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Restarting The Growth Engine: A Plan To Reform America’s Capital Markets
"Policymakers and thought leaders [must] address these problems now before a crisis arises. We have it within our power to take sensible, effective steps to ensure that U.S. markets are the most efficient, transparent and attractive in the world. The question is, can we find the political will to take them.”
- Commission of the Regulation of U.S. Capital Markets in the 21st Century. U.S. Chamber of Commerce, Report and Recommendations, March 2007.
Of course, a crisis did arise—as did a massive legislative and regulatory response—but those prescient words are truer today than they were in 2007. The challenges of 2007 still remain, but they have become more complex. New challenges have arisen as well.
Since the 2008 financial crisis erupted, the United States has seen a massive response to promote financial stability—the passage of the Emergency Economic Stabilization Act of 2008 and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act” or “Dodd-Frank”) and the development and implementation of Basel III, to name a few. A massive new layer of regulation was added in the hopes of making our financial system more stable, but it has constrained credit and sapped liquidity from our capital markets. This has impacted the businesses that rely on our capital markets for funds. Are the generators of growth and jobs—American businesses—more empowered now? Sadly, the answer is “no.”
Regulators have more regulatory powers than ever and engage in a micromanagement- style of oversight, but they are unable—or unwilling—to consider the implications of their actions on the markets they regulate.
This has resulted in policies that have led to more inefficient markets that are a drag rather than a boost for the economy. Today, corporate treasurers must deal with less liquid and more inefficient markets. Since 1996, the number of public companies has decreased by 50%. Economists are confounded by low productivity, and while unemployment rates have dropped, labor participation has hit all-time lows. All of this is happening while economic growth seems stuck at 2%—a growth rate sufficient to stave off a recession, but not sufficient to provide Americans with the level of prosperity they expect or can pass on to the next generation.
While the responses to the financial crisis did address some of the root causes of the crisis, many were left unaddressed. The 1930s regulatory system remains in place with layers added to it. Regulators were not provided with the tools to keep up with dynamic, evolving global capital markets. New agencies and rules were created, but obsolescence was never addressed. There is a troubling pattern of systemic risk oversight and consumer protection enforcement that “end-runs” the transparency, efficiency, and quality controls of the Administrative Procedures Act (“APA”). Rulemaking, in some areas, became more opaque and disregarded the very real, adverse consequences that new rules sometimes heap upon the economy. Tools needed for smart regulation are often ignored. Rather than ensuring an even playing field that promotes competition, regulation has become a game of “gotcha” designed more to address governmental reputational risk rather than enforcing the law in a fair and balanced way.
Yet the picture is not all doom and gloom.
The American economy remains the most resilient and nimble in the world and rewards prudent risk takers. We have seen new markets and companies grow and thrive even in these tough times. The American economy is still growing, while many economies around the world are in a recession. Unfortunately, the tepid growth is occurring in spite of, rather than due to, the regulatory structures currently in place.
It is imperative that we make progress now—with an increasingly global economy, businesses must have the ability to compete and our regulators must be able to coordinate with their counterparts.
The issue facing the next administration—regardless of party affiliation—is this: how to ensure that the United States has the modern financial regulatory system needed so that fair and efficient capital markets can provide the resources for businesses to compete and for consumers to have affordable, accessible, and fair financial products that they need.
The hallmarks of the U.S. financial system have been diversity, competition, and innovation. This dynamic system has benefited businesses and investors alike. We need an efficient nonbank financial sector to coincide with a stable banking system. Safety and soundness must be paramount, but innovation and growth must also be encouraged.
The next administration has the opportunity to fix the mistakes of the past and address the structural shortfalls that may limit the future horizons of growth. The right solutions will allow resources to be deployed in the manner needed to achieve the rates of growth and job creation we expect.
We believe that the focus for the next administration should be on the following subject areas:
- Regulatory reform of agencies to promote efficient capital markets;
- International coordination and process;
- Systemic risk monitoring and management to fit the circumstances and business model;
- Retirement security to provide investors with transparency, options, and certainty;
- Financial reporting and corporate governance modernization to meet the needs of businesses and their investors;
- Capital formation and Financial Technology (“FinTech”), fostering innovation and growth;
- Litigation reform and restoring due process; and
- Consumer protection.
With this agenda for the next administration, we provide some answers and suggestions for the executive and legislative branches and regulatory agencies, both domestic and global. While we do not expect to have all the answers, we think it is important to have a debate of ideas, instead of competing sound bites, so we can make 2017 the year of progress rather than another year of plodding along.
- Create a Presidential Commission on Financial Regulatory Restructuring;
- Reform and place the regulatory processes of the Federal Reserve and other banking regulators on par with other agencies;
- Reconstitute the Financial Stability Board through a treaty to create transparent and accountable regulatory and designation processes;
- Modernize rule writing through enhanced economic analysis and examination of existing regulations before creating new ones;
- Reform the Financial Stability Oversight Council and clarify use of systemic risk designations and regulation;
- Provide relief for small, medium and regional banks from enhanced regulations and systemic risk regulations and tailor systemic risk regulation to the nonbank business model;
- Conduct a study of major regulatory initiatives for cumulative impacts on all financial institutions, their customers and economic growth;
- Restructure the Consumer Financial Protection Bureau into a commission and place it under congressional oversight through appropriations;
- Congress should create a special bi-cameral committee to study the FinTech landscape and its policy recommendations;
- Repeal the Department of Labor’s Fiduciary Duty Rule and replace it with a Security and Exchange Commission (SEC) uniform fiduciary standard rule;
- Create a Financial Reporting Forum to identify and address emerging financial reporting issues;
- Reform corporate governance 14a-8 rules and modernize shareholder resubmission thresholds;
- Congress and the SEC should create fair due process by creating rights of discovery, right of removal in complex cases, and preservation of right to jury trial; and
- Congress should enhance capital formation by passing a JOBS Act 2.0 package.