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3 Harv. Bus. L. Rev. Online 1 (2012-2013)

handle is hein.journals/hblro3 and id is 1 raw text is: COMPLEXITY OF REGULATION Chester S. Syattt It is a great pleasure to provide keynote remarks at this weekend's conference on Complexity and Change in Financial Regulation at the Harvard Law School. In my comments tonight I will try to build from my experiences as a former Chief Economist of the U.S. Securities and Exchange Commission (SEC) from 2004 through 2007 and as a close observer of the evolution of financial regulation in the aftermath of the financial crisis to focus upon the Complexity of Regulation. While our financial system is itself very complex, our financial regulators would benefit in many cases by designing simple and robust approaches that build off of basic principles and that emphasize the role and importance of economic incentives and markets. While I recognize that to some degree complexity in financial structure breeds complexity in regulation, often the causality is reversed. Complexity in regulation leads to complexity in financial structures and systems, particularly in light of the efforts of market participants to mitigate the costs and complications induced by regulation, including attempts to engage in regulatory arbitrage. Consequently, much of the costs of regulation in my view are associated with its intricacies. It also is useful to recognize that complexity in regulation leads to huge entry barriers associated with the cost of regulatory compliance. Instead of addressing too big to fail, this can lead to maintaining too big to fail institutions. This is a connection that appears to be underappreciated by our financial regulators. Given these broad perspectives, you might not be surprised to hear that I feel that the extent of complexity in financial regulation has been, to a degree, excessive. For example, regulators often would do far better in accomplishing their regulatory goals by adapting relatively simple standards and principles that force market participants to internalize the consequences of their actions. Economic principles emphasize the importance and power of relatively robust Chester S. Spatt is the Pamela R. and Kenneth B. Dunn Professor of Finance at the Tepper School of Business at Carnegie Mellon University, where he has been a faculty member since 1979. Professor Spatt also served as the Chief Economist of the U.S. Securities and Exchange Commission in Washington, D.C. from July 2004 until July 2007. He gratefully acknowledges financial support from the Sloan Foundation.

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