It is important to note that collaboration between firms and regulators often gets confused with influence. The expectation is the relationship must be guarded, even contentious between the parties lest it be considered too cozy. The survey disputed this and confirmed the value of collaborative interaction between regulators and regulated industry players who have deep knowledge and expertise. While some see it as the fox guarding the henhouse, many of those professionals interviewed stressed that regulators cannot operate as effective market cops with an amateur understanding of industry or how markets work. Experts at these regulated businesses play a significant role in properly educating regulators.
The potential effects of regulatory capture can be mitigated by these important steps. First, collaborations must exist and regulators must understand the finer details of how the regulated businesses operate. What is critical in this regard is staying up-to-date on trends and practices. As we learned from the 2008 financial crisis, market regulation and enforcement must evolve as quickly as the securities and investment business itself. That means a very high and evolving level of market expertise among regulatory staff is necessary. Because of the need for continuing collaboration with industry, ensuring regulatory staff is specifically prepared for the inevitable influence game is fundamental. New tools and technology can help.
What we have learned recently from law enforcement in other contexts is the value of documented interactions — what really took place and what was the nature of the interaction. Many police departments mandate the wearing of body cameras to document their policing function. Market cops should consider using the equivalent in the context of engaging the industry on regulatory enforcement matters. A video or audio record would be beneficial in documenting the complete narrative of such interactions, it could be used to verify enforcement outcomes and potentially train staff.
These steps will improve effectiveness and transparency and serve to bolster public confidence in the regulatory system and market players. In a low-return environment, we need that confidence more than ever. n
Kurt N. Schacht is New York-based managing director, standards and advocacy, CFA Institute, and chairman of the Investor Advisory Committee of the Securities and Exchange Commission.