Topic: Regulatory Studies

Schumer-Bloomberg on Sarbanes-Oxley

Apparently I am not alone in the skepticism I expressed last week concerning an oped by Sen. Chuck Schumer (D-NY) and New York City mayor Michael Bloomberg, in which the duo decries the ill effects of regulation and frivolous lawsuits on New York’s financial services sector.  Four of the five letters to the editor in today’s Wall Street Journal expressed incredulity that these two pols could possibly expect to be taken seriously on the subject, given their otherwise steadfast support for government intrusion into our lives. 

I don’t know the newspaper business, but I have an inkling the WSJ ran their piece not so much for the good ideas it contained, but because it knew that the juxtaposition of those ideas with that by-line would elicit a spankfest from its readership that would lend itself to today’s title of the Letters to the Editor section: ”Schumer and Bloomberg Are For Less Regulation? Is This a Joke? (sorry, subscription required).

There was one letter, however, that actually defends Sarbanes-Oxley and the huge regulatory burdens imposed upon financial services firms operating in New York because it “gives our New York financial market a distinct competitive advantage [relative to London].”  Come again?  Yes, this letter argues that, ”while it is quite true that there are more regulatory bodies and higher fines in New York than overseas, that is only a temporary situation.”  The author argues not that those U.S. regulations will be relaxed, but that the regulatory burden on firms operating in the London market will be just as heavy in the future, and that New York firms are lucky to have a head start on the learning curve.

To put this all in context, the author of the pro-regulation letter is a vice president at Orchestria Corporation (a New York company), which is an entity that “helps companies achieve compliance and good governance through electronic communication control.”  Orchestria is in the business of helping it’s customers “to efficiently manage the burden of regulation and ensure compliance.”  In other words, Orchestria (and probably hundreds of companies like it) is the Frankenstein of Sarbanes-Oxley.  Although people like Schumer and Bloomberg are recognizing rhetorically the damage caused by regulatory overkill, righting the ship will be more difficult than just publishing an oped.

Sarbanes-Oxley has created a whole new industry that benefits from the status quo.  I wonder if they know any politicians who would enjoy their financial support.

CAN-SPAM Didn’t - Not By a Long Shot

Every once in a while, it’s useful to go back and look at how Congress has done with past regulatory efforts.  The exercise might help determine whether to embrace, or be skeptical about, future efforts.

Congress passed the CAN-SPAM Act in late 2003, and it became effective January 1, 2004.  Here’s the Federal Trade Commission’s summary of the law, which tells us that CAN-SPAM bans false or misleading header information, prohibits deceptive subject lines, requires that commercial e-mails give recipients an opt-out method, makes it illegal for commercial e-mailers to sell or transfer the email addresses of people who choose not to receive their e-mails, and requires that commercial e-mail be identified as an advertisement and include the sender’s valid physical postal address.

And here’s the result:  3 out of 4 e-mails are spam, and 0.27 percent of e-mails comply with CAN-SPAM.  That’s 27 in every 10,000 e-mails.

The regulation is a failure.  It provided consumers with zero benefit.  Most people are seeing less spam in their Inboxes because of improved filtering technology, a product of commercial ISPs working to serve their customers.

Should Congress or the FTC ramp up enforcement?  Increase penalties to bring spammers to heel?  No.  They should abandon the enterprise entirely and confess their incompetence to regulate the Internet and technology.

Despite its failure, consumers continue to bear the costs of the tedious regulations CAN-SPAM imposed on legitimate businesses.  They pay just a little more taxes, a little more for everything they buy online, and they forgo the benefits of that tiny margin of innovation lost as businesses divert their efforts to compliance. 

(Hat tip: TechDirt)

Schumer’s Epiphany?

I had to do a double take of the by-line of an unabashedly pro-capitalism op-ed (subscription required) in today’s Wall Street Journal. Yes, indeed, that was Sen. Chuck Schumer (D-NY) who co-authored a piece with New York City mayor Michael Bloomberg on the need to rethink stifling regulation of America’s financial services industries, and to consider tort reform.

