Perhaps the most frequent criticism directed at government regulatory agencies, particularly on the federal level, is the likelihood of “regulatory capture” as a result of the perceived iniquity of the “revolving door” – that is, the insidiousness perceived by critics in the practice by which regulatory officials are appointed from the ranks of the industry to be regulated, or from the ranks of counsel to that industry. This newspaper wants to speak on behalf of the revolving door.
Think, if you will, of the individuals considered to be heroes of the regulatory wars of the past two decades. Chairmen Arthur Levitt of the SEC and Brooksley Born of the CFTC come quickly to mind. They both spent years of their professional lives, prior to presidential appointment, within or speaking for the respective industries they were then called upon to regulate. And it was the experience garnered in those years spent “in the trenches” that gave them insight into the substantive issues facing those industries, into the consequences of various possible regulatory actions (or non-action) addressing those issues, and into the practical likelihood of reactions anticipated to be forthcoming from those industries’ participants. Not that Ms. Born and Mr. Levitt were met with unanimous praise from the regulated industries, or (in Ms. Born’s case) that her insights carried the day on a crucial regulatory issue (in fact, she frightened the stuffings out of most of us at the time). But their understanding of the functioning of the respective markets and of the role of regulation, for good and for ill, that came from experience, was invaluable in both regulatory contexts.
The same can be said for the other side of the revolving door – the departure of regulatory officials for positions in the particular regulated industry or with counsel that represent that industry. The leavening of attitudes that comes when the yeast of an until-recently regulator acts on the coagulated dough of regulated-industry attitudes, and brings along knowledge of the current concerns and predilections of the regulating agency, greatly benefits both sides of the regulatory divide. The regulators’ job is made easier by the spread of that knowledge, and the market participants’ conduct is guided into directions that benefit the firms’ customers and counterparties and protect the firms, and the markets, against damaging prosecution.
The ideal, while rarely achieved, is epitomized in the likes of Ray Garrett and John Damgard – the first so well respected as a private securities law counselor that the White House could turn to him at a moment when confidence in the reliability of the SEC as an independent regulator was much in question, and the other so highly regarded by Congress as a spokesman for the futures industry that he could influence regulatory policy even from outside the formal ranks of the CFTC. Hardly either captors or captives!
What these reflections suggest, correctly it seems to us, is that the back-and-forth flow of self-respecting individuals is a beneficial force in the regulatory arena. Neither regulatory orthodoxy nor commercial ambition, alone without the admixture of the other, is healthy for the marketplace of ideas and enterprise. And yesterday’s trader or regulator is already a day behind the market developments that have been devised just this morning. It takes a combination of the Manny Cohens and the Leo Melameds to keep the balance of lively entrepreneurial juices stirring within vibrant (and predictable) marketplace protections.
Which leads to a concluding comment: The calendar of our constitutional electoral process inevitably takes away the longest-serving among us. This year we’ll be losing, among others, Congressman John Dingell of Michigan, whose inheritance from his father was a deep concern for the U.S. financial markets. As longtime chairman of the House Energy and Commerce Committee, Congressman Dingell yielded to no one in government who cared more, or upset more regulators and market participants (including corporate counsel) for acting in what he saw to be a disregard of the deepest interests of the U.S. financial markets. His is a different sort of revolving door, for his job was “to guard the guards.” For many years, agree with him or no, he did that job conscientiously and well.
Edward H. Fleischman,