Congress has given federal regulators broad authority over key areas of our society, and the actions of those regulators often have profound effects on our lives and on our future. We applaud the swift and decisive actions by financial regulators to prevent the run on Silicon Valley Bank from cascading through the regional banking system. But regulatory power is not absolute; it is granted by Congress and has strict limits, and its exercise requires due process.
Some regulators, in their zeal to achieve a social policy agenda set by a few extreme progressives in the Democratic Party, seem to be embracing a new strategy that evades constitutional impediments: outsourcing U.S. regulatory policy to Europe.
This tactic may not be immediately obvious. After all, many important issues cross borders and involve our regulatory counterparts. But it does fit with the modus operandi of the new breed of U.S. regulators who seem to believe that when our laws do not provide their desired outcome, the law should be bent.
With this perspective, finding a way to substitute European Union regulation, which is more in line with progressive objectives, for U.S. regulation becomes an attractive strategy. And the practice appears widespread. This should trouble anyone who believes in national sovereignty or our proven approach to regulation.
The decision this week by Britain’s Competition and Markets Authority to block Microsoft’s purchase of the video game company Activision Blizzard is just the latest example of the tail wagging the dog.
Historically, U.S. law would allow this type of “vertical” transaction — where the two companies are in different parts of a large industry but do not compete — to proceed. These combinations can enhance competition; in this case, new and improved gaming products could be developed and distributed more quickly and efficiently. Courts and respected legal commentators have long accepted that these integrations are better for consumers.
Yet the Federal Trade Commission, which is unapologetically anti-merger when it comes to Big Tech, has been using all available means to block the transaction. This includes making procedural choices that have, intentionally or not, allowed British regulators to step in and propose their own remedies.
Microsoft and Activision have vowed to fight the action in Britain, and this month the U.S. Supreme Court in a unanimous decision made it easier for businesses to challenge the kind of procedures the F.T.C. deployed here. But now there is no doubt that a transaction involving two major U.S. companies will have its timing and material terms dictated by Europeans.
The F.T.C.’s actions in another proposed acquisition are instructive. Illumina, a biotech company, sought to buy Grail, a start-up that makes a blood test that searches for early-stage cancer. Like Microsoft-Activision, this was a “vertical” merger that historically would be allowed to proceed.
In February and March of 2021, F.T.C. regulators reached out to their European Union counterparts, according to emails that were obtained through a Freedom of Information request. That April, the Europeans asserted jurisdiction using a novel theory, asserting that the combination would stifle innovation in the E.U. even though Grail does no business in the bloc. As a result, a matter of potentially significant importance to the U.S. health care industry — including how quickly Americans can get cutting- edge cancer detection technology — landed in the hands of the Europeans. The E.U. then concluded that the merger should be unwound.
The F.T.C. has not questioned the European Union’s unprecedented power grab. European action is likely to provide results that are more in line with the F.T.C.’s agenda than the F.T.C. could achieve on its own here. Americans should know whether this outsourcing of authority was intentional or just a series of coincidences. We are skeptical, in part because the F.T.C. is not alone in outsourcing. (An F.T.C. spokesman said the agency “regularly and lawfully coordinates with international partners, as it has for decades under both Republican and Democratic chairs” but never outsources its authority. He added that regulators make their own “independent judgments “when a deal appears blatantly anticompetitive.”)
Similarly, the Securities and Exchange Commission’s recent proposal to require public companies to publish extensive emissions data and disclose information about the climate risks they face, even if irrelevant from an investment perspective, is based on E.U. requirements. The S.E.C. claims that conforming to the European financial regulations — rules based on directives of the European Parliament and intended to drive social objectives — is a laudable goal. In doing so, the S.E.C. is effectively seeking to import European energy and climate policy.
The Federal Reserve and other financial regulators face virtually constant pressure from members of Congress and international bodies to import similar, sweeping E.U. regulations regarding banking, insurance and asset management. Our financial regulators have no constitutional authority or ability to set our energy and climate policy; they certainly cannot do so by deference to the Europeans.
If these were isolated examples of abdication of regulatory authority to Europe, we might shrug it off. They are not. Our regulators are all too often deferring to foreign counterparts, citing euphemisms like “international cooperation” and “global regulatory harmonization” while paying short shift to their obligation to consider domestic consequences in accordance with our laws.
The Europeans are our allies, but they also are our competitors. Shouldn’t we expect European regulation of U.S. matters to favor European interests over the interests of U.S. citizens? What will U.S. regulators say in the future when European regulators, citing the Microsoft and Illumina examples, assert jurisdiction over a U.S.-centric transaction where U.S. and European interests are at odds? What if Chinese regulators make similar assertions?
This leads to a fundamental question that is gaining attention: Why isn’t Congress taking the lead on climate change, the effects of social media and other critical societal issues? Or, conversely, why are these issues being addressed through piecemeal actions of regulators and inevitable court challenges to their authority and judgments? This departure from our norms is the result of our high current level of partisanship and other factors, including a negative feedback loop among members of Congress and aggressive regulators.
Members from both sides of the aisle publicly push regulators to take actions that they favor, including actions that test the limits of (or go well beyond) the regulators’ authority. This approach publicly demonstrates the member’s commitment to the issue at hand — a political advantage — while shifting responsibility for addressing the issue to the regulator.
When regulators accept transfers of these congressional responsibilities, they not only drift outside their designated lanes, but they also remove the incentive for Congress to pursue legislative solutions. Why go through the messy legislative process when you can get what you want directly from the regulators? This, unfortunately, leads to legislative inaction in Congress and can be viewed as another form of constitutionally challenged outsourcing.
A second fundamental question raised by the outsourcing of regulation is why would we change our historic approach, particularly in the case of market regulation? The United States has only 4.2 percent of the world population, yet roughly 50 percent of the world’s investment capital is generated here, with much of it being invested in the United States and in U.S. companies operating globally. As a result, the United States leads the world in industries critical to social welfare and national security, including technology, health care and aerospace. About 20 percent of the world’s investment capital is generated in Europe. Shouldn’t Europe be looking to learn something from the United States, not the other way around? And, again, this is an issue for Congress, not our regulators and courts.
The consequences of this tactic are not limited to the transactions at hand. The actions of the F.T.C., S.E.C. and other regulators are followed closely, and investors adjust their behavior accordingly. These ripple effects, in most cases, have benefits, with behavior conforming to expected regulatory norms. They are costly, however, when the regulatory actions are aggressive and likely to be reversed. Investors cannot count on a reversal and, as a result, pass on otherwise attractive opportunities.
To promote national security and maintain our leadership in key industries, President Biden is pushing U.S. companies to “onshore” production. The apparent outsourcing of U.S. regulatory policy is strikingly at odds with these widely supported objectives. No one — not Congress, not the White House — should be in favor of regulatory outsourcing. Whether intentional or not, it should be brought to an end.
Jay Clayton was the chairman of the Securities and Exchange Commission from 2017 to 2020. Gary D. Cohn was the director of the National Economic Council from 2017 to 2018.
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