CORPORATE TRENDS — Regulators and the market

Like most idealistic initiates to the world of regulatory processes, I have a little dream. My dream is one of markets which are competitive and of securities which are sold honestly, so that investors can secure information efficiently. In my dream, market access is open and transactions are governed by market terms, rather than conflicts of interest. My dream is one of a marketplace where new technology and product innovation are seldom delayed, where prices accurately and immediately reflect events, and where stability prevails, with speculative excess occurring rarely, if ever.

One striking feature about discussions of regulatory processes and reforms is that many of the principal participants speak different languages. As a student of law and of economics, I have observed how the very strengths of legal and economic training can carry with them the seeds of communication problems and biases.

I wonder whether the lawyer lacks the systematic orientation at which the economist is so adept. The lawyer is trained to analyze one party’s rights against those of another, often without considering fully how his advice might affect third parties and what bearing it may have on the future. Similarly, the lawyer’s substantial concern for justice often leads him to focus too little on what may be the costs of correcting the perceived injustice.

On the other hand, the economist’s strength in measurement may tend to cause him to attend too little to the immeasurable. The lawyer may not be sufficiently skeptical about the efficacy of law, whereas the economist may have a similar blind spot regarding the efficacy of markets. The lawyer may be too focused on the political process, whereas the economist may think too infrequently about it.

The Ontario Securities Commission (OSC) is conspicuous for its lack of economists. As a collection of accountants and lawyers, perhaps it sometimes fails to recognize that the political process from which every regulatory agency and program emerges is itself a strong kind of free market (albeit with a different distribution of “buying” power than is the case in economic markets). Ideally, in a democracy, the process of deciding which problems require action and what that action should be, is open and competitive . . . In addition to problems of inconsistency and random selection of priorities, a common administrative problem is “tunnel vision.” This tends to occur when an agency organizes its tasks to the extreme of having each employee pursue particular goals single-mindedly, often to the point of causing more harm than good.

The OSC, while challenged by such problems, is fortunate to be somewhat insulated from their most pernicious effects. For one, the markets it attempts to regulate are simply too dynamic to be constrained for very long by regulatory inconsistency.

Regarding the problems of random selection of priorities, the OSC is fortunate in that it serves industries which have a vested interest in improving and maintaining the efficacy of the regulatory system. Indeed, securities market participants often initiate concrete alternatives to existing regulatory requirements or processes, rather that merely react. The OSC enjoys no special advantage regarding “tunnel vision.” Here, as with any organization, the challenge is one of leadership. In particular, the leaders must articulate appropriate goals and values and create a sense of mission, so as to inspire enthusiasm. Staff must be given opportunities to contribute ideas and participate in achieving the organization’s goals. Feedback and evaluation are important, as are opportunities for training and advancement, adequate facilities in which to work, and freedom to exercise initiative and responsibility.

— From a speech by Edward Waitzer, chairman of the Ontario Securities Commission, delivered recently at York University in Toronto.