In a Washington Post editorial, Paul Volcker laid out why meaningful reform of the financial regulatory structure is needed.  In doing so, he makes a compelling argument for the Transparency Label Initiative™.

it is all too clear that the federal financial regulatory structure is simply inadequate to head off future crises. The structure that failed us in anticipating and responding to the emergency is largely still in place.

Important progress has been made, here and internationally, in shoring up banking regulations, notably through stronger capital requirements. …

But, basically, the institutional structure for financial regulation — which traces its origins to the 1930s — has resisted repeated efforts for meaningful reform. As a result, what we see in full view are inconsistencies in approaches among the half-dozen or more regulatory agencies, differing priorities, overlaps and gaps, squabbling over turf, incentive for competition in lax regulation; and too many opportunities for agency “capture” by those regulated.

Equally important, and a large new challenge for financial regulation and supervision, has been the multiplying innovations in finance and the proliferation of complicated and often opaque instruments outside the formal (and heavily regulated) commercial banking system. Commercial banking has become dominated by enormous institutions engaged in a complex combination of activities and operating across many countries. The free flow of capital internationally has further challenged the dispersed institutions responsible for regulation and supervision.

The Transparency Label Initiative™ meets all the challenges Mr. Volcker lays out.

First, the Initiative directly deals with opacity in financial products and benchmark financial prices.  Where the product or benchmark financial price is transparent, it is awarded a label.  On the other hand, the lack of a label is a red flag waving saying investors should stay away as this product or benchmark financial price is for gamblers only as it is opaque and likely rigged in the bankers’ favor.

Second, the Initiative isn’t limited by the 1930s institutional structure for financial regulations.  For example, the SEC is limited to requiring disclosure for publicly traded securities.  If there is transparency so an investor could know what they own or are thinking of buying, the Initiative’s labels can appear on both publicly traded and privately placed securities.

Third, the Initiative is international in scope.  The Initiative isn’t constrained to only looking at financial products or benchmark financial prices in the US.  It looks across the global financial system.

Fourth, the Initiative can peacefully co-exist with each country’s equivalent of the SEC.  The relationship is a “belt and suspenders” where the SEC sets minimum disclosure requirements and the Initiative fills the gaps where there is opacity still in the financial system.

Fifth, the Initiative doesn’t suffer from an “incentive for competition in lax regulation”  and it isn’t subject to “capture by those regulated” as it is paid for by the buy-side.