September 11, 2011
September 10, 2011
Ms. Elizabeth Murphy, Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0310
Reference: File No. S7-36-11
Dear Madam Secretary:
I appreciate the opportunity to respond to the Securities and Exchange Commission's (SEC) request for comment on a proposed retrospective review of existing regulation.
"Were All Screwed How Toxic Regulation Will Crush the Free Market System" (WA Publishing, 2009) argues that the main capital market problem confronting the SEC is a lack of definitional precision relative to a one-size-fits-all (OSFA) regulatory regime. As markets mature, they become more complex. If there is complexity, there is uncertainty. Question: how do you govern uncertainty with a deterministic, OSFA regulatory regime?
The lack of precision that conflates risk and uncertainty has resulted in a troubling trend of larger and more frequent boom-bust cycles. But, why has this troubling trend kept growing? Because conflating business risk with capital market uncertainty produces unintended consequences of contingent and unforeseeable liabilities for market practitioners. Holding market participants who deal in uncertainty to the condition of determinism convey regulatory rights without attendant regulatory responsibilities. Such regulation imposes sanctions that stifle free market innovation and adaptability.
The problem is not so much with best-practice regulation codified in support of industry standards (i.e., financial industrys FLITE Model of Fairness, Liquidity, Integration, Transparency, and Efficiency), but with rule-writing,the proscriptive description of an undesirable situation. Rule-writing is ad hoc policymaking that Band-Aids over the current problem. It expects buy-in from society by describing the undesirable situation and prefacing it by saying dont do this.
Unfortunately, describing is not solving. Rule-writing enabled bad Sarbanes-Oxley rules to grow into more burdensome Dodd-Frank rules. Rule-writing in the form of one-size-fits-all (OSFA) deterministic regulatory metrics were mischaracterized as a proxy for stability where policymakers were blinded to attendant opportunities for ever smarter game-playing in the regulatory machinery. No-money down, negative cash flow, mortgage-backed securities that were marked-to-model valuations were uncertain (not risky) securities. This catastrophic AAA-mischaracterization initially foiled, and eventually froze the pricing mechanism causing systemic failure. Therefore, unless and until systemic randomness is segmented into predictable, risky, and uncertain underlying economic domains, errors of conflation will continue to thwart effective and efficient capital market governance.
Stephen A. Boyko, Chairman
N2K Ecosystems, Inc.