With A Grain of Salt!: US Treasury invites responses on improvements to the US Capital Markets regulation - Sent Using Google Toolbar

With A Grain of Salt!: US Treasury invites responses on improvements to the US Capital Markets regulation

US Treasury invites responses on improvements to the US Capital Markets regulation

Financial and economic laws and regulations provide the rules of the game. It is the game of accepting, giving and managing money. And if the rules aren't good or fit for purpose, then people will take their ball and go play somewhere else where the rules are good. Basically speaking, a regulatory framework is considered to be "good" if it provides an optimal mix of consumer protection, financial institution oversight and management, not too much bureaucracy, allows people to raise and deposit funds effectively and efficiently, etc. The American Capital Markets Regulatory System was rated to be one of the best in the world but is now showing its age. So the US Treasury has invited responses to 30 questions raised about the current state of US regulation. Here are my thoughts on this interesting step.

I have already talked about this issue here in much broader terms, but suffice to say, the US legal system pertaining to the capital markets is now showing signs of strain. It is high time that it was made fit for purpose and in a better shape to respond to rapidly changing financial markets of the future. I reiterate, this is just my personal opinion. This essay has nothing to do with my employers (either past, current or future). This is also not part of any investment advice. Do NOT take this seriously or your armpit hair will fall out.

Ok, now that we have that out of the way, I have to admit that this is one of the things which I like about western economies and that is its ability to learn, regroup, ask silly questions, consult widely, debate, discuss and change direction. This continuous improvement, a constant search for betterment and improvement is what feels good in terms of aiming for the betterment of humankind. So, the US Treasury knows that the economic and financial legal structure has been established over decades and centuries. And as usual, times have moved on and while there has been a valiant effort to keep up, mistakes have been made and there is now a deep seated concern in the corridors of power and finance that something needs to be done.

As I mentioned, the world financial markets are getting increasingly linked together as evidenced by the increased correlation between the world's equity market indices. More importantly, the world financial system is getting further and further atomised. In other words, the old familiar structure and ways of working are disappearing or morphing into new animals. In the 1980's, London went through the "Big Bang", immediately sweeping away the decades old structures and ways of doing business. Quarter of a century later, all the old British Merchant Banks have disappeared into the ether. Japanese Banks came up very strong during that time and people were worried about Japan taking over the financial world and now they have re-trenched right back. Nobody could have imagined that a Chinese bank could make a pitch for an American Investment Bank or become primary shareholder in a major British Commercial Bank but it has happened now. Morgan Stanley (a large US investment bank) had 2 international offices in early 1980's but now has more than 45 dotted around the world.

The US economy is still the largest powerhouse, with a huge equity and risk taking culture. Which is one of the reasons why its equity markets are so good. It also has a large rich population. It also has very good financial institutions. It also has very smart fellows running its institutions. And it believes in creative destruction. Institutions and individuals go bankrupt, merge, demerge, acquire, divest, you name it. This provides the churn, money follows to where it earns the most and where it doesn't, it is killed off rapidly. And for a long time, the domestic regulatory system was good enough to manage this as most of the financial transactions were developed, managed and settled internally.

But with the increase in imports and exports, international business, footloose professionals, ability to raise money anywhere, money coming in and out with ease (no capital controls), the regulatory system is not really good. The current rules based approach means that everything has to have a rule. Which means that given the complex society, there are zillions of rules and lawyers have fun in skirting around or bending the rules. Not good. It is not providing good consumer protection, it is making life very difficult for the financial institutions in terms of administration, regulation is fragmented between different bodies, cannot keep up with new fangled instruments which are traded across the world on a real time basis. It is not able to handle the financial institutions which have grown into behemoths straddling the globe and the financial natives are restless.

So the US Treasury is asking some very basic questions, such as

  • Does the "functional" regulatory framework under which banking, securities, insurance, and futures are primarily regulated by respective functional regulators lead to inefficiencies in the provision of financial services?
  • Many countries have moved towards creating a single financial market regulator, some countries have adopted a twin peaks model of regulation, separating prudential safety and soundness regulation and conduct-of-business regulation. What are the strengths and weaknesses of these structural approaches and their applicability in the United States? What ideas can be gleaned from these structures that would improve U.S. capital market competitiveness?
  • In recent years, debate has emerged about "more efficient" regulation and the possibility of adopting a "principles-based" approach to regulation, rather than a "rules-based" approach. Others suggest that a proper balance between the two is essential. What are the strengths, weaknesses and feasibility of such approaches, and could a more "principles-based" approach improve U.S. competitiveness?
  • Does the current regulatory structure adequately address consumer or investor protection issues? If not, how could we improve our current regulatory structure to address these issues?

