“If you have 10,000 regulations, you destroy all respect for the law.” —Winston Churchill
One thing is certain: The growth in the number of laws and regulations is staggering, and this growth—not only in depth of rules, but breadth of rules—tends to overlook the notion that their purpose is to curb bad behavior. A nearly 100-year-old distinction in antitrust law offers us two useful types of legal doctrine to analyze the types of rules: (1) Per Se, and (2) Rule of Reason. The former is the equivalent of a strict ban, while the latter allows for carve-outs and exceptions. (It’s no wonder that larger corporations prefer the latter: they have the scale necessary to compete.)
Rules and regulations that are constructed with more carve-outs create an implicit regulatory tax with which only larger institutions can compete. These discrepancies aren’t always intentional by regulators—and occasionally, they’re even the result of good intentions. Regulation is a necessary component of a properly functioning market: it outlines the boundaries of the sandbox so that all parties are properly informed. Moving towards per se methods of regulation more clearly defines the boundaries, but this isn’t the direction that the rules have been heading.
Our contemporary problem isn’t necessarily a result of the level of complexity or style, but rather the frightening depth of regulation that often detaches the rules from the purpose or very law itself. Instead of writing clean, easy-to-understand rules and regulations and updating them as necessary, regulators turn to burying changes and new components in interpretations. While this may be a byproduct of lengthy and difficult legislative processes, those processes exist to protect the market from over-burdensome regulation and over-active regulators.
A prime example is the Volcker Rule. Largely expected to re-install the structural protections that were part of the 37-page Glass-Steagall Act (which prohibited commercial banks from engaging in the investment business), the Volcker rule comprised more than 900 pages when published. This creates barriers to entering the market and hurts financial institutions by significantly increasing their costs. Instead of the rule of reason approach with various carve-outs, exceptions, and confusion, we should adopt the per se approach to writing rules: simple, clear, bright-line regulation.
Another example comes from our own experience reviewing a variety of regulations and—importantly—their sources. In 2016, we found Enforcement Actions from a self-regulatory organization that cited the Q&A section from guidance documents as the authority on which they are prosecuting. Now, there are five ways a corporation could get fined, as illustrated below. Isn’t it anti-ethical to prosecute any party, in any format, on anything other than a published rule?
Clearly, the inefficiency and improper usage of non-rules adds significant cost. So how do we fix this?
- First, regulators should be upfront about the rules and include all relevant information in the (simple!) rule itself. This means placing all liability in the rules themselves, not buried in Q&A and interpretive notices.
- Second, regulators should proactively add and subtract rules to address market harm and consolidate existing rules wherever possible.
- Third, it is imperative that regulators write cleaner and more complete rules, rather than carving out exceptions that even the biggest players struggle to navigate.
- Finally, and most importantly, regulators should embrace the per se style of drafting: clear rules and structures should be preferred over difficult, dense, and exception-riddled rules that only cause confusion, unintentional violations, and costs for all parties.
Until these changes take place, companies will continue to struggle with compliance—and this struggle drives Ascent’s mission. We know that technology can help to equalize the playing field, and we’re working to build solutions that simplify compliance so you can get back to business.