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Can’t we just ask the regulator?: Difference between revisions
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{{a|devil|{{image|Conundrum with Whiteboard|png|“Conundrum with Whiteboard”. {{vsr|1995}}}}}}{{smallcaps|It is well-known}} and widely reported that regulations have grown in scope, density, interrelation and complication since those mad, dreamy Eighties days when rules were for birds and the Randian spirit of Aleister Crowley was the dominant fingerpost showing the way to the future: | {{a|devil|{{image|Conundrum with Whiteboard|png|“Conundrum with Whiteboard”. {{vsr|1995}}}}}}{{smallcaps|It is well-known}} and widely reported that regulations have grown in scope, density, interrelation and complication since those mad, dreamy Eighties days when rules were for birds and the Randian spirit of Aleister Crowley was the dominant fingerpost showing the way to the future: | ||
“''Do what thou wilt shall be the whole of the Law''”. | {{Quote|“''Do what thou wilt shall be the whole of the Law''”.}} | ||
Modern finance was once unexplored: broken-fenced frontiers everywhere you looked, and you were free to wander the hinterland, scalping unwitting customers — “ripping customers’ faces off” was the vogue term — unrestrained by official hand. | Modern finance was once unexplored: broken-fenced frontiers everywhere you looked, and you were free to wander the hinterland, scalping unwitting customers — “ripping customers’ faces off” was the vogue term — unrestrained by official hand. | ||
This, contemporary [[thought leader]]<nowiki/>s believed, was best for everyone, in the long run. “Government is not the solution to our problem; government ''is'' the problem,” Ronald Reagan once famously put it. Javier Milei {{Plainlink|https://www.weforum.org/events/world-economic-forum-annual-meeting-2024/sessions/special-address-by-javier-milei-president-of-argentina/|did again — without attribution — at the WEF in 2024}}, but he feels like a man out of time. | This, contemporary [[thought leader]]<nowiki/>s believed, was best for everyone, in the long run. “Government is not the solution to our problem; government ''is'' the problem,” Ronald Reagan once famously put it. Javier Milei {{Plainlink|https://www.weforum.org/events/world-economic-forum-annual-meeting-2024/sessions/special-address-by-javier-milei-president-of-argentina/|did again — without attribution — at the WEF in 2024}}, but he feels like a man out of time. | ||
For in recent times — President Milei’s remarks notwithstanding — this carefree impulse has fallen on stony ground. Of course it has: to survive its auto-destruction, any new programme must self-organise: its founding spirit of optimistic anarchy will resolve into well-meant, gentle governance which, in time, will | For in recent times — President Milei’s remarks notwithstanding — this carefree impulse has fallen on stony ground. Of course it has: to survive its auto-destruction, any new programme must self-organise: its founding spirit of optimistic anarchy will resolve into well-meant, gentle governance which, in time, will freeze into an impenetrable tundra of rules, etiquettes and ways of behaving, all loosely [[calculated]] to maintain and strengthen the [[power structure]] as it emerges around the programme. | ||
This happened to the nineteen-fifties, to rock ’n’ roll, to the internet, it’s happening to crypto right now and, if Skynet doesn’t happen first, it will happen to AI before long. | This happened to the nineteen-fifties, to rock ’n’ roll, to the internet, it’s happening to crypto right now and, if Skynet doesn’t happen first, it will happen to [[AI]] before long. | ||
The financial markets are the same, only on a loop: the free-wheeling 1920s gave way, via the shock of the Great Depression, to sober, careful regulation. From there a mid-century of cold war in the East and warm steady growth in the West gave way to libertine laissez-faire | The financial markets are the same, only on a loop: the free-wheeling 1920s gave way, via the shock of the Great Depression, to sober, careful regulation. From there a mid-century of cold war in the East and warm steady growth in the West gave way to the libertine laissez-faire eighties, the [[The End of History and the Last Man|End of History]] itself in the nineties, and that decayed into late-stage freewheeling techno-anarchy in the noughties. | ||
Twenty years on we are all technocrats now: a freedom that once seemed hopeful and elegant now seems barbaric in its simplicity. We have become inured to the idea that, because it can be, our every financial impulse should be minutely monitored, reported, and ''regulated''. An industrial estate has taken root around this business of ''administering'' things. | It all fetched up, back where it started, upon the rocks of the [[Global Financial Crisis]], whereupon the cycle began again. Detailed, rules-based regulation was back in style. | ||
Twenty years on, [[We are all Keynesians now|we are all technocrats now]]: a freedom that once seemed hopeful and elegant now seems barbaric in its simplicity. We have become inured to the idea that, because it can be, our every financial impulse should be minutely monitored, reported, and ''regulated''. An industrial estate has taken root around this business of ''administering'' things. | |||
===The theory=== | ===The theory=== | ||
