Republican Presidents have often had cause to be disappointed with their choices for the Supreme Court, who end up being far more liberal than one would have hoped. We see the same thing these days at the SEC. where Bush-nominated and registered Republican Chairman William Donaldson increasingly sides with the Commission's two Democrats against the other two Republicans. The latest 3-2 vote came on the SEC's proposal to regulate hedge funds. Fortunately, good old Fed Chairman Alan Greenspan may have let some of the air out of that trial balloon:
Federal Reserve Chairman Alan Greenspan on Tuesday said a U.S. Securities and Exchange Commission proposal to crack down on hedge funds will not work as hoped and predicted a flood of new funds could lead to large losses. "My problem with the SEC's current initiative is that the initiative cannot accomplish what it seeks to accomplish," said Greenspan in testimony before the Senate Banking Committee. Making clear he disapproves of the proposal backed by SEC Chairman William Donaldson, Greenspan said forcing hedge funds to register with the SEC as proposed would likely do little to prevent fraud. As a result, he said, the SEC could come under pressure to tighten its regulatory grip even more on the $850 billion hedge fund industry, resulting in damage to an industry that he called a vital part of the U.S. financial system. "Hedge fund arbitrageurs are required to move flexibly and expeditiously if they are to succeed. If placed under increasing restrictions, many will leave the industry -- to the significant detriment of our economy," he said. ...
Reiterating earlier comments, Greenspan called hedge funds "major contributors to the flexibility of our financial system" that help the economy absorb shocks. He added that even if the SEC could detect hedge fund abuses through registration data, it would probably be too late. "By the time of detection, hedge funds would have long since moved on to different strategies," he told the committee.
We know Greenspan is right based on our experience with registration of corporate securities. The SEC almost never detects fraud through the registration process. Instead, the registration process creates a paper trail of disclosures against which subsequent events can be measured and upon which suit can be brought if fraud comes to light. As I explained in my treatise Corporation Law and Economics (makes a great gift!):
The large volume of registration statements filed with the SEC and its limited resources have meant that by the time the SEC gets around to prosecuting most violations, the offering is long since over. The SEC therefore usually relies on other civil and criminal sanctions to punish violators. Indeed, the SEC cannot even make a detailed examination of all of the registration statements that are filed with it. A two tier system of review has thus evolved. A full blown SEC review normally is undertaken only with respect to initial public offerings and with respect to filings by financially troubled companies. Other filings typically only receive cursory review.
If you're interested in pursuing this topic, I commend to you the dissenting statements by SEC Commissioners Glassman and Atkins.
