It’s the “magic mix” of public and private regulatory infrastructure that gives the United States the deepest and most trusted capital markets in the world, said John J. Brennan, the former CEO and chairman of The Vanguard Group. Brennan spoke as part of the Golub Center for Finance and Policy Distinguished Speaker Series at MIT Sloan Dec. 1.
Unlike in many other countries, where the government regulates the financial markets on its own, the United States has had a tradition of private sector involvement since the development of the New York Stock Exchange in 1792, said Brennan, who heads the Board of Governors of the Financial Industry Regulatory Authority, which is the regulator for all broker-dealers and stockbrokers in the United States. FINRA, authorized by Congress, is a private, nonprofit organization that works in conjunction with the Securities and Exchange Commission. Brennan is also the former chairman of the Financial Accounting Foundation, a public-private entity that oversees financial reporting standards.
This private sector oversight, which is complemented by governmental regulation, is vital to both market function and investor protection, Brennan said.
“The commonality among the Financial Accounting Foundation and FINRA is that they both have a single point of focus—what’s best for the investors. Not what’s best for my constituents in a voting bloc,” Brennan said.
The regulatory pendulum During periods of heavy regulation, Brennan said, returns on capital can be depressed and entrepreneurship may be stifled. But when the pendulum swings back, loose regulations can result in crises such as the dot-com bubble of the late 1990s and the global financial crisis of 2008.
In response to the 2008 crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010. The controversial legislation is not yet fully implemented, but critics have called for its repeal, and its future is uncertain under incoming president Donald Trump. Brennan said he supports amending Dodd-Frank, because although the act is not perfect, there’s still “a lot of good in it.”
“We are in the midst of a change in government in the United States … a change in philosophies about a lot of different things,” Brennan said. Will the mix of private and public sector regulation still work? “You bet,” he said.