Will Over-Regulation Hamstring U.S. Competitive Advantage?

For decades, American presidents from both sides of the political aisle have steadily relaxed regulations governing areas from pollution to finance.

But as the U.S. faces its worst economy since the Great Depression—and with a new president who champions a stepped-up role for government—President Obama’s administration appears poised to move aggressively on a number of fronts: from reigning in the finance segment—including the formerly nearly ungoverned hedge fund market, to embracing new strategies to cut emissions.

A bigger dose of regulation may indeed be in order, say faculty from Emory University and its Goizueta Business School. But they also caution that heavy-handed oversight could pose fresh threats to financial institutions and to other struggling industries.

A new direction for regulation

”From Ronald Reagan onward, the general movement was in the direction of less government regulation,” observes William W. Buzbee, a professor of law at Emory’s School of Law and director of the institution’s Environmental and Natural Resources Law Program. “We will see more regulation under President Obama, but it took a long time for the economy to weaken, and it will take a long time to develop and implement the tighter rules.”

Financial institutions in particular will have to get used to the idea of more oversight, according to Buzbee.

“Many banks went over the edge when it came to overly liberal mortgage lending and exotic mortgage-linked securities, while hedge funds gambled too much on derivatives and other investment instruments,” he says. “The collapse of many companies has increased the momentum to reign in excesses.”

U.S. Treasury Secretary Timothy Geithner struck a similar note in his late-March written testimony to the House Financial Services Committee.

“The crisis of the past 18 months has exposed critical gaps and weaknesses in our regulatory system,” said Geithner. “As risks built up, internal risk management systems, rating agencies and regulators simply did not understand or address critical behaviors until they had already resulted in catastrophic losses. This crisis has made clear that certain large, interconnected firms and markets need to be under a more consistent, and more conservative regulatory regime.”

During his first few months in office, much of Obama’s attention has been focused on economic challenges. But during the presidential campaign, Obama also addressed environmental, healthcare and other issues. Buzbee thinks those issues will not stay sidelined very long.

“The recession has slowed the momentum for legislation targeting climate change,” he says. “Also, to make people pay for greenhouse gas emissions and encourage use of alternative energy sources could raise prices in the short-term, so those efforts too are on a slower track right now. But Obama is not likely to drop them from his agenda.”

In fact, says Buzbee, although industry lobbyists have already mounted a strong push against increased environmental and financial regulation, Obama is likely to get strong public support for some of the changes.

“The recent national recall of peanut products due to salmonella contamination concerns has a lot of people worried,” explains Buzbee. “So the support is there for expanded federal Food and Drug Administration activity. Also, the high number of Americans without health insurance—and the heavy costs to business under our current system—is likely to generate support for new legislation on that front.”


How far does Obama’s mandate go?

Obama may have a clear mandate for change, particularly when it comes to the financial industry, but will he go too far and make U.S. institutions less competitive?

“There is some concern that the administration is using the bank bailout as an excuse to dictate too much to the industry,” according to Narasimhan Jegadeesh, a chaired professor of finance at Emory University’s Goizueta Business School. “The salary restrictions and the prohibitions on hiring H-1B visa holders [both imposed on banks that received Troubled Asset Relief Program, or TARP funds], make some banks jump through very strict hoops and could end up damaging their ability to compete in a difficult market.”

Jegadeesh is quick to point out, however, that he’s not condemning any additional regulation. Instead, it’s a matter of degrees.

“Some enhanced oversight would not hurt,” he says. “For example, perhaps there should be restrictions on insured assets—like accounts that are covered by the Federal Deposit Insurance Corp—that prevent banks from investing them in risky securities.”

Hedge funds may also be subject to more rules—or at least more transparency, according to Treasury Secretary Geithner.

In the wake of the Bernard Madoff pyramid scheme, “it is clear that, in order to protect investors, we must close gaps and weaknesses in regulation of investment advisors and the funds they manage,” noted Geithner.

