SEC Commissioner Robert J. Jackson, Jr. called upon the agency to focus on the “forgotten fourth pillar” of its mission: facilitating competition in capital markets.
In a speech to a Washington D.C. think tank, Mr. Jackson highlighted the current lack of competition across financial markets and urged the SEC to address this problem through rulemaking and oversight. According to Mr. Jackson, the concentration of power in a few players across capital markets has worsened over the decades. Among other issues, Mr. Jackson noted (i) the lack of competition in public stock exchanges and national credit rating agencies and (ii) the decrease in IPOs among smaller companies due to the seven percent IPO tax. To reduce the concentration of power among these players, Mr. Jackson advised the SEC to:
- review the current state of competition in financial markets, not just the effect proposed rulemaking may have on it;
- more formally incorporate competition economics into the agency’s work;
- collaborate with the Federal Trade Commission; and
- be more vigilant in oversight, not less.
Lofchie Comment: There is no doubt that competition is a powerful force and should be encouraged to the extent possible. That said, there is only so much that the SEC can do to encourage competition, without going into business for itself, while there is a great deal that the SEC, along with other regulators, can do to discourage competition.
Let’s start with the destruction of firms through over-harsh enforcement actions. Exhibit No. 1 would be Salomon Brothers, a great firm largely destroyed by a combined federal, 50-state enforcement barrage in response to limited misconduct by a very small number of individuals. Arguably, Kidder Peabody suffered the same fate. Further, it was a Department of Justice enforcement action that likely resulted in the destruction of the Arthur Anderson accounting firm; although the DOJ’s victory in court was reversed by the Supreme Court, the accounting firm was already dead at that point.
Since Dodd-Frank was adopted, the number of operating futures commission merchants has been cut in about half. See generally, CFTC Commissioner Giancarlo Warns of Threat Posed by “Increasing Ill-Conceived Regulatory Burdens.” Virtually no new banks are being created; in good part due to increased regulatory burdens. The SEC’s recently proposed fiduciary rule raises a similar concern, that “full service” brokers may be driven out of service. See Choose One: Best Interest or Full Service.
These examples stand in contrast to Mr. Jackson’s view that it is some SEC inertia that has resulted in the decrease of IPOs, see SEC Commissioner Faults Regulatory Policies for Downward Trend in IPOs.
Of course, blame should not be confined to the federal government. In fact, New York State is likely the country’s leader in adopting financial regulations that sound nice on the airwaves but set impossible standards on the ground. See, e.g., NY Financial Services Department Adopts Final Revisions to Cybersecurity Requirements.
In short, there is only so much that the government can really do to force competition, but there is a great deal that it can do to kill competition.