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

PAREDES.DOC
9/8/2006 9:12:27 AM
1020 UNIVERSITY OF ILLINOIS LAW REVIEW [Vol. 2006
chief securities regulator as well as to settle the markets and boost investor
confidence. At a minimum, the SEC may have to regulate enough to
avoid provoking public outrage for seemingly taking a permissive stance.
This is true even if the prudent policy, when it comes to the narrower
substantive question of how best to regulate the securities markets,
would be to take a more moderate approach. The institutional legitimacy
of the SEC is a worthy consideration, and how the SEC measures
up to the public’s perception of a proper regulatory response matters. 173
Second, not only may the public demand SEC action, but the SEC
staff might too. This is not to suggest that an administrative agency
should regulate to please the staff. It is to say, though, that staff morale
matters. A demoralized staff can undercut an agency’s effectiveness and,
in some instances, talented individuals will simply leave. It is reasonable
to think that the SEC staff would have been demoralized if the agency
had not cracked down in response to the abuses at Enron, WorldCom,
and elsewhere. One can easily imagine the staff questioning what the
SEC’s purpose is if it is not to respond with a heavy hand to such a wave
of scandal.
Third, if the SEC had not stepped up its regulatory efforts by adopting
a host of new regulations, bringing a record number of enforcement
actions, and imposing historic civil fines, some other lawmaker probably
would have taken such steps. In particular, the SEC’s aggressive stance
to occupy the field of securities regulation, including the SEC’s decision
to extend the Advisers Act to cover hedge fund managers, might have
kept Eliot Spitzer from asserting the New York Attorney General’s Office
further into securities markets, and the SEC’s active agenda might
have kept Congress from enacting more legislation if it perceived the
SEC as being too passive. Even those who have been critical of the SEC
for overregulating might have been stuck with a “pick your poison”
problem in which the active SEC of the past few years was the best available
option when compared to the risk of an even more active Spitzer or
Congress had the SEC been less aggressive. In short, SEC activism
might have arrested a more burdensome crackdown by others.
173. For more on administrative agency legitimacy generally, see, for example, Bressman, supra
note 149. See also Richard B. Stewart, The Reformation of American Administrative Law, 88 HARV.
L. REV. 1667 (1975). For relevant discussions of Stewart, see Matthew D. Adler, Justification, Legitimacy,
and Administrative Governance, ISSUES IN LEGAL SCHOLARSHIP (2005), available at http://www.
bepress.com/ils/iss6/art3/; Jerry L. Mashaw, Structuring a “Dense Complexity”: Accountability and the
Project of Administrative Law, ISSUES IN LEGAL SCHOLARSHIP (2005), available at http://www.
bepress.com/ils/iss6/art4/. To many individuals, the mere existence of malfeasance proves that federal
securities regulation was not stringent enough. There is, of course, a different way of looking at it. It
might be conclusive proof that the regulatory regime is overly burdensome if there were no frauds.
This is not to say that a major fraud, particularly when it leads to a company’s collapse, is good in and
of itself. It is to say, though, that an optimal regulatory regime will be flexible enough to allow not
only for mistakes, but also for some corruption and abuse.