Economic Regulation

Economic Regulation in the United States

Economic Regulation

Introduction

According to the Encyclopedia of the American Constitution, in the field of economic policy, the composite constitutional powers of American governments federal, state, and local are extremely broad. Granted that governments may not implement economic policies that would violate the guarantees of the bill of rights or a few other (provisions) (…). The term “economic regulation” has no clearly defined meaning. In its narrowest sense, it is probably limited to government control of prices, outputs, and market entry. At one time, such regulation was widespread, covering major industries such as transportation.

Innovations in Regulatory Design

Since rules and principles each have their strengths and weaknesses, regulators sometimes try to combine them both in hybrid systems of regulation. Examples include recently adopted international standards governing the computation of risk-adjusted bank capital and the SEC’s standards for calculating the fair value of mutual funds. Both sets of regulations rely on principles that the industry must follow in developing and deploying complex econometric models to assess their own compliance.

The international banking community is facing the implementation of a new capital adequacy framework, known as Basel II. Although the underlying document is lengthy and complicated,
the framework is based on risk-management principles and relies heavily on the parties with access to the best information. In this case, the regulated financial institutions are deemed to have the best information. Accordingly, under Basel II, banks are responsible for computing their own bank capital and for determining the appropriate level of bank capital (within certain
specified limits). The role of the regulator is then to supervise the private parties after the fact. It remains to be seen how well this innovative approach will work.The success of Basel II will
probably rest on the ability of regulators to assess the sophisticated econometric models that banks develop and, hence, the willingness of member governments to invest in hiring and educating capable regulators.

In the case of the SEC’s mutual fund standards, the issue is how to value fund shares each day. The appropriate valuation of shares is not clear-cut, as some mutual fund holdings are illiquid
while others may change in value in domestic after-hours trading or trading on markets around the world occurring after the 4:00 p.m. market close in the United States.The SEC’s fair value standard is principles-based in that it stipulates that a mutual fund has an obligation to determine the “fair” value of the shares.

As with the banking example, the regulation relies upon the party with access to the best information to determine the appropriate value. Historically, most mutual funds have chosen to
use close-of-business prices to determine the fair value of the shares, although a few firms rely on a separate pricing model to value shares when there has been a substantial move in prices
since the close of business. For example, some argue that underlying prices need to have shifted at least 2 percent to justify using a price other than the one at the NYSE close. As with the new Basel II standards, it remains to be seen how well this hybrid approach will work. (1)

Economic Regulation

In Legislation

Economic Regulation in the U.S. Code: Title 49, Subtitle VII, Part A, Subpart ii

The current, permanent, in-force federal laws regulating economic regulation are compiled in the United States Code under Title 49, Subtitle VII, Part A, Subpart ii. It constitutes “prima facie” evidence of statutes relating to Transportation (including economic regulation) of the United States. The reader can further narrow his/her legal research of the general topic (in this case, Aviation Programs and Transport Programs of the US Code, including economic regulation) by chapter and subchapter.

Resources

Notes

1. Coglianese, Cary,Thomas J. Healey, Elizabeth K. Keating, and Michael L. Michael, “The Role of Government in Corporate Governance,” Regulatory Policy Program Report RPP-08 (2004), Cambridge, MA: Center for Business and Government, John F. Kennedy School of Government, Harvard University

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