And some specific questions such as

  • Securities and Futures
    • Is there a continued rationale for distinguishing between securities and futures products and their respective intermediaries?
    • Is there a continued rationale for having separate regulators for these types of financial products and institutions?
  • What is the key consumer/investor protection elements associated with products offered by securities and futures firms? Should there be a regulatory distinction among retail, institutional, wholesale, commercial, and hedging customers?

The answers are pretty much self evident, I am afraid. The current capital markets structure where different regulators look after different bits of financial sectors is no longer appropriate. There are way too many firms which straddle the boundaries, there are way too many products which straddle the boundaries and there are way too many customers who straddle states and countries. Distributed regulatory bodies such as this is a recipe for disaster. It has to be clearly fitted into an overall structure reporting into the representatives of the people in the legislature, run by the executive and checked by the judiciary.

Whether you go for a single regulator (like the UK) or break it up into two (like the Netherlands), does not really matter to that extent as long as the responsibilities and accountability is CLEAR AND TRANSPARENT between the bits and the political masters. Also, in cases of crisis, it should be clear who is to be contacted for what and who makes the decision (learn from the UK Northern Rock Crisis where nobody was responsible and the British Prime Minister Gordon Brown hid under his desk – bloody typical!).

I do not like rules based regulation at all. More rules the more rule breakers and then there are more rules and so on and so forth. Not good. And this is a classic way of trying to control everything and failing to do any controlling. So have principles and manage by exception. So if you are interested to make sure that the consumers are protected, say so cleanly. You will not lie, you will not bullshit, you will not over-promise, you will say clearly what are the risks, the returns and the administration involved. That's it. You don't have to sit there and write a 20 volume law rule book explaining in gruesome detail how, what, where, when, who of every financial product, consumer, place, time, event, etc. etc. We do have great precedents, look at the Ashok Code or the Hammurabi Code or the 10 Commandments. The best examples of principles based regulation. If the lawyers complain, tell them that every lawyer has to actually carve every rule they come up with into stone with their own hands using a chisel. I think that would cut down the rules dramatically, don't you think?

Two last comments. The first is that the regulation should not concentrate on product differentiation between futures and securities. That's the thin end of the wedge of trying to regulate products. I mean futures and insurance are conceptually the same. What's the big point in having 2 different regulators looking after this? Insurance has already merged heavily into futures and vice versa in the real life anyway. So instead of looking at the products, regulate what they will be used for. So the regulation should concentrate on making sure that the sellers explain each product based upon common standards and metrics. These can be age or tenure; the return based upon a common measure; the probability of loss based upon historical measures, etc.

And the last comment is that individual rights are paramount. So you need to make sure that you distinguish between different classes of consumers as well as made it very clear and transparent as to how people can switch between classes. Now you would ask, how do I distinguish between classes? Well, it is simple, look at the body. If the body is a warm one, then it is a private human customer. If it is an entry in the Companies House, then it is a company. In the interests of efficiency, you could split up the companies into basic companies (small and medium scale companies) who require much more hand-holding and protection versus bigger or firms who might want to give up protection for greater return. So three blocks, retail consumers, basic commercial firms, advanced commercial firms.

If I had to boil down the zillions of pages of rules, regulations and everything under the sun, I would point to the commandment, "Thou shall not cheat". Pretty simple no?

All this to be taken with a grain of piquant salt!!!

New Patent Rules on Hold - Sent Using Google Toolbar

New Patent Rules on Hold

New Patent Rules on Hold
Drug Discovery & Development - November 05, 2007

New rules designed to improve patent quality and the effectiveness and efficiency of patent examination scheduled to go into effect on November 1 were delayed following a last-minute court ruling. On October 31, U.S. District Court for the Eastern District of Virginia, ruling on a complaint filed by GlaxoSmithKline, issued a preliminary injunction delaying the new rules from taking effect.

