Perhaps the best way to describe the layers of regulation that the SEC, the states, and the SROs provide is as multiple safety nets to make investors more confident about taking the various risks that investing entails. While the regulation doesn’t reduce volatility, prevent interest rate risk, or protect you against losses in a falling market, it does help to ensure that what happens in your portfolio is the result of normal market activity and the investment decisions you make — not manipulation or deception.
Is regulation effective? On the one hand, you could argue that the corporate fraud, accounting debacles, and mutual fund trading scandals of the past few years were possible despite the highly regulated environment in which they occurred. Yet ultimately those misdeeds were uncovered, leading to investigations, prosecutions, and adaptations to the industry and the law, none of which would have been achieved without regulation in place.
You could also argue that increased regulation sometimes consumes time and money that might be better spent on services that benefit investors in more direct ways, and that the cost of regulation is ultimately paid by clients. What’s more, some would say that the fact that investors voted with their wallets and dumped their shares in these companies, amply demonstrates that the market itself is best able to punish bad behavior. It may also be true, as critics charge, that new rules may go further than is required to combat abuse.
But although people may disagree about the details, the consensus is that regulation that properly balances investor protections, costs, and effect on competition is both necessary and positive.
