By Lene Powell, J.D.
In a democratic capitalist society, market regulators must not only work within economic and legal frameworks, but must also apply moral principles as well, said CFTC Chairman J. Christopher Giancarlo in remarks at Concordia College. In walking a careful line between imposing only necessary rules, yet also vigorously protecting market integrity, regulators must be fair and have “moral capital,” not take sides or favor one set of market actors over another.
“I always feel we have done our job if people welcome adjudication or agency action because they know we will be fair,” said Giancarlo in prepared remarks, “Financial Market Regulation: A Moral Framework.”
Protecting democratic capitalism. Drawing on his experience of 30 years in the private sector as well as his past four years in the federal government, Giancarlo said it was economic fact that free and competitive markets combined free enterprise, personal choice, voluntary exchange, and the legal protection of person and property form the underpinnings of broad and sustained prosperity and human advancement.
In protecting these values, Giancarlo said the Golden Rule is the foundation for civilization and regulation. Market regulators and participants must treat one another with the respect and regard they want for themselves. Market regulators must not limit economic freedom without serious justification and must solve for demonstrable problems, not mere incidents of bad behavior. Yet because freedom can be exploited to create monopoly, defraud others, and manipulate markets, regulators must put reasonable limits on market activity. Distinguishing the two must be based on careful, data driven econometric analysis and not anecdote and political expediency, said Giancarlo.
The perils of self-regulation. In acting within the limits set by Congress, regulators are not free agents or rogue actors, and must be perceived as fair and just agents, Giancarlo said. He pointed to the negative example of the British East India Company, which was a closed private corporation, serving a select few chartered members, yet which also advanced British official interests, to the point where the interests of Britain and company shareholders were often one and the same. As one historian noted, they were both regulatory body and sole operator, overseeing markets for their trade and having a virtual monopoly over them.
Self-regulating and often unaccountable to anyone other than itself, the company was both private and public, a business and quasi-governmental, observed Giancarlo. Notably, the trade involved commodities and the use of futures, long before that name was used. Haunted by secrecy, greed, and unseemly enrichment, the company ultimately failed, closing its doors in 1874.
“We have also learned over time that regulators should not run the very businesses they are regulating nor be captured by them. It is appropriate that there be a proper zone of separation between business and government,” said Giancarlo. “Self-regulation has an important role to play in developing and embracing industry best practices, but that role is different from and not a substitute for government regulation.”
Protecting market integrity. Because criminality takes away our freedom for the personal gain of the few, there must be no tolerance for fraud, deception, or manipulation in financial markets, said Giancarlo. Market regulators must maintain bulwarks against misbehavior because market integrity is essential to fostering robust trading and responsible risk taking.
In turn, free and well-ordered financial markets have the potential to make us more virtuous and better as family members, colleagues, citizens, businesspeople, market participants, and regulators, said Giancarlo. “Financial markets must be a source for human good, not exploitation.”