Aggregated News From Investment Management Regulators

ICYMI: Harvard Business Law Review Publishes Chairman Tarbert’s Framework for Sound Regulation


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“The fundamental objective for any government agency overseeing financial markets and institutions should be sound regulation. And how we regulate is just as important as what we regulate. Every major financial regulator in the world employs, to varying degrees, two primary methods of regulation: principles-based and rules-based …

“The CFTC has a unique history and tradition of being a principles-based regulator. Loosely stated, this means that the CFTC relies more on clearly stated principles to achieve regulatory objectives than it does on compliance with detailed, prescriptive rules. The CFTC has generally been more of a principles-based regulator than other U.S. regulators …

“In general terms, principles-based regulation reflects a transition away from detailed, prescriptive rules toward high-level, broadly-stated principles that create standards by which regulated firms must operate …

“Principles-based regulation is not intended to be “light-touch.” In my view, so-called light-touch regulation is not really regulation at all; rather, it serves more of a monitoring function. That may make sense in isolated circumstances but is far from the kind of conduct regulation or prudential supervision required in financial markets. Nor is principles-based regulation a euphemism for deregulation. Instead, principles-based regulation is a different vehicle for achieving the same regulatory objective or outcome as rules-based regulation.  It simply does so in a way that is often more efficient and less burdensome than rules-based regulation, leaving space for flexibility and innovation …

“None of this is to say that a rules-based approach is never desirable. Rules-based regulation has distinct advantages over principles-based regulation in certain circumstances …

“In practice, it is rare for there to be pure principles-based regulation or pure rules-based regulation. Pure principles and pure rules are the two points at the ends of the regulatory spectrum. Every principles-based regulatory regime has some rules, and every rules-based regime has some element of principle … Thus, the choice is not either/or, but more a question of striking the appropriate regulatory balance …

“There are four main categories of factors that should be considered in determining the appropriate mix of principles and rules in a regulatory system, namely: (1) regulatory objectives, (2) nature of the market/subject matter, (3) attributes of market participants, and (4) qualities of the regulator …

“In some cases, this may require the CFTC to adopt detailed, prescriptive rules (e.g., position limits). In other cases, it may require the CFTC to adopt more principles-based regulations that set forth broad objectives and outcomes for regulated parties to strive toward, without necessarily adopting rules that address every particular fact and circumstance (e.g., digital assets). To be sure, we will focus on the right blend of principles and rules to achieve the outcome of sound regulation …

“I believe the CFTC should not confront this endeavor alone … It is my hope that the CFTC’s use of the framework set out in this article will encourage other financial regulators to reflect on when principles-based regulation may achieve superior results than rules-based regimes, and vice versa. The goal is not to create light-touch regulation or to engage in de-regulation. Rather, the goal is sound regulation. And, at bottom, sound financial regulation is about using the right tools, at the right time, and for the right reasons.”

The full article is available here.


Regulator Information

Abbreviation: CFTC
Jurisdiction: USA

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