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The Psychology of Regulation

Applying nudge theory to compliance

As we steadily approach the 10-year anniversary of the financial crash, there can be no doubt that it has transformed the regulatory culture and environment that firms inhabit. On one level this means most firms now find themselves far more heavily regulated than before. The desire among authorities to ‘fix’ the causes of the crash – as well as improve transparency and minimize risk more generally – has inspired pages and pages of new rules and controls, such as the comprehensive ‘Dodd-Frank’ (Wall Street Reform and Consumer Protection) Act.

But it isn’t just about the volume of new rules. The way and extent to which these rules are enforced is also changing. Alternative funds are coming under unprecedented scrutiny from an increasingly proactive SEC. The numbers illustrate the extent to which the Regulator is on the warpath: in 2013 the Enforcement Division of the SEC opened up 908 investigations (a 12% increase on the year before) and obtained 574 formal orders of investigations (up 20% over the same period). It is estimated that in today’s environment a whopping one in 12 firms will face action at some point. And fines have reached record highs. This isn’t some covert operation; to quote the SEC’s Mary Jo White verbatim, “We are casting our nets wider, and using nets with smaller spaces, paying attention to violations and violators regardless of size… we will be in more places than ever before.”

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