And that is fine. Being a pragmatist, it is not the [[Jolly Contrarian|JC]]’s motive to take sides in the cosmic debate: rather, to say, however heavily we frame our rules, good governance and our well-rehearsed imperative of juridical [[certainty]] requires them to be as plain, clear and actionable as they can be. The world is [[Certainty|uncertain]] and [[Complexity|non-linear]] enough: the guardrails we erect to protect each other from it should not be. We should not be left in doubt what we can and cannot do. | And that is fine. Being a pragmatist, it is not the [[Jolly Contrarian|JC]]’s motive to take sides in the cosmic debate: rather, to say, however heavily we frame our rules, good governance and our well-rehearsed imperative of juridical [[certainty]] requires them to be as plain, clear and actionable as they can be. The world is [[Certainty|uncertain]] and [[Complexity|non-linear]] enough: the guardrails we erect to protect each other from it should not be. We should not be left in doubt what we can and cannot do. | ||
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Sure, regulators purport to render their rules in plain English, but often by way of aspiration rather than outcome. And, at the end of the day, if regulations ''are'' confusing the market, whether or not regulators believe it, this is reason enough to clarify them. If you can’t just rewrite them — a continually morphing regulatory textscape would be worse even than static rules no one understands — a regulator should at least be prepared to clarify and issue binding guidance about what its own rules to mean and how it intends to enforce them. | Sure, regulators purport to render their rules in plain English, but often by way of aspiration rather than outcome. And, at the end of the day, if regulations ''are'' confusing the market, whether or not regulators believe it, this is reason enough to clarify them. If you can’t just rewrite them — a continually morphing regulatory textscape would be worse even than static rules no one understands — a regulator should at least be prepared to clarify and issue binding guidance about what its own rules to mean and how it intends to enforce them. | ||
Continental tax authorities occasionally issue tax rulings. The SEC has been known to issue the odd “no-action letter”, more by way of forbearance from enforcement | Continental tax authorities occasionally issue tax rulings. The SEC has been known to issue the odd “no-action letter”, more by way of forbearance from enforcement than enduring interpretation of its rules, though one eventually crystallises into the other. | ||
But these are exceptions. This is not, in the Anglo-Saxon markets, the done thing. There are no [[Bright-line test|bright lines]], after all. It is as if regulators are keeping the option to retrospectively smack down the regulated to suit the political climate. Perhaps | But these are exceptions. This is not, in the Anglo-Saxon markets, the done thing. There are no [[Bright-line test|bright lines]], after all. It is as if regulators are keeping the option to retrospectively smack down the regulated to suit the political climate. Perhaps they fear the [[precedent]] an erroneous ruling night create: their own staff — as prone to budget cuts, downskilling and outsourcing as the rest of us — might have no better idea what the rules are meant to mean than we do. | ||
Perhaps the underfunded gamekeeper fears the poacher’s skill in finding loopholes and running around the spirit in which the rules were put in place. | Perhaps the underfunded gamekeeper fears the poacher’s skill in finding loopholes and running around the spirit in which the rules were put in place. | ||
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In any case, regulators will not generally tell you what they think their rules mean. On your own head be it. We think this is a pity. | In any case, regulators will not generally tell you what they think their rules mean. On your own head be it. We think this is a pity. | ||
== JPMorgan, the NDA and the | Announcing ''after the fact'' what regulations mean and then prosecuting historical violations is, in essence, [[retrospective legislation]]. | ||
It also creates poor incentives all round. It ''encourages'' regulators to create ambiguous regulation — as you say, this gives them [[plausible deniability]] should their subjects find loopholes — and it intermediates and institutionalises the [[advisory-industrial complex]]. | |||
An environment where merchants need professional advice to carry out [[Business as usual|their day-to-day business]] ''just to protect them from breaking the law'' is not working properly. Financial services, being concerned with lending colossal sums of money, has no shortage of call for lawyers already. | |||
== JPMorgan, the NDA and the whistle-blowers == | |||
In related news we hear that, in January 2024, JPMorgan agreed to pay the [[SEC]] a US$18m fine for signing [[confidentiality agreement]]s that violated Rule 21F-17(a) of the [[Securities Exchange Act of 1934]]. | In related news we hear that, in January 2024, JPMorgan agreed to pay the [[SEC]] a US$18m fine for signing [[confidentiality agreement]]s that violated Rule 21F-17(a) of the [[Securities Exchange Act of 1934]]. | ||
This rule says no-one may not stifle | This rule says no-one may not stifle “whistle-blowers”: citizens who wish to give the [[Securities and Exchange Commission|SEC]] information about possible securities law violations. Where this leads to conviction, whistle-blowers stand to be rewarded. | ||
The settlement doesn’t seem to suggest that JPMorgan intended to, or actually did, use its NDAs to prevent anyone reporting securities violations. To the contrary, JPMorgan seems to have been rather good about self-reporting, whenever the need arose. Nor does the SEC allege anything ''was'' concealed from it. Rather, it is the [[The dog in the night time|dog in the night-time]]: since JPMorgan’s confidentiality agreements ''might'' have had that effect, or ''might'' have been used this way, the SEC [[Unknown unknown|can not now know what it does not know]]. | The settlement doesn’t seem to suggest that JPMorgan intended to, or actually did, use its NDAs to prevent anyone reporting securities violations. To the contrary, JPMorgan seems to have been rather good about self-reporting, whenever the need arose. Nor does the SEC allege anything ''was'' concealed from it. Rather, it is the [[The dog in the night time|dog in the night-time]]: since JPMorgan’s confidentiality agreements ''might'' have had that effect, or ''might'' have been used this way, the SEC [[Unknown unknown|can not now know what it does not know]]. | ||
