CFTC Chair Praises PWG Guidance for Being Principles-Based

In remarks today at the annual Futures Industry Conference, CFTC Chair Reuben Jeffery III praised the principles-based approach taken by the recent hedge fund guidance issued by the President’s Working Group on Financial Markets. More broadly, he announced his general support for a principles-based approach to market oversight.

The PWG’s principles are intended to guide market participants, as well as U.S. financial regulators, as they address investor protection and systemic risk issues associated with the rapid growth of hedge funds. Although the PWG principles specifically target private pools of capital, he noted, they contain valuable advice for every financial services provider. In his view, these principles are compelling at a time when the globalization of markets and innovation in financial products has created a much more complex financial environment.

According to the CFTC official, the current Depression-era rooted regulatory structure is ill-suited to meet the challenge of a dynamic, global market for financial services. A rigid prescriptive regime is simply incompatible with the flexibility needed in a global competitive environment, he insisted. Instead, joining a growing chorus, he praised the principles-based approach for establishing high level objectives and providing guidance on how regulated entities can achieve those objectives. What matters in a principles-based approach is not a focus on means, he reasoned, but rather effectiveness in achieving the desired policy outcomes.

But, similar to FSA Chair Callum McCarthy, he emphasized that a principles-based approach does not mean the elimination of all prescriptive rules. Relying solely on fixed rules may be appropriate in situations where, for example, the risks can be identified with a degree of confidence and uniform treatment is critical. Customer funds protection rules generally fall within this realm, he said. In addition, the principles-based approach must be accompanied by a vigorous enforcement program based on a zero-tolerance policy for those who seek to game the system through fraudulent acts. In my opinion, Chairman Jeffery takes a very realistic view of principles-based regulation.

In the end, it all comes down to how best to achieve the correct balance between rules and principles. In such a rapidly evolving industry, he said, having the option to rely upon a flexible, principles approach provides a useful tool in carrying out congressional mandates to promote responsible innovation and fair competition.