Lamenting the relative decline of NYC as the world’s financial capital, Schumer and Bloomberg identify stifling regulation and frivolous law suits in the United States as major factors contributing to London’s and Hong Kong’s relative ascent as premiere locations for initial public offerings in recent years. Among the facts they cite is that in 2005, only one out of the top 24 IPO’s was registered in the United States, while four were registered in London. Moreover, “next year more money will be raised through IPOs in Hong Kong than in either London or New York.”

Schumer and Bloomberg cite regulatory costs that are 15 times higher in the United States than in Britain, an adversarial relationship between “tough cop” regulators and business in the United States, and the surging costs of securities-related class action suits as key factors driving business away from New York’s financial houses. The auditing expenses associated with the requirements of Sarbanes-Oxley are deemed to have grown “beyond anything Congress had anticipated.”

These are indeed serious problems, but it’s hard not to laugh about the irony. Schumer’s never met a regulation he didn’t like. He’s never been a friend of business. Of course he voted for Sarbanes-Oxley, along with all of his colleagues in the Senate, but he also led the charge against Kelloggs, General Mills, and the other cereal companies in the 1990s, when the price of Lucky Charms became unacceptably high to him. Just last summer, Schumer urged federal regulators to examine the behavior of oil companies to make sure they weren’t holding back production. And Schumer has been quick to ascend the podium to decry America’s growing trade deficit, urging, at times, government intervention to “correct” that growing problem.

That Schumer is suddenly opposed to stifling regulation and is saying things that are sure to upset the trial lawyers is welcome news. But it is likely just a fleeting flirtation with enlightenment. Let’s see what happens when someone points out to the Senator that New York’s capacity to attract IPOs, and the foreign investment that follows, is more a cause of the U.S. trade deficit than any “unfair trade” practices he assails. Which cause will he champion then?

Kahn on ‘Net Neutrality

Venerated deregulator Alfred Kahn weighs in on “ ‘net neutrality” - the proposal to have Congress and the Federal Communications Commission decide the terms on which ISPs could provide service, and whom they could charge for what. Net neutrality regulation is advanced primarily by the political left. Here’s Kahn on his bona fides:

I consider myself a good liberal Democrat. I played a leading role under President Carter in the deregulation of the airlines (as Chairman of the Civil Aeronautics Board) and trucking (as Advisor to the President on Inflation), against the almost unanimous opposition of the major airlines and trucking companies and–let’s be frank about it–their strongest unions. Among our strongest allies were Senator Ted Kennedy, Stephen (now Supreme Court Justice) Breyer, and such organizations as Common Cause, Public Citizen, the Consumer Federation of America and Southwest Airlines.

On telecommunications competition:

In telecommunications, cable and telephone companies compete increasingly with one another, and while the two largest wireless companies, Cingular and Verizon, are affiliated with AT&T and Verizon, respectively, some 97 percent of the population has at least a third one competing for their business as well; and Sprint and Intel have recently announced their plan to spend 3 billion dollars on mobile Wi-Max facilities nationwide. Scores of municipalities led by Philadelphia and San Francisco, are building their own Wi-Fi networks. And on the horizon are the electric companies, already beginning to use their ubiquitous power lines to offer broadband–to providers of content, on the one side, and consumers, on the other.

His conclusion: “There is nothing ‘liberal’ about the government rushing in to regulate these wonderfully promising turbulent developments.”

Lovely Hospital, Doc — Be a Shame if Anything Were to Happen to It…

I recently came across a transcript of National Economic Council director Al Hubbard’s remarks to a hospital trade group back in March.  In it, Hubbard discusses Bush administration policy regarding price transparency in health care.  That policy was later fleshed out in an executive order, which mandated that federal health programs furnish beneficiaries with information on prices, etc.  The administration stopped short of imposing a similar mandate on the private sector.

But Hubbard’s comments to the hospitals let us know where the president is headed.  And it was Hubbard’s…shall we say…rhetorical agility that I find priceless:

The president’s approach has been…that through persuasion we can get the [health care] providers of this country to start providing accurate, easy-to-use information and we don’t have to go to legislation, because, you know, legislation is a very crude tool to accomplish things and we would much rather let the free market, and you all individually, com[e] up with the best way of approaching transparency as opposed to Congress and the federal government telling you how to do it. But the president has also made it clear that if the provider community is not receptive to providing transparency that we will turn to Congress and ask them to support transparency.