That an NDA ''might'' have a “chilling effect” on a | That an NDA ''might'' have a “chilling effect” on a whistle-blower was enough of a pretext for the SEC to extract US$18m from JPMorgan. The threat of further action seems to have been enough of a pretext for JPM to just pay up. This all seems rather unfortunate for the rest of the market. | ||
Firstly, be assured a wholesale re-engineering of the confidentiality agreement standard will shortly descend on us. NDAs are plenty long enough already: this will not make them shorter. | Firstly, be assured a wholesale re-engineering of the confidentiality agreement standard will shortly descend on us. NDAs are plenty long enough already: this will not make them shorter. | ||
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So, firstly, JPMorgan is being fined, basically, for agreeing to a pretty standard NDA. | So, firstly, JPMorgan is being fined, basically, for agreeing to a pretty standard NDA. | ||
Secondly — a point Matt Levine makes with typical brio — is that this means that a securities law violation you can blow your whistle about — and be rewarded for under the | Secondly — a point Matt Levine makes with typical brio — is that this means that a securities law violation you can blow your whistle about — and be rewarded for under the whistle-blowing programme — is ''the very existence of a non-compliant NDA itself''. | ||
The NDA contravenes Rule 21F-17(a), after all. That is a violation of a securities law. You stand to gain by reporting it, in ostensible breach of its terms. | The NDA contravenes Rule 21F-17(a), after all. That is a violation of a securities law. You stand to gain by reporting it, in ostensible breach of its terms. | ||
But as above, in as much as they cleave to the market standard of only permitting disclosure to regulators when asked, ''all'' standard NDAs breach Rule 21F-17(a). Not because | But as above, in as much as they cleave to the market standard of only permitting disclosure to regulators when asked, ''all'' standard NDAs breach Rule 21F-17(a). Not because the market means to chill whistle-blowers, but because this ''never occurred'' to anyone before. | ||
It would be interesting to know who planted the idea of this enforcement in the SEC caseworker’s head. We have all heard of lawyers chasing ambulances: here is the stranger case of an ambulance chasing lawyers. | It would be interesting to know who planted the idea of this enforcement in the SEC caseworker’s head. We have all heard of lawyers chasing ambulances: here is the stranger case of an ambulance chasing lawyers. | ||
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In another disturbing facet of US justice administration, JPMorgan has agreed to the settlement, a ''civil'' prosecution — don’t titter at the back, this is a thing in America — without admission or denial of liability, no doubt taking the pragmatic view that comparatively light fine, in financial services, is a doddle against the administrative hell and regulatory stress of contesting such a charge. | In another disturbing facet of US justice administration, JPMorgan has agreed to the settlement, a ''civil'' prosecution — don’t titter at the back, this is a thing in America — without admission or denial of liability, no doubt taking the pragmatic view that comparatively light fine, in financial services, is a doddle against the administrative hell and regulatory stress of contesting such a charge. | ||
But in doing so, | But in doing so, JPMorgan has acquiesced to a bad principle, thereby enacting it upon everyone else. Is ''every'' non-disclosure agreement fair game? Will there be a range of swingeing fines against other [[Broker|brokers]]? Would it change your answer if those made to sign such agreements had a direct financial incentive to shop their brokers to the SEC? | ||
Expect a flurry of activity in the NDA space, even repapering ones already executed, and — inevitably — the lengthening of an already tedious symbolic ritual. | Expect a flurry of activity in the NDA space, even repapering ones already executed, and — inevitably — the lengthening of an already tedious symbolic ritual. | ||
====What would a compliant NDA look like?==== | ====What would a compliant NDA look like?==== | ||
Here is where | Here is where a regulator’s reluctance to explain its own rules creates work for lawyers without reason. The advisory-industrial complex has just acquired another [[Ghost story|''ghost story'']]: a [[Tail event|tail-event]] risk which necessitates a four-eyes check of every NDA that goes out the door. In the prudent operation of a financial services organisation, this is nothing but sawdust in the gears. It addresses no real risk of mischief — no-one had any intention to suppress whistle-blowing in the first place, remember — and will do little to change the regulator’s attitude to {{Strike|rent|fine}} collection if, once more after the fact, it decides that whatever you put in your NDAs to cover the point still does not pass muster. | ||
If we take it as read that JPMorgan’s infraction was formal and not substantive then surely the practical thing for [[SEC]] to do would be to warn them off and issue some new guidance to the industry, ''including acceptable contract wording'': to say, as long as your NDA provides that “nothing in this agreement is intended to prevent any person reporting possible legal violations to any regulatory authority” | |||
Were the SEC to give the remainder of the market clear guidance on how to act without the ongoing intermediation of the advisory-industrial complex, [[JPMorgan]] might not have suffered in vain. | |||
{{sa}} | {{sa}} | ||