When the Levees Break by Kunz Karen;Martin Jena; & Jena Martin

Author:Kunz, Karen;Martin, Jena; & Jena Martin [Kunz, Karen & Martin, Jena]
Language: eng
Format: epub
Publisher: Lexington Books/Fortress Academic
Published: 2016-08-15T00:00:00+00:00

Chapter 6

Whole Market Regulation

A product is only as good as the system that it is designed to work within. That’s true for cogs on a wheel, bricks in a dam and, in this case, products in a securities market. Whole market regulation is our recognition of this fact and, thus, our effort to address all aspects of this new marketplace.

Ironically, the idea of whole market regulation is not a new one. In fact, the original conception for whole market regulation begins where it all began—after the stock market crash of 1929.1 Recognition of the need for a regulatory system to prevent fraud and market manipulation spurred innovative solutions, despite protestations from the most influential money men of the time—the “banksters” as Ferdinand Percora, the New York District Attorney charged with investigating the crash, called them. After endless Congressional hearings, Pecora developed the most innovative, comprehensive regulatory structure of the time—thus the SEC and the disclosure system were born. Since then, the idea for whole market regulation has been lost amidst the din of disclosure. It has reared its head on rare occasion, such as in the Report of the Presidential Task Force on Market Mechanisms in 1988. But in actuality, all of the Congressional legislation, commissions and task forces have only served to pile on to the existing disclosure system, creating a reactionary structure lacking preventative measures. The result is a regulatory structure that resembles our tax code, amended so many times that it has become largely ineffectual.

The irony is, that many people at the highest regulatory level, recognize that a piecemeal approach is unwise. For instance, “Secretary of Treasury Timothy Geithner said the string of recent financial crises ‘have caused a great loss of confidence in the basic fabric of our financial system,’ and ‘To address this will require comprehensive reform. Not modest repairs at the margin . . .’”2

And yet, we keep doing it anyway.

Given how vast and complicated our current markets are, the idea of regulating the system as a whole is one that is becoming increasingly crucial. Our whole market regulation model goes back to the future, back to the core principles of the 1933 and 1934 Acts and their intent to prevent fraud and protect investors. And yet, to be effective, there are a number of implications for our whole market model that we need to examine. The purpose of this chapter is to assess the effects on regulation and regulators, sales and supervision, trading (both high frequency and regular investments) and the exchanges, and broker-dealer operations and compliance.

A Word About Whole Market Regulation

Whole market regulation, at its core, focuses on systemic risk. Traditionally, the focus of regulation has been on the players involved in the markets. Within this disclosure-based framework, corporations long garnered the most regulatory attention, with other participants—brokerage firms, market makers, exchanges and the like—also being considered but less centrally so. The expansion of SRO responsibilities allowed for increased focus on the workings of the markets, broadening over time to include broker-dealers, exchanges, brokers, advisors and managers.

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