In the latest installment of the GCFP Distinguished Speaker Series, Jack Brennan, Chairman of the Financial Industry Regulatory Authority (FINRA) Board of Governors, discussed the role of private-sector regulation in a packed room at MIT Sloan on December 1. The former CEO and Chair of The Vanguard Group delivered a riveting lecture for the first half of the hour-long event before shifting to a Q&A session with the audience.
A self-described “free market guy,” Brennan acknowledged the surprising position in which he now finds himself of being a regulator. However, he was quick to say that he finds the experience deeply gratifying. Brennan believes that much of what makes the United States’ market extraordinary, now and historically, is the role of private sector regulation. He cited the self-regulation of the New York Stock Exchange, in existence since 1792, as an example of the tradition of non-governmental regulation that has spanned this country’s history.
Continuing with the historical perspective, Brennan analogized the fluid level of financial regulation in the U.S. to a swinging pendulum. Although the ideal level would be somewhere in the middle, regulation tends to drift toward too much or too little. Under-regulation has historically resulted in crises, which then prompt a sharp spike in regulation; but over-regulation incites backlash, which in turn drives regulation down below the optimal level.
An advantage of private sector regulators over the public sector, Brennan explained, is that the individuals in those positions tend to stay put longer. The extra experience not only affords additional perspective but also crucially supports the development of relationships within the industry that matter so much. Brennan lauded these “regulatory patriots,” people in the private sector who dedicate their lives to transparency and investor protection. He highlighted their unique brand of engagement, which allows them to be informed but not influenced by how their constituents are affected by regulations, as a significant distinction of private sector regulators like FINRA from regulators in government.
In typical MIT fashion, audience members were prepared with a bevy of thoughtful questions, many of which touched on expectations for the future. One attendee asked Brennan if he thought the market could ever exist without government regulation, or if not, why not. Brennan smiled and replied with two words: “Human nature.”