on the decision to regulate hedge funds - University of Illinois Law ...

PAREDES.DOC
9/8/2006 9:12:27 AM
1012 UNIVERSITY OF ILLINOIS LAW REVIEW [Vol. 2006
perceived regulatory void. 137 Plus, the SEC faces a new kind of pressure
to regulate as securities markets have become more democratized in recent
years with a growing number of investors, including individual investors,
paying attention to the SEC. 138 The existence of a burgeoning
“investor class” in the United States, where nearly half of all U.S. households
were invested in one or more mutual funds in 2003, is bound to influence
securities regulation, even at an independent administrative
agency such as the SEC. 139 Even though commissioners and staff at the
SEC are not as brazenly political as elected officials might be in trying to
please voters, individuals within the agency, to one degree or another,
are presumably interested in shoring up their own reputations and promoting
their own personal opportunities. Any such concerns play out
against a background sensibility that regulators do “good” by acting,
which itself points toward more regulation. Further, the SEC has an institutional
interest in assuring its predominance in regulating securities
markets and staking out its jurisdiction against potential or actual incursions
by Congress or the states. It should be noted, though, that not everybody
at the SEC has towed the more-aggressive regulatory line of recent
years. Although making the case against more regulation on the
heels of Enron was an uphill challenge given the political climate, SEC
Commissioners Atkins and Glassman repeatedly dissented in a series of
important three-to-two votes. 140
The bright side of regulatory competition, coupled with increased
public scrutiny of the agency, is that it might have spurred a lax SEC into
action. 141 The concern, of course, is that the SEC became too active in
trying to protect investors. 142
137. A more sinister take, and one that has been offered regarding the SEC’s hedge fund regulation,
is that the SEC has acted opportunistically to build a regulatory empire when given the chance to
do so in the wake of Enron and the other scandals. See SEC Crime Spree, WALL ST. J., Sept. 27, 2004,
at A18 (describing the new hedge fund rule as SEC “empire-building”); see also Macey, Positive Political
Theory, supra note 136 (arguing that the scandals at Enron and elsewhere created a “policy window”
that allowed the SEC to expand its reach).
138. See, e.g., Donaldson, supra note 134 (“More recent disclosures that a number of mutual
funds engaged in late trading, market timing, and selective disclosure have led individual investors to
be outraged, and to demand a swift response.”).
139. INVESTMENT COMPANY INSTITUTE, 2004 MUTUAL FUND FACT BOOK 79–80.
140. Commissioners Atkins and Glassman dissented, for example, when it came to adopting the
new hedge fund rules, Regulation NMS, and new board independence requirements for mutual fund
boards. For more on the political climate post-Enron favoring aggressive regulation of corporations
and securities markets, see generally Roberta Romano, The Sarbanes-Oxley Act and the Making of
Quack Corporate Governance, 114 YALE L.J. 1521 (2005).
141. See, e.g., Coffee, A Course of Inaction, supra note 9, at 46; Dale A. Oesterle, Early Observations
on the Prosecutions of the Business Scandals of 2002–03: On Sideshow Prosecutions, Spitzer’s
Clash with Donaldson over Turf, the Choice of Civil or Criminal Actions, and the Tough Tactic of Coerced
Cooperation, 1 OHIO ST. J. CRIM. L. 443, 467–71 (2004).
142. Most of the critiques have focused on the SEC’s response to Spitzer. Many have argued that
the SEC ramped up its regulatory and enforcement efforts, at least in part, to show it was acting and to
stay a step ahead of Spitzer. See Coffee, A Course of Inaction, supra note 9, at 49 (explaining that
“Spitzer’s tougher approach has clearly had an impact on the SEC”); Macey, Wall Street in Turmoil,
supra note 136, at 120; Oesterle, supra note 141, at 458–71; Charles Gasparino, Regulators Muscle Up,