When is persuasion not persuasion?  When it’s a threat.  Later, in an answer to a question, Hubbard dispensed with the subtleties:

And by the way – and I hate to use this blunt club as a threat – if you don’t, it’s going to be imposed upon you. It is going to be imposed upon you.

In other words, Pres. Bush thinks that the market should do whatever it wants, so long as it’s exactly what he wants.

Which is exactly the same as not being for a free market at all.

Fake Boarding Pass Generator Underscores ID Woes

Yesterday, the blogosphere crackled with news that ‘net surfers could use a website to generate fake boarding passes that would enable them to slip past airport security and gain access to airport concourses. The news provides a good opportunity to illustrate a credentialing (and identity) system, how it works, and how it fails.

It’s very complicated, so I’m going to try to take it slowly and walk through every step.

The Computer Assisted Passenger Prescreening System (CAPPS) separates commercial air passengers into two categories: those deemed to require additional security scrutiny — termed “selectees” — and those who are not. When a passenger checks in at the airport, the air carrier’s reservation system uses certain information from the passenger’s itinerary for analysis in CAPPS. This analysis checks the passenger’s information against the CAPPS rules and also against a government-supplied “watch list” that contains the names of known or suspected terrorists.

Flaws in the design and theory of the CAPPS system make it relatively easy to defeat. A group with any sophistication and motivation can test the system to see which of its members are flagged, or what behaviors cause them to be flagged, then adjust their plans accordingly.

A variety of flaws and weaknesses inhabit the practice of watch-listing. Simple name-matching causes many false positives, as so many Robert Johnsons will attest. But the foremost weakness is that a person who is not known to be a threat will not be listed. Watch-listing does nothing about people or groups acting for the first time.

In addition, a person who is known and listed can elude the system by using an alias. The use of a false or synthetic identity (and thus an inaccurate boarding card) could assist in this. But the simplest wrongful use of this fake boarding card generator would be to make a boarding card that allows a known bad person to receive no more security scrutiny than all the good people.

When CAPPS finds that a passenger should be given selectee status, this is transmitted to the check-in counter where a code is printed on the passenger’s boarding pass. At the checkpoint, the boarding pass serves as a credential indicating that the person is entitled to enter the concourse, and also indicating what kind of treatment the person should get — selectee or non-selectee. The credential is tied to the person bearing it by also checking a government-issued ID.

In a previous post, I included a schematic showing how identification cards work (from my book Identity Crisis). This might be helpful to review now because credentials like the boarding pass work according to the same three-step process: First, an issuer (the airline) collects information, including what status the traveler has. Next, the issuer puts it onto a credential (the boarding pass). Finally, the verifier or relying party (the checkpoint agent) checks the credential and accords the traveler the treatment that the credential indicates.

Checking the credential bearer’s identification, a repeat of this three-step process, and comparing the names on both documents, ties the boarding pass to the person (and in the process imports all the weaknesses of identification cards).

Each of these steps is a point of weakness. If the information is bad, such as when a malefactor is not known, the first step fails and the system does not work. If the malefactor is using someone else’s ticket and successfully presents a fake ID, the third step has failed and the system does not work.

The simple example we’re using here breaks the second step. A person traveling under his own name may present a boarding pass for the flight for which he has bought a ticket — but the false boarding pass he presents does not indicate selectee status. He has eluded the CAPPS system and the watch list.

The fake boarding pass generator does not create a new security weakness. It reveals an existing one. Though some people may want to, it’s important not to kill the messenger (who, in this case, is a Ph.D. student in security infomatics at Indiana University who created the pass generator to call attention to the problem). As I’ve said before, identity-based security is terribly weak. Its costs — in dollars, inconvenience, economic loss, and lost privacy — are greater than its security benefit.

Hopefully, the revelation that people can use fake boarding passes to elude CAPPS and watch-lists is another step in the long, slow process of moving away from security systems that don’t work well, toward security systems that do. Good security systems address tools and methods of attack directly. They make sure all passengers on an airplane lack the capacity to do significant harm.