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

PAREDES.DOC
9/8/2006 9:12:27 AM
1014 UNIVERSITY OF ILLINOIS LAW REVIEW [Vol. 2006
swayed by pressure from the public or media scrutiny to regulate. Even
if individuals at the SEC do not push regulation to score points with the
public, the effect is comparable if the SEC tries to outflank elected officials
to protect its turf. 145
The same point can be made another way by more explicitly considering
the SEC’s payoffs when deciding whether or not to regulate. If the
SEC fails to regulate, particularly on the heels of a period of scandals,
and there are subsequent instances or episodes of attention-grabbing corporate
malfeasance, the SEC will likely be scorned for being lax. Yet if
the SEC regulates aggressively, the SEC may face some mild criticism,
but it will not be lambasted for going too far. This itself could bias the
agency in favor of regulating when in doubt.
To be clear, this is not to say that the SEC should not take the public’s
views and concerns into account; it should. For that matter, the SEC
should also take the views and concerns of corporate America into account.
Further, the SEC should be flexible enough to adjust its regulatory
agenda and proposals as it gains a richer and more textured understanding
of issues. 146 However, there is a difference between regulators
who consider the perspectives of the public in trying to craft the optimal
regulatory regime that accommodates all interests and regulators who
regulate, if only in part, to appease an agitated public, avoid the risk of
further criticism, or career build. 147
The SEC is always subject to political influence because of congressional
oversight and funding decisions, as well as the possibility that
Congress will legislate or simply subject the SEC to hearings on the Hill
to explain itself. 148 The White House also can always publicly or pri-
145. The phrase “regulatory competition” really is a misnomer in this context. Regulatory competition
typically contemplates that regulated parties have a choice of which regulatory regime governs
their activities. For example, a company can choose to incorporate in Delaware, California, Nevada,
Ohio, or any other state. The reality, though, is that parties are subject to both the SEC and to Spitzer
(or any other state authority with jurisdiction). Instead of referring to regulatory competition between
the SEC and Spitzer, perhaps we should talk in terms of “regulatory piling on.” Beyond that, when
Spitzer or others in effect regulate through law enforcement, the de facto regulatory regime that such
authorities impose is not subject to any of the procedures spelled out in the Administrative Procedure
Act. The decision-making process can take place behind closed doors, whereas at least the meetings
of administrative agencies, such as the SEC, generally must be open. (The best such example being
the global settlement addressing securities analyst conflicts of interest, which, it should be noted, the
SEC signed on to. See, e.g., Stephen Labaton, 10 Wall Street Firms Reach Settlement in Analyst Inquiry,
N.Y. TIMES, Apr. 29, 2003, at A1; Randall Smith et al., Wall Street Firms to Pay $1.4 Billion to
End Inquiry, Record Payment Settles Conflict-of-Interest Charges, WALL ST. J., Apr. 29, 2003, at A1.)
Ironically, the D.C. Circuit Court of Appeals recently found that the SEC itself violated the requirements
of the Administrative Procedure Act in adopting certain mutual fund rules in 2004. See infra
note 187.
146. See infra note 184 and accompanying text.
147. As one of the SEC Canons of Ethics puts it, a Commission member “should not be swayed
by partisan demands, public clamor or considerations of personal popularity or notoriety; so also he
should be above fear of unjust criticism by anyone.” 17 C.F.R. § 200.58 (2005).
148. For an overview of the independence of the SEC and its funding, see Seligman, supra note
143.