Some Questions About a National Securities Regulator

On Thursday, Federal Finance Minister Jim Flaherty announced a partnership between the federal government and the provinces of British Columbia and Ontario aimed at creating national uniformity in the regulation of securities. The arrangement, entitled the “co-operative capital markets regulatory system,” will be encouraged on the other provinces in a bid to create a single national regulator of stocks and bonds.

Despite Flaherty’s optimism concerning the deal, there are many reasons to be wary about a national securities regulator administered by government. (For the following discussion, I am wholly indebted to the work of author Thomas E. Woods, Jr.)

First of all, investing is risky. You may lose your money. As a result, investors must be alert to the riskiness of their investments. This natural alertness is diminished by the existence of a national securities regulator.

Consider the example of Bernie Madoff, who bilked investors of $50 billion through his now infamous Ponzi scheme. This occurred under the “watchful eye” of the oblivious Securities and Exchange Commission (SEC), the United States counterpart of our newly proposed system. In fact, Madoff was only arrested after being turned in by his own sons, to whom he confessed once his scam began to unravel.

Nonetheless, could you blame a defrauded investor for assuming that, if Madoff was running a criminal Ponzi scheme, the regulator would have done something about it?

Secondly, regulatory agencies create additional risk by eliminating diversification. According to economists Jeffrey Friedman and Wladimir Kraus, “Regulations are like mandatory instructions for herd behavior, automatically increasing systemic risk.”

In addition, attempts at regulatory oversight, however noble they are intended to be, are disrupted by the revolving door that exists between industry and regulatory agencies. They become characterized by a system of crony capitalism where well-connected firms set the regulatory agenda and genuine supervision disappears. The result is less competition from smaller companies facing increasing regulatory compliance burdens. This is the essence of Nobel Laureate George Stigler’s capture theory of regulation.

Flaherty assures us that an “expert board of directors” will run the regulatory system. Notwithstanding the suspect ability of a group of central planners sitting around a boardroom table to make decisions in the best interest of all Canadians, how likely is it that such an agency will attract the cream of the crop of the financial services industry?

Not very, according to Woods:

And to put it bluntly, how many business school or other graduate students aspire to become regulators? The brighter students go on to become successful businessmen and entrepreneurs, and the slower ones wind up in the regulatory agencies. We expect a kid who graduated number 505 out of a class of 508 not to get his clock cleaned by a kid who graduated number 12?

Moreover, identifying a problem in the securities industry is one thing. Possessing the knowledge and courage to fix the problem without creating unintended consequences is entirely different.

Perhaps worst of all is the tendency of any failure on the part of government regulators to be attributed to insufficient resources. “On the enforcement side,” attests Flaherty in the preceding video, “we’re going to beef up the enforcement, we’re going to have more people, more experts, more accountants, more lawyers, more prosecutors, because Canada’s reputation when it comes to enforcement of securities fraud is weak.”

In other words, regulatory inadequacy is the fault of greedy, selfish taxpayers for not paying enough taxes. Shame on all of us.

For an excellent discussion of regulation and more, see Dr. Woods’s book “Rollback: Repealing Big Government Before the Coming Fiscal Collapse.”



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  • About Gregory Cummings

    Gregory Cummings writes about Canadian monetary and economic policy. His writing has been featured at the Ludwig von Mises Institute of Canada and the Ludwig von Mises Institute's Mises Daily publication. Read more.

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