From the February 2009 issue of Wealth Manager Web • Subscribe!

Let the Sunstein In

There's been much interest in the nomination of Mary Schapiro, the head of FINRA, to be the Obama administration's chairman of the Securities and Exchange Commission. Ms. Schapiro's knowledge of the industry is without question, though some wealth managers might question her commitment to independent advice, since FINRA has been lobbying for some time to assume regulation of RIAs. However, the most important regulator you've never heard of is the administrator of the Office of Information and Regulatory Affairs (OIRA) in the Office of Management and Budget. Known as the "regulation czar," the head of OIRA is the presidential appointee whose job it is to make sure that the regulations promulgated by some 50 federal agencies accurately reflect the president's policies, or in the OIRA's own words, "to follow certain principles in rulemaking," including "consideration of alternatives to the rulemaking and analysis of the rule's effects on society, both its benefits and costs."

Under President Barack Obama, the job of doing the cost-benefit analysis of federal regulation will be filled by his 54-year-old former colleague at the University of Chicago Law School, Cass Sunstein, who now plies his trade at Harvard Law School. Sunstein is the co-author, with behavioral finance guru Richard Thaler, of Nudge: Improving Decisions About Health, Wealth and Happiness. The two men wrote an op-ed for The Wall Street Journal last August 13 that may provide some insight into how Sunstein might behave as czar. The question had to do with the Federal Reserve's desire to improve disclosure in mortgage lending: "Everyone, including the Fed, is well aware that in banning activities that have caused justified ire in some quarters, the regulator is playing a game of whack-a-mole. If some method of making money is eliminated, lenders will find a new way in the near future. Merely by making market pricing more transparent, better disclosure can make consumers better shoppers, enabling them to be their own regulators.

The same concept should be widely adopted as the 21st century's first-line approach to consumer regulation. At least in general, the government should not decide which pricing practices are permitted; it should simply require suppliers to make their pricing observable."

Sunstein is a proponent of what he calls "libertarian paternalism," a way of encouraging people to do what you want, using your knowledge of what motivates them, without forcing them to do so. Whether that approach will work in this post-meltdown age remains to be seen.

James J. Green, editorial director, can be reached at

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