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Was SEC Chair Christopher Cox right to dismiss self-regulation?
By Lauren | October 2, 2008
As the subprime mortgage/credit crisis continues to play out, the second-guessing has begun. The New York Times recently quoted Securities and Exchange Commission Chairman Christopher Cox as blaming the SEC’s “voluntary regulation” program for the failure. To grossly oversimplify the program, investment banks were invited, but not required, to submit to the SEC’s supervision, opting in or out as they chose. Cox argued that the discretionary nature of the program “weakened its effectiveness,” concluding that “the last six months have made it abundantly clear that voluntary regulation does not work.”
WIth due respect, I don’t agree.
Self-regulation is not only perfectly legitimate, it can be extremely effective – if it really happens. Regulations are, after all, the legal minimum that a business must satisfy, and they don’t always demand a whole lot. Businesses and professionals who want to compete effectively in today’s demanding markets are often compelled to go well beyond regulatory minimums if they want to keep their customers, clients, employees and shareholders happy, and they’re justly proud of the elevated standards they set for themselves.
At the same time, even the strictest regulations rarely prevent dishonest or greedy people from breaking the rules if the potential rewards are large enough. (If they did, we wouldn’t need prisons.) With $700 billion on the table, it’s safe to assume that the investment bankers who created this disaster reckoned they could make astonishing profits if they just bent the rules on who could borrow and how much. They even got away with it for a while, which created a greater incentive to keep breaking the rules and raking in the money.
There’s definitely a place for regulation in our vastly complex economy, especially when it comes to protecting consumers and preventing corporate greed from running completely amok. But no regulatory regime is going to be completely successful in preventing dishonest behavior. Regulation and self-regulation complement each other, and we need them both.
Topics: Business Ethics, Corporate Governance, Legal Ethics, Personal Ethics, Social Ethics, corporate responsibility, ethics |