Statistics and pundits—those oft-maligned liars—share the same stories: we are more highly regulated than ever before. While the Federal Register has hovered around 80,000 pages per year, the Code of Federal Regulations has added nearly 45,000 pages since 2010. Unsurprisingly, confusion abounds in this tangled web of regulations. Imagine a simple regulatory “sandbox,” having four corners in which you can play (that is, legal spots in which companies can operate). Facing regulation from as many as 12 bodies (and often more!), how can the average financial services broker find a safe spot to play in a sandbox that now has 3,972 sides?
We conducted a lexical analysis of financial service regulatory rulebooks to see where they rank on a spectrum from simplicity to cross-rule complexity. After removing basic words (like “the”, “a”, etc.), we tested for the number of unique words, with more unique words indicating greater clarity. The results were not surprising:
Admittedly, the Exchanges’ rulebooks that show the highest level of simplicity were calculated based on trade practice rules. Nonetheless, all calculations were done on a ratio basis. The higher the number, the smaller the regulatory sandbox. In other words, the higher percentages mean a higher degree of certainty and, thus, a higher ability of customers to manage their compliance risk.
The certainty of a smaller sandbox means lower regulatory costs for companies—a result that is clearly better for everyone.