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What if the NCAA adopted Dodd-Frank?

Posted by Larry Ribstein on September 30, 2011

Larcker & Tayan speculate, for example (footnotes omitted):

Researchers have long noted that the compensation of college football coaches has risen faster than the compensation of other university employees. According to one study, the compensation awarded to head coaches rose 500 percent between 1986 and 2007. By comparison, the compensation of university presidents rose 100 percent and the compensation of full professors only 30 percent over this period. Student athletes receive no compensation. As a result, the average head football coach of an NCAA Division I school earns three times the compensation of the average president, 17 times the salary of an assistant professor, and an infinite amount more than the average student athlete. The NCAA Act required that a university calculate and disclose these ratios for its own constituents.

They ask:

* If these requirements would not work in an athletic setting, should we expect them to work in business?
* Why are the governance provisions of Dodd-Frank legally required, rather than voluntarily adopted by individual companies?
* Why does Dodd-Frank place such emphasis on executive compensation and disclosure? Will its compensation requirements reduce governance failures?

Posted in financial regulation | 12 Comments »

SEC Organizational Reform Hearing

Posted by J.W. Verret on September 14, 2011

The semester is off to a bang.  I arrived at Stanford Monday to start teaching in the Law School and begin a research fellowship at the Hoover Institution.  Yesterday I hiked in the mountains overlooking the SF Bay.  Today I am flying back to DC (and blogging in flight, how cool is that) to testify Thursday before the House Committee on Financial Services alongside SEC Chairman Schapiro, former Chairman Pitt, and former Commissioner Paul Atkins on proposed legislation from Congressman Scott Garrett and Chairman Spencer Bachus to reform and reshape the SEC.

Part of the hearing, titled “Fixing the Watchdog: Legislative Proposals to Improve and Enhance the Securities and Exchange Commission” will deal with the study on SEC organizational reform mandated by the Dodd-Frank Act and conducted by the Boston Consulting Group.  Frankly, I found it full of quotes from the consultant’s desk manual, with references to “no-regrets implementation,” “business process optimization” and “multi-faceted transformation.”  I believe the technical term is gobbledy-gook.

The remainder of the hearing will involve a discussion of the SEC Organizational Reform Act (or “Bachus Bill”) and the SEC Regulatory Accountability Act (or “Garrett Bill”).  The Bachus Bill proposes a number of organizational reforms, like breaking up the new Division of Risk, Strategy, and Financial Innovation to embed the economists there back in to the various functional divisions.  The Garrett Bill seeks to strengthen the guiding principles originally formulated in the NSMIA amendments by elaborating on how the agency can meet its economic analysis burden in rule-making.

I thought I would give TOTM readers a sneak peak at my testimony.  I aim to make two key points.  First, sincere economic analysis is important.  SEC rules have consistently done a poor job of meeting the mandate of the NSMIA to consider the effect of new rules on efficiency, competition, and capital formation, and they will continue to do a poor job until they hire more economists and give them increased authority in the enforcement and the rule-making process.  Second, the SEC’s mission should include an explicit requirement that it consider the effect of new rules on the state based system of business entity formation.

Here’s a sneak peak at my testimony for TOTM readers:

Chairman Bachus, Ranking Member Frank, and distinguished members of the Committee, it is a privilege to testify today.  My name is J.W. Verret.  I am an Assistant Professor of Law at Stanford Law School where I teach corporate and securities law.  I also serve as a Fellow at the Hoover Institution and as a Senior Scholar at the Mercatus
Center at George Mason University.  I am currently on leave from the George Mason Law School.

My testimony today will focus on two important and necessary reforms.

First, I will argue that clarifying the SEC’s legislative mandate to conduct economic analysis and a commitment of authority to economists on staff at the SEC are both vital to ensure that new rules work for investors rather than against them.  Second, I will urge that the SEC be required to consider the impact of new rules on the state-based system of business incorporation.

Every President since Ronald Reagan has requested that independent agencies like the SEC commit to sincere economic cost-benefit analysis of new rules.  Further, unlike many other independent agencies the SEC is subject to a legislative mandate that it consider the effect of most new rules on investor protection, efficiency, competition and capital formation.

The latter three principles have been interpreted as requiring a form of cost-benefit economic analysis using empirical evidence, economic theory, and compliance cost data.  These tools help to determine rule impact on stock prices and stock exchange competitiveness and measure compliance costs that are passed on to investors.

Three times in the last ten years private parties have successfully challenged SEC rules for failure to meet these requirements.  Over the three cases, no less than five distinguished jurists on the DC Circuit, appointed during administrations of both Republican and Democratic Presidents, found the SEC’s economic analysis wanting. One
failure might have been an aberation, three failures out of three total challenges is a dangerous pattern.

