A trio of Duke scholars is spearheading a new study of capital markets modeled after the highly influential 1963 Special Study of Securities Markets. The SEC Special Study, as it is known, is credited with setting a policy agenda for both the Securities and Exchange Commission and Congress for the decades that followed.
Duke Law Professors James Cox and Lawrence Baxter, and Professor Edward Balleisen of the Department of History, convened a gathering, on June 4, of 25 lawyers, academics, and policymakers to explore the need for and possible scope of a new study of capital markets. They and their colleagues on an eight-member steering committee met with an enthusiastic response from the diverse participants at the roundtable, which was held at the Duke in Washington office. The group has now released a white paper titled, “A Second Special Study of Capital Markets: Whether, What and How?”
“The original SEC Special Study had three parts to it — a descriptive study of changes in capital markets, an evaluation of the regulatory challenges and structures, and a section addressing institutional design going forward,” explained Cox, the Brainerd Currie Professor of Law and an expert in securities law, who drafted the white paper. “It lifted the knowledge and statute of the SEC, so they understood what was going on in the markets, and then it truly set the agenda for the next two decades, bringing about changes in the law in the early 1960s and again in the 1970s. It transformed markets dramatically. We think the opportunity is ripe to have a similar influence here.”
Balleisen, who focuses his scholarship on regulation and the role of institutions, noted that the SEC Special Study, which he examined in the course of researching the history of American business fraud, had clear resonance in the wake of the 2008 global financial crisis.
“I have been struck, since the early days of the financial crisis, by some recurring themes in the commentary by knowledgeable observers of financial policy — that systemic complexity in the financial system has created powerful new risks; that the pace of technological change and innovation in financial instruments has increasingly challenged the capacity of regulators to ‘see’ key aspects of the financial system they are supposed to oversee; and that the complex balance of regulatory goals in finance shifted decisively in the last 30 years away from systemic stability and investor/consumer protection, and toward facilitation of financial innovation and sustaining the competitiveness of leading financial centers. The Special Study was a research exercise that closed an analogous (if arguably less daunting) gap in regulatory knowledge about the financial markets and their interaction with regulatory frameworks.
“This is precisely the sort of complicated analytical terrain where interdisciplinary social science research can make an enormous difference to policy formulation,” said Balleisen, a senior fellow at the Kenan Institute for Ethics.
For Baxter, who focuses his teaching and scholarly research on domestic and international banking regulation, the project is particularly intriguing in light of the increasing intersection of those activities with securities regulation.
“Securities regulation now collides with banking regulation because of the evolution of the holding company — the ‘universal banks,’” said Baxter, the William B. McGuire Professor of the Practice of Law. “Now you’ve got the Fed as a major regulator of broker-dealers, and so I’m very interested in it from that point of view. And the financial markets have evolved to the point that banks are heavily involved in securities activities, which raises all kinds of interesting questions about the appropriateness of the current regulatory structure. Is the SEC adequately equipped for the modern role it has to perform in light of huge change in the nature of financial markets since the special study in the ’60s?
“I think this could be a very profound study.”
As their white paper states, participants in the June 4 roundtable, who included lawyers, economists, congressional and agency staff, private-sector policymakers, and former regulators, agreed that “the cause of regulation and the position of regulators” would benefit greatly from a comprehensive study of capital markets.
“While dramatic changes have transpired since then posing the question whether another study should be undertaken. This question is especially timely in light of the rapid changes in capital markets resulting from advances in information technology, significant global capital flows, and such regulatory changes as [the] Graham-Leach-Bliley Act and the historic Dodd-Frank Wall Street Reform and Consumer Protection Finance Act,” dramatic changes in U.S. capital markets had prompted the study in the early 1960s, even more the white paper states.
Given, in part, the lack of public funding for their enterprise — a key difference from the 1963 SEC Special Study — and the current deep political divide over many aspects of market regulation, participants are planning, initially, to keep their study descriptive, and stimulate and develop research research through a series of conferences and symposia. They aim to map how capital markets operate and how they have evolved, and demonstrate the ways that financial institutions, different capital markets, securities, and products are now interconnected in ways they weren’t in the 1960s.
“The thought is, going forward, that this will be a dynamic mapping of the capital markets, incorporating various disciplines, that ultimately will provide a topology to help us understand markets in a true historical fashion,” said Cox, noting that participants will have the benefit of an enormous body of existing research on capital markets that will both inform and identify areas where more study is required in order to benefit regulatory policy. “If you understand and extrapolate from the forces of history, it can make for better regulation.”