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November 24, 2014

Guest blog: Rethinking regulation: Moving away from monolithic views

By Cindy Fornelli*

When it comes to policy-making and regulation, it’s easy to think in shorthand. We’re all familiar with the sound bites: "Government is the problem." "Government is the solution." "Washington is broken."

Yet when we dig into the subject of regulation and its role — whether through in-depth surveying, or simply a good conversation on the topic — it quickly becomes clear that the shorthand is neither accurate nor especially helpful. Indeed, from this observer’s view, both anecdotal and statistical evidence show that American attitudes about government and regulation are quite complex and nuanced. Understanding the implications of this complexity could help to guide us as we continually strive to rethink, and to improve, our approach to regulation.

So where have I heard nuanced views regarding regulation? Last year, we created an initiative known as "Women in Capital Markets." Several times per year, this initiative brings together a group of senior leaders in finance, business, media, academia, and policy for a broad discussion on the critical issues facing US and global capital markets.

At a recent Women in Capital Markets gathering, the consensus was clear among these leaders that the balance between regulation and economic growth can be thrown off when regulatory requirements become overly complex or conflicting. Strong concerns were voiced that the current regulatory environment shows signs of this imbalance. "Regulators are much more involved and intrusive," said one participant. "Financial companies are much more risk-averse than they used to be, and innovation is more difficult."

Another participant agreed, noting that at her company, the time required to develop new offerings for customers has ballooned. "Where they once could get a product out in six months, now it might take 18 months or longer to get regulatory approval," she said.

It’s worth noting that he women at this gathering were not out to bash regulators. Quite the contrary, many of the participants are former regulators themselves; the key role of regulation in healthy capital markets was taken as a given at the outset of the discussion. One guest also struck me with this point. "It’s always a mistake to talk about regulation in a monolithic way," she said, noting that most private sector interests do not reflexively support deregulation. Indeed, companies and trade groups often vigorously defend existing rules. "What they want is certainty," she suggested.

In short, in the view of this elite group, regulation is not the problem — but it can certainly pose a problem.

Like the participants in the Women in Capital Markets initiative, many investors don’t make the mistake of thinking about regulation in monolithic fashion. As revealed recently by the Center for Audit Quality’s Main Street Investor Survey, regulation is important to them, but they don’t want the government to overdo it.

Fortunately for all of us, I see instances in Washington where regulators are highly attuned to effectiveness. For example, the US Securities and Exchange Commission (SEC) has since last January been active on the issue of fundamentally reforming corporate financial disclosure. At the outset of these efforts, the bugaboo was "disclosure overload." But the emphasis has since changed. Regulators astutely recognized that while investors often want less information, sometimes they want more. "Disclosure effectiveness" is the new goal.

How can we promote such regulatory effectiveness, not just in disclosure, but across the policy landscape? My colleagues at the Women in Capital Markets Initiative threw out several good ideas at our recent event. Many of these ideas focused on improving communication and interaction between government and key stakeholders. Participants noted, for example, that the SEC has made excellent use of roundtables to gather stakeholder input, both before and after regulator action. More such roundtables, especially those that allow dialogue among various stakeholders, could be used to examine rules that have been in place for a set period.

There are no doubt myriad more ways to enhance effectiveness in policymaking. But a simple change in mindset — moving away from monolithic thinking — may help create certainty, unlock innovation, and make the familiar sound bites obsolete.

*Cindy Fornelli is a former deputy director at the SEC and senior vice-president at Bank of America. She has served as the executive director of the Center for Audit Quality since its establishment in 2007.

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