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May 2014 Archives

Au Revoir Dollar
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The newspapers this week are full of stories of the impending settlement between French bank, BNP Paribas, and US authorities for BNP's alleged violations of US sanctions. The latest speculation on the settlement number is $10 billion. That hefty financial contribution to American coffers is just part of the anticipated settlement. According to the Wall Street Journal, the New York Department of Financial Services is also insisting that executives lose their jobs and the bank temporarily lose its dollar-clearing privileges. The transactions, at issue apparently fall under US law because they were denominated in dollars. As reported by France's Le Figaro, Bank of France governor Christian Noyer noted that the transactions at issue did not run afoul of French or European Union laws and regulations or United Nations rules. He also cautioned other banks in light of "evolving American jurisprudence".

Absent more details about the conduct at issue, it is difficult to assess the degree of wrongdoing and the proportionality of the contemplated settlement. If these were dollar-denominated transactions conducted by bank employees outside of the US in compliance with applicable foreign laws, should US regulators be pursuing this case at all? By using dollar denomination as a jurisdictional hook are financial regulators hastening the transition away from the dollar's reserve currency status, a trend that many believe is already underway? Rather than using the dollar and opening themselves up to unpredictable punishment at the hands of countless federal and state regulators, companies might choose to conduct their business in other currencies. American regulators and prosecutors should not hesitate to pursue illegal conduct, but focusing their attention on cases not reasonably within their regulatory jurisdiction could have the undesirable consequence of making the dollar a currency to be avoided.

Last week, the Public Company Accounting Oversight Board released its staff guidance on economic analysis in PCAOB standard setting. According to PCAOB Chairman James Doty, "[t]he Guidance should give those who are interested in the PCAOB's standard setting a better understanding of the analysis that staff plan to conduct to ensure effective and efficient rulemaking." The PCAOB guidance is an important departure from the historical reluctance of federal financial regulators to conduct economic analysis in connection with their rulemaking. In response to this aversion to pre-regulatory analysis, Abby McCloskey and I released a paper this week exploring the merits of a statutory requirement applicable to all the federal financial regulators.

Rather than something to be feared, economic analysis helps a regulator identify the problem it is trying to solve and think through potential solutions. Yes, it is a difficult, time-consuming, and costly exercise. It is true that there are hard to quantify benefits and costs, uncertainties, data gaps, and indirect effects. Despite these problems, most regulators are required by executive order to conduct economic analysis. Given the far-reaching effects that federal financial regulations have, the benefits of ascertaining what your rule will do before you adopt it outweigh the costs of doing a reasonable analysis. The PCAOB guidance embraces a form of analysis similar to that required under the executive orders. The other federal financial regulators should do the same. A clear, statutory requirement applicable to all of the financial regulators would ensure that thinking about whether and how regulations will work and what their likely consequences will be is not optional.

Designating in the Dark
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On Monday, the Financial Stability Oversight Council will hold an asset management conference with industry, academics, regulators, and a handpicked audience. The FSOC, which is made up primarily of the heads of the federal financial regulatory agencies, has the power to designate non-bank financial companies for regulation by the Federal Reserve. Monday's event will be the latest step in the FSOC's consideration of whether to designate one or more asset managers as systemically important. A report by the FSOC's sidekick--the Office of Financial Research--on the asset management industry looked as if it had been written without much consideration of the actual nature, purposes, or risks of the industry.

Earlier this week, the Securities and Exchange Commission's conflict minerals rule went back to court as the rule's challengers asked for a stay. The SEC adopted the rule under a Dodd-Frank provision intended to mitigate the violence in the Democratic Republic of the Congo. The Court of Appeals for the DC Circuit held last month that "to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have 'not been found to be 'DRC conflict free,''" they violate the First Amendment. The court remanded the case to the district court, but the actual mandate for the district court to act will not be issued until early June--after the conflict mineral rule's impending reporting deadline of June 2. It would have made sense for the SEC to stay the enforcement of the rule until the district court clarifies the degree to which the First Amendment violation impairs the rule. SEC Commissioners Daniel Gallagher and Michael Piwowar argued for a full stay on the grounds that the whole rule carries the First Amendment taint. Instead, the SEC issued only a partial stay of the elements of the rule that the court clearly identified as unconstitutional. Companies were directed to comply with the remainder of the rule on the existing timeline. Even if the SEC has technical legal grounds to proceed without waiting to hear from the district court, doing so displays a troubling lack of sensitivity to practical realities. Such indifference to the rule's costs, complexities, and unintended consequences is typical of the SEC's approach to implementing the conflict minerals provision. The SEC has failed to take steps within its discretion to identify and minimize these effects. For example, the SEC decided to require companies to file reports under the rule, rather than furnish them--a wording change with serious implications for legal liability. Once again, in refusing to tweak the rule's compliance timeline, the SEC is acting with unnecessary inflexibility.

Equalizing Markets
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New York Attorney General Eric Schneiderman took the latest step in his "Insider Trading 2.0" initiative to reshape the securities markets. On Wednesday, the attorney general announced an agreement with PR Newswire, a company that distributes corporate news releases. Pursuant to that agreement, PR Newswire will require direct recipients of its information to certify that they will not use it for high-frequency trading purposes. Attorney General Schneiderman has made similar pacts with other news distributors and entered into an agreement with Thompson Reuters, pursuant to which the company agreed to stop selling early access to the University of Michigan consumer sentiment survey. The attorney general is on a mission to ensure--as he said in a recent speech--that the United States is "a little more equal than the rest of the world." But equality based upon prohibiting people from investing in speed, technology, and legal access to information is a foreign concept in American markets. Freely functioning markets allow people to express the value they place on something. A long-term investor is not willing to pay anything for a short-term trading advantage, but a frequent trader may find a two-second information advantage so useful that she is willing to pay for it. The frequent trader's choice to buy something that the long-term investor does not want or need is not a sign of inequality; it is a reflection of different preferences. It's not the government's job to equalize market participants' preferences.



Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.