Grey matters

Further assessment of the Iron Law of financial regulation: A postscript to Regulating in the Dark

Roberta Romano

available at

In an earlier [2012] companion essay, Regulating in the Dark, Prof. Romano contended that there is a systemic pattern in major U.S. financial regulation:
(i) enactment is invariably crisis driven, adopted at a time when there is a paucity of information regarding what has transpired,
(ii) resulting in off-the-rack solutions often poorly fashioned to the problem at hand, (iii) with inevitable flaws given the dynamic uncertainty of financial markets,
(iv) but arduous to revise or repeal because of the stickiness of the status quo in the U.S. political framework of checks and balances.

This pattern constitutes an “Iron Law” of U.S. financial regulation. The ensuing one-way regulatory ratchet generated by repeated financial crises has produced not only costly policy mistakes accompanied by unintended consequences but also a regulatory state whose cumulative regulatory impact produces over time an increasingly ineffective regulatory apparatus.

This postscript analyzes the experience with regulators’ implementation of Dodd-Frank since the publication of the earlier essay. After a discussion of broad issues related to the statute and its implementation, the analysis focuses on two provisions by which Dodd-Frank exemplifies the difficulties that are created by legislative strategies conventionally adopted in crisis-driven legislation, off-the-rack solutions along with open-ended delegation to regulatory agencies as legislators, who perceive a political necessity to act quickly, adopt ready-to-go proposals offered by the policy entrepreneurs to whom they afford access: the Volcker rule, which prohibits banks’ proprietary trading, and the creation of the Consumer Financial Protection Bureau.

The analysis bolsters the original essay’s contention regarding the inherent flaws in major financial legislation and the corresponding benefit for improving decision-making that would be obtained from employing, as best practice, the legislative tools of sunsetting and experimentation to financial regulation. The use of those techniques, properly implemented, advances means-ends rationality, by better coupling the two, and improves the quality of decision-making by providing a means for measuring and remedying regulatory errors. 

CFR comment:

Anything Prof. Romano, a leading corporate law scholar, writes is worth reading. This essay, which builds on her 2012 essay Regulating in the Dark in REGULATORY BREAKDOWN: THE CRISIS OF CONFIDENCE IN U.S. REGULATION (Cary Coglianese, ed. 2012), is a superb, if depressing, analysis of the implementation of the Dodd-Frank financial regulatory statute. Prof. Romano devastatingly critiques the process of creating crisis legislation and the regulation writing that follows and makes some practical suggestions that might benefit OFC regulators considering how to improve their regulatory processes: sunsetting and regulatory experimentation.

The most critical issue facing tax administration today – and what to do about it

George K. Yin

Available at

The text of a keynote address from a June 2014 research seminar which describes how the IRS might stabilize its reputation with Congress and the public in light of the agency’s recent difficulties. The speech proposes a greater emphasis on promoting transparency in exempt organization decisions as a means of improving confidence without sacrificing privacy rights of individuals or interfering with enforcement. 

CFR comment:

Prof. Yin is an important voice in U.S. tax policy, having served as chief of staff for the Joint Committee on Taxation from 2003-05 as well as advisor to many key players in tax policy, from the U.S. Treasury to Congressional committees. His views on tax matters are always interesting.

Corporate inversions and the unbundling of regulatory competition

Eric L. Talley

Available at


A sizable number of U.S. public companies have recently executed “tax inversions” – acquisitions that move a corporation’s residency abroad while maintaining its listing in domestic securities markets. When appropriately structured, inversions replace American with foreign tax treatment of extraterritorial earnings, often at far lower effective rates.

Regulators and politicians have reacted with alarm to the “inversionitis” pandemic, with many championing radical tax reforms. This paper questions the prudence of such extreme reactions, both on practical and on conceptual grounds. Practically, I argue that inversions are simply not a viable strategy for many firms, and thus the ongoing wave may abate naturally (or with only modest tax reforms).

Conceptually, I assess the inversion trend through the lens of regulatory competition theory, in which jurisdictions compete not only in tax policy, but also along other dimensions, such as the quality of their corporate law and governance rules. I argue that just as U.S. companies have a strong aversion to high tax rates, they have a strong affinity for strong corporate governance rules – a traditional strength of American corporate law. This affinity has historically given the U.S. enough market power to keep taxes high without chasing off incorporations, because U.S. law specifically bundles tax residency and state corporate law into a conjoined regulatory package. To the extent this market power remains durable, radical tax overhauls would be unhelpful (and even counterproductive). A more blameworthy culprit for inversionitis, I argue, can be found in an unlikely source: Securities Law.

Over the last fifteen years, financial regulators have progressively suffused U.S. securities regulations with mandates relating to internal corporate governance matters – traditionally the domain of state law. Those federal mandates, in turn, have displaced and/or preempted state law as a primary source of governance regulation for U.S.-traded issuers.

And, because U.S. securities law applies to all listed issuers (regardless of tax residence), this displacement has gradually “unbundled” domestic tax law from corporate governance, eroding the U.S.’s market power in regulatory competition. The most effective elixir for this erosion, then, may also lie in securities regulation. I propose two alternative reform paths: either (a) domestic exchanges should charge listed foreign issuers for their consumption of federal corporate governance policies; or (b) federal law should cede corporate governance back to the states by rolling back many of the governance mandates promulgated over the last fifteen years.

CFR comment:

This is a terrific paper that puts inversions into a regulatory competition context, where the competition is not just between Ireland and the United States but also between the U.S. federal government (through the securities law) and Delaware. It focuses attention on the erosion of the advantages of state-level corporate governance law in the U.S. (where Delaware has had a significant advantage because of its excellent Chancery Court and its up-to-date statutory framework) by the waves of federal “reforms” in Sarbanes-Oxley and Dodd-Frank.

By federalizing significant portions of governance, the advantages of being resident in the U.S. are transformed into being listed on U.S. exchanges. Prof. Talley suggests that this shift accounts for much of the current inversion wave. As a result, competition for business entities with a “bundle” of tax and governance (the old regime) looks quite different from unbundled tax and governance (the new regime). He offers a formal model capturing this insight. The key insight is: “By unbundling governance from tax, the federal government has arguably compromised its ability to extract tax rents in exchange for offering value-enhancing governance. To the extent that this unbundling trend continues, moreover, the inversion wave could actually grow worse.”

The policy prescriptions that follow from this are quite different from those suggested by U.S. politicians – rather than focusing on making inversions harder to accomplish, federal law makers should roll-back their intrusion into governance and/or restructure corporate tax to impose a higher effective rate on foreign entities listing in the United States.


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Andrew P. Morriss

Andrew P. Morriss, Chairman, is the D. Paul Jones, Jr. & Charlene Angelich Jones – Compass Bank Endowed Chair of Law at the University of Alabama School of Law. He was formerly the H. Ross & Helen Workman Professor of Law and Business at the University of Illinois,Urbana-Champaign. He received his A.B. from Princeton University, his J.D. and M.Pub.Aff. from the University of Texas at Austin, and his Ph.D. (Economics) from the Massachusetts Institute of Technology. He is a Research Fellow of the N.Y.U. Center for Labor and Employment Law,and a Senior Fellow of the Institute for Energy Research, Washington,D.C., as well as a regular visiting faculty memberat the Universidad Francisco Marroquín,Guatemala. He is the author or coauthor of more than 50 scholarly articles, books, and bookchapters, including Regulation by Litigation (Yale Univ. Press 2008) (with Bruce Yandle and Andrew Dorchak), and is the editor of Offshore Financial Centers and Regulatory Competition (American Enterprise Institute Press 2010).

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