The Biotechnology Industry Organization (BIO), Pharmaceutical and Research Manufacturers of America, and the American Intellectual Property Law Association filed supporting complaints. Opponents to the rules identified key concerns:

  • The proposed rules would reduce the number of times a patent applicant could contest or amend rejected or pending patent claims. Previously, applicants could file an unlimited number of amendments or challenges, known as continuations. Under the new rules, applicants could file two continuations;  any additional challenges must include an explanation justifying the request.
  • Continuations are considered an important tool for pharmaceutical patent applicants, because new information about an invention often comes to light after the initial patent application has been filed. Many companies use continuations to delay introduction of a product, monitor market developments, and then modify their patents to take advantage of emerging trends. This information can be added to the application via a continuation, allowing the applicant to retain the original filing date.
  • The US Patent and Trademark Office (USPTO) wants to limit the number of continuations to help make the patent-application process more efficient and to reduce its massive application backlog. Continuation requests accounted for nearly 30% of all patent applications in 2006, up from 27% in 2005 and 25% in 2004, according to the office.
  • Opponents of the new rules said the rules were unclear, stifled innovation, and would make it more expensive for small companies and individual inventors to patent their inventions.

USPTO employees will continue processing and examining patent applications under the rules and procedures in effect on October 31, 2007, until further notice, according to the USPTO Web site.

More information:
Biotechnology Industry Organization 


The therapeutic effect of good vibrations - FierceBioResearcher - Biotech research, Biotechnology research, Bioinformatics - Sent Using Google Toolbar

The therapeutic effect of good vibrations - FierceBioResearcher - Biotech research, Biotechnology research, Bioinformatics

Working on the theory that bones respond best to low magnitude, high frequency 'signals,' researchers at the Center for Biotechnology, State University of New York at Stony Brook have completed an animal study that suggests that placing mice on a buzzing platform for 15 minutes a day caused them to lose a significant amount of weight while improving bone structure. Their theory--which will now best tested in a federally funded study on elderly humans--is that the precursor cells of fat are turned into bone. They reached this conclusion despite a huge amount of professional skepticism that this kind of therapy could produce these results. So far, though, mice, sheep and turkeys have all experienced bone growth after sessions spent on a vibrating platform. Bone loss is a major health issue for the elderly. People lose two percent of their bone each decade past the age of 35.

- check out the article from The New York Times


SSRN-A Tale of Two Case Methods by Benjamin Barton - Sent Using Google Toolbar

SSRN-A Tale of Two Case Methods by Benjamin Barton

A Tale of Two Case Methods

University of Tennessee College of Law

Tennessee Law Review, Vol. 75, No. 3, 2008

This essay argues that law schools should adopt the business school case method. Business school cases are generally real life problems. They ask the students to read the files and then perform actual management tasks. The students also generally work in teams and are graded on their actual work throughout the semester. The students thus spend their time learning how to actually manage, instead of only learning dry management theory.

There are several advantages to the business school case method. The business school case method is much more focused on the actual process of being a business manager. By comparison, the law school case method focuses on the work of judges, not lawyers.

The team aspect of business schools is also preferable to traditional law school classes. Some lawyers practice solo, but a majority work in groups, and working on a team is a necessary (and largely untaught) legal skill.

Business schools also give students more regular feedback on their work, because each project/case is graded along the way. Business school grading is also much more rational than law school grading (and better approximates the experiences of MBA students when they graduate). This is because MBA students are graded on the strength of their actual work, not a single exam at the end of the semester. In sum, trading case methods with MBA programs might vastly improve the first year, and legal education as a whole.

Keywords: business school case method, law school teaching
Accepted Paper Series

Suggested Citation
Barton, Benjamin, "A Tale of Two Case Methods" . Tennessee Law Review, Vol. 75, No. 3, 2008 Available at SSRN: http://ssrn.com/abstract=1021306

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Contact Information for BENJAMIN BARTON (Contact Author)

Email address for BENJAMIN BARTON
University of Tennessee College of Law
1505 West Cumberland Avenue
Knoxville , TN 37996
United States