“Hedge fund investments are usually limited to wealthy people who should be sophisticated enough to take care of themselves,” says Jegadeesh. “But it would not hurt to require more disclosure, particularly about risk exposures. It’s still too early to determine how far the Obama administration will take regulation, but there is a general concern that restrictions in general can tie industries’ hands and weaken their competitive advantage.”

One concern is that the government may impose heavy regulation on the “low hanging fruit,” or easily visible targets like hedge funds, according to Kevin M. Crowley, an adjunct lecturer of finance at Goizueta.

“Some activity, like credit swaps, collateralized debt obligations and other derivatives that are not very transparent and that were traded with minimal regulations, probably should be subject to greater regulation,” he says. “But plans to increase taxes on money funds’ offshore profits may go too far, and could hinder the investment activity of U.S.-based funds.”

Unintended consequences and moral hazard

In fact, some “heavy handed” government regulation is already resulting in unintended consequences, says Klaas Baks, an assistant professor of finance at Goizueta and director of the Emory Center for Alternative Investments.

“The bonus and salary restrictions placed on banks that accepted TARP money represented a fairly crude measure,” he says. “Performance-based bonuses tend to align employees’ incentives with the interests of shareholders and incidentally, with the government, too. Even if the bonuses during Wall Street’s heyday were not perfectly structured to achieve this alignment, killing these bonuses altogether eliminates the link between the parties.”

Additionally, in the long run, says Baks, “people will follow the best economic opportunities,” so the banking segment is likely to lose valuable talent.

Part of the problem with the Obama administration’s efforts is that “you can’t simply regulate away losses,” says Tarun Chordia, a chaired professor of finance at Goizueta. “The optimal level of loan losses in a bank’s portfolio is not zero.”

Chordia says he can understand the concern among the president’s advisers, but adds that research indicates too much regulation can also hurt the economy.

In addition, Chordia worries about politicizing agencies that are supposed to exercise independent judgment.

“The Federal Reserve is getting more involved in market functions [like directly lending money to Wall St. firms and purchasing some mortgage-backed securities] than it ever did before,” he says. “So far the Fed has retained its independence, but will it stay that way? Its deep involvement with markets could leave it more susceptible to political pressure.”

There is better way, according to Goizueta’s Crowley.

“In a healthy free market, capital should flow to the strongest institutions and best management teams,” he says. “When the government interferes with the free market, this process is distorted. Sick companies and weak management teams are supported, and healthy competitors and strong, prudent managers are denied growth capital.”

Some observers, for example, have argued that the federal government should have saved former Wall Street powerhouse Lehman Brothers Inc. from liquidation. But that would be the wrong move, Crowley argues.

“According to this view, we could have avoided much of the market turmoil if Lehman had been protected,” he says. “In my view, this is not clear. We really do not know what the market reaction would have been if another sick company were propped up. And any potential short-term benefit of protecting insolvent banks would be offset in the long run by a financial system that lacks the necessary market disciplines of both risk and reward. Moral hazard would increase, and institutions would continue to take out-sized risks expecting that the government would shelter them from pain.”

In general, “a heavy regulatory hand could crimp the market, causing financial distortions and creating moral hazards,” he says. “Perhaps the best approach is simply to let people pay dearly for their own sins."

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Does Your Marketing Comply? How the CAN-SPAM Changes Affect Your Company

Rismedia - On July 7, the Federal Trade Commission’s new rules for the CAN-SPAM Act of 2003 went into effect. If you are an e-mail marketer, you probably already have heard about this. But do you know exactly how those changes will affect your sending practices? To ensure you are in total compliance with the law, let’s look at the key issues of the new CAN-SPAM requirements.

