are entitled to jury trials.
Also in June 2024, came the demise of the “Chevron deference” or the “Chevron rule.” The Chevron deference gave broad powers to regulatory agencies to determine the meaning of statutes that pertain to the areas under their regulatory purview. In 1974 the Supreme Court stated that an agency’s administrative interpretation, so long as it was consistent with the agency’s other statements and with the congressional purpose, would be able to interpret relevant statues, rather than judges. On June 28, such agency authority was pulled-back substantially, with judges handed the interpretive powers once placed in the hands of federal agencies. The Supreme Court issued its decision striking down the Chevron deference, in the case Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024). Chief Justice Roberts wrote the majority opinion, which held that the Chevron deference conflicted with the Administrative Procedure Act (“APA”) since “under the APA, it thus remains the responsibility of the court to decide whether the law means what the agency says.” He continued that “Congress expects courts to handle technical statutory questions,” not agencies.
I mentioned that, in certain cases, regulatory actions (through rulemaking or otherwise) are indeed called for. Some industry complaints can be no more than gratuitous, kneejerk, or – frankly – obtuse. Some robust rulemaking has been brought upon the industry by its own bad acting and negligence (Sarbanes-Oxley (2002); Dodd-Frank (2010), etc., whether or not one agrees with all of their provisions), and in those cases complaining about the compliance costs rings hollow. Beyond this, we have to remember that the slogan “deconstructing the administrative state,” while serving as a good populist rallying cry, can lead to unintelligent and ham-handed ways to address regulatory overreach. The goal isn’t the death of our regulatory agencies. The goal is better and more intelligent regulation. The recent wave of push-back, which targets specific problematic rules one by one, is the way to do it. However, it remains to be seen whether some of the more sweeping efforts to “deconstruct” the administrative state will prove apt – or disastrous.
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Comments can be sent to: dmcclean@bgei.net