Dec 3, 2020 - Economy

The places regulation does not reach

Illustration of a roll of cash held together with red tape.

Illustration: Aïda Amer/Axios

Financial regulation is not exactly simple anywhere in the world. But one country stands out for the sheer amount of complexity and confusion in its regulatory regime — the U.S.

Why it matters: Important companies fall through the cracks, largely unregulated, while others contend with a vast array of regulatory bodies, none of which are remotely predictable.

Driving the news: Pick a recent headline and it's easy to see how valued — and how obvious — the lack of regulation is in financial markets.

  • Financial data powerhouse S&P Global is buying rival IHS Markit for $44 billion, even as the London Stock exchange looks like it has received EU approval to buy another huge data provider, Refinitiv, for $27 billion. (The giant in the space, Bloomberg, is worth north of $60 billion.) Such companies are integral to the functioning of financial markets, but, antitrust concerns aside, their operations are largely opaque to regulators.
  • S&P Global will also precipitate a massive $100 billion flow out of existing S&P 500 stocks and into Tesla on Dec. 21, when the index giant will finally allow the electric carmaker to join its benchmark index. That's hardly a sign of an efficient market, but regulators have no ability to intervene.
  • The Nasdaq stock exchange announced that it wants to delist companies that don't start nominating a diverse slate of directors — something that roughly 75% of those companies don't want to do, according to what Nasdaq itself says is their revealed preference. That power — to possibly reshape the governance of thousands of companies — is being wielded not by any regulator or legislator, but by a privately-owned company. (Admittedly, the SEC does first need to sign off on the plan.)

How it works: Institutions and individuals that control vast wealth — foundations, endowments, billionaires — are almost entirely unregulated. The asset managers who help to invest that wealth are also largely unregulated.

  • Insurance companies are regulated, but only by a patchwork quilt of state regulators. No federal regulator has oversight or control over the industry.
  • The places that the investments are actually held — the so-called custodians — are regulated, which is one reason why investment managers invariably outsource that part of their business.
  • The exchanges where the investments are traded tend to avoid close regulation, to the detriment of systemic stability. The "shadow banks" that normally keep those exchanges liquid — except during times of stress — are less regulated still.
  • Ratings agencies, proxy advisors, information providers, and other companies providing crucial grease for the wheels of finance — they're largely unregulated too.

What to watch: There's talk that the Biden administration will be much more aggressive about regulating hedge funds than any of its Democratic or Republican predecessors.

  • Biden's presumptive pick as head of the National Economic Council, however, Brian Deese, would be arriving at the White House via the revolving door from BlackRock. The $7 trillion investment giant has relationships with hundreds of regulators around the world, but no one regulator is charged with looking at it as a single global systemically-important entity.

Of note: JPMorgan's fiduciary arm was recently hit with a $250 million fine by the OCC, one of America's bank regulators. Other major fiduciaries include giant nonbanks like Vanguard, Fidelity, and BlackRock, none of which ever have ever faced a fine remotely as large.

The bottom line: The U.S. would benefit greatly from having a single powerful financial regulator operating a principles-based regime that would encompass all financial institutions. Even many of the institutions would welcome such a thing. The problem is that the existing interests are too entrenched for that to ever happen.

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