If you don’t know anything about CAN-SPAM, you’re not alone. Unfortunately, 81 percent of e-mail marketers are unaware of the CAN-SPAM Act and its requirements. Here’s a quick recap: In 2004 when the law took effect, a lot of topics were unclear. It didn’t answer a lot of questions surrounding multiple senders or forward-to-a-friend. Also, industry critics were concerned that the 10-business-day rule for removing opt-out requests from a mailing list was too long. It was clear that a little tweaking would be necessary to clear up confusion among commercial e-mail marketers.

Now here we are, four years later. The new CAN-SPAM requirements clearly define “the sender,” and answer some marketers’ concerns around multiple-sender best practices. Here are the main points the new rules clarify:

- Multiple Advertisers: This is where it gets a little tricky, but stay with me. Multiple advertisers have the option of designating one person or party among them as the “CAN-SPAM sender.” This would actually work out to their advantage, as it significantly reduces the complexity of complying with the law in a joint-marketing scenario. If multiple senders do choose to do this, the “designated sender” may be the only one in the “From” line and is the only sender required to include an unsubscribe link and physical address.

In order to qualify as a sender in a multi-advertiser scenario, the law is also much more favorable now. To qualify as the “CAN-SPAM” sender, one must first be “advertising or promoting” one’s own products. Secondly, you must be an initiator of the e-mail. Only “initiators” that advertise their own product, service or Web site can qualify as a sender. After the above two conditions are met, the “From” line must show who will be the “designated sender.”

Keep in mind that this new “designated sender” rule is optional. Marketers can still have two senders in an e-mail if they want to, so that all parties are fully compliant. This is important to note, because if the “designated sender” fails to comply with the law, all other marketers in that message are now potentially liable for compliance.

- Opt-Out Process: The new requirements specify that senders cannot complicate the opt-out process. You can only require an e-mail address on the opt-out page that visitors get to when they click the “unsubscribe” link in your e-mail, and you can’t require a user to visit more than one Web page to opt out.
If you require users to log in to an account with a username and/or password to “manage their e-mail preferences” when all they want to do is unsubscribe, you’re out of compliance. If you have an opt-out survey or a five-page opt-out process designed to make your customers think twice before opting out, you are definitely not in compliance with the law. Charging a fee or requiring any information beyond their e-mail address is now strictly prohibited.

The single-page, single e-mail address form, Web-based opt-out has always been considered a best practice, and now that level of simplicity is a requirement by the law. Keep in mind that you can, however, ask for more information on the opt-out page — you just can’t require it.

One thing that did not change is the 10-day opt-out rule. The reality is that spammers do not honor opt-outs at all while legitimate marketers have not been opportunistic with the 10-business-day window, so the FTC saw no reason to shorten the time frame.

- Forward-to-a-Friend: If a marketer induces or offers an incentive to someone to forward a message, then that marketer has “initiated” that message, and full compliance with CAN-SPAM is required. This may not seem like a big deal, but it is an important clarification of this law. Full compliance means you must scrub outbound forwards that were induced or incented against your suppression list before delivering the forward. It means that an opt-out link and physical address must be included, and the “From” line should probably be the marketer rather than the individual that wants to forward the message. And to top it all off, it doesn’t matter if the forward was done inside the forwarder’s e-mail client or on your website. If the sending of the message is not procured by the advertiser, then the advertiser is not an “initiator” and can’t be held liable for CAN-SPAM compliance.

All in all, the new regulations are something that legitimate marketers should embrace, and make compliance and liability discussions easier to have. If you follow sending best practices, you may have nothing to worry about or change since the FTC’s position is well in line with the prevailing philosophy in the industry.

The one thing all marketers should check is their opt-out page. Make sure it complies with the new opt-out requirements, as that’s probably the one place where people are most out of compliance.

Whether you are starting from scratch or just ensuring you are on the right track, total compliance is in your hands.

By John Engler

John Engler is the vice president and general manager of UnsubCentral, an Austin, Tex.-based company that offers advertisers and affiliates CAN-SPAM suppression list management solutions. Posted by