Retail Securities Regulation in the Aftermath of the Bubble
Chapter in NBER book Economic Regulation and Its Reform: What Have We Learned? (2014), Nancy L. Rose, editor (p. 545 - 588)
This chapter discusses regulation of the retail securities and investments industry, written for and from the perspective of an industrial organization economist. The chapter opens with a discussion of the economic size and scope of the retail securities and investments industry. It next reviews the sources of market failure that create an economic rationale for regulation, with particular focus on information imperfections that give rise to agency conflicts, and potential behavioural limits on investor processing, monitoring and oversight. After a brief overview of the laws and regulatory institutions that comprise the core of modern securities regulation, the chapter turns to four recent regulatory issues with parallels in other industries. The first is the question of price regulation versus disclosure of investment management fees, an issue of ongoing policy debate, particularly in the mutual fund sector. The second discusses the role of antitrust policy and agency regulation in disciplining firm behaviour, especially when regulatory capture may be a concern, echoing the discussion of chapter one. Next is the interplay between firm boundaries and conflicts of interest, which received prominent attention in the creation and subsequent repeal of the Glass-Steagall Act. Finally, the chapter analyzes the effects of competition when quality is not observed, and the potential role for minimum quality standards and regulatory oversight in this setting. The conclusion highlights the recurring role that the market and regulatory failures it describes play in financial market failures, including the 2008 financial crisis.
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