Many SEC rules have treated the economic analysis requirements as an afterthought. This is in part a consequence of the low priority the Commission places on economic analysis, evidenced by the fact that economists have no significant authority in the rule-making process or the enforcement process.

As an example of the level of analysis typically given to significant rule-making, consider the SEC’s final release of its implementation of Section 404(b) of the Sarbanes-Oxley Act.  The SEC estimated that the rule would impose an annual cost of $91,000 per publicly traded company.  In fact a subsequent SEC study five years later found average implementation costs for 404(b) of $2.87 million per company.

That error in judgment only applies to estimates of direct costs.  The SEC gave no consideration whatsoever to the more important category of indirect costs, like the impact of the rule on the volume of new offerings or IPOs on US exchanges.

In Business Roundtable v. SEC alone the SEC estimates it dedicated over $2.5 million in staff hours to a rule that was struck down.  An honest commitment by the SEC to empower economists in the rule-making process will be a vital first step to ensure the mistakes of the proxy access rule are not replicated in future rules.

I also support the goal in H.R. 2308 to further elaborate on the economic analysis requirements.  I would suggest, in light of the importance and pervasiveness of the state-based system of corporate governance, that the bill include a provision requiring the SEC to consider the impact of new rules on the states when rule-making touches on issues of corporate governance.

The U.S. Supreme Court has noted that “No principle of corporation law and practice is more firmly established than a state’s authority to regulate domestic corporations.”

Delaware is one prominent example, serving as the state of incorporation for half of all publicly traded companies.  Its corporate code is so highly valued among shareholders that the mere fact of Delaware incorporation typically earns a publicly traded company a 2-8% increase in value.  Many other states also compete for incorporations, particularly New York, Massachusetts, California and Texas.

In order to fully appreciate this fundamental characteristic of our system, I would urge adding the following language to H.R. 2308:

“The Commission shall consider the impact of new rules on the traditional role of states in governing the internal affairs of business entities and whether it can achieve its stated objective without preempting state law.”

The SEC can comply by taking into account commentary from state governors and state secretaries of state during the open comment period.  It can minimize the preemptive effect of new rules by including references to state law where appropriate similar to one
already found in Section 14a-8.  It can also commit to a process for seeking guidance on state corporate law by creating a mandatory state court certification procedure similar to that used by the SEC in the AFSCME v. AIG case in 2008.

I thank you again for the opportunity to testify and I look forward to answering your questions.

Posted in corporate law, cost-benefit analysis, economics, financial regulation, securities regulation, truth on the market | 3 Comments »

Dodd-Frank and law’s information revolution

Posted by Larry Ribstein on September 9, 2011

In Law’s Information Revolution, Kobayashi and I note that:

a Davis, Polk & Wardwell LLP report on Dodd-Frank became a main way to access materials relating to this long and complex law. The firms hope to use these materials to generate business. Law firms might also sell subscriptions to more sophisticated materials or offer them for free only to clients in order to bind the clients to the firm.

Indeed, this has come to pass.  The NYT discusses various businesses which have sprung up in reaction to Dodd-Frank:

Call it Dodd-Frank Inc. A year after Congress passed the broadest financial overhaul since the Great Depression, the law has spawned a host of new businesses to help Wall Street comply — and capitalize — on the hundreds of new regulations.

[Aside:  Who says the current administration is not creating jobs?]

One example:

Some law firms have even become small-scale publishing houses. Davis Polk & Wardwell, for example, is offering a $7,500-a-month subscription to a Web site that tracks the progress of every Dodd-Frank requirement. So far, more than 30 large financial companies have signed up.

As Congress started drafting the legislation in the spring of 2010, Davis Polk & Wardwell began compiling a spreadsheet to keep its lawyers updated on hundreds of regulations. Then, Gabriel D. Rosenberg, a young associate, proposed turning the firm’s database of legal summaries and rule-making deadlines into an interactive site — and spent a weekend building a prototype.

By late July, clients started logging on to the “regulatory tracker” — and have steered more business to the firm as a result, said Randall D. Guynn, the head of Davis Polk’s financial institutions group. “There were a lot of new relationships because people want this,” he said.

While we’re at it, why not privatize Dodd-Frank rule-writing as well?  See my and Kobayashi’s Law as a Byproduct.

Posted in financial regulation, legal profession | Comments Off

Incentive pay for bank regulators

Posted by Larry Ribstein on September 9, 2011

Now that regulating banker pay has been studied exhaustively, here’s something else worth studying:  bank regulator pay.  Fred Tung and Todd Henderson are on the case, in Pay for Regulator Performance.  Here’s the abstract:

Few doubt that executive compensation arrangements encouraged the excessive risk taking by banks that led to the recent Financial Crisis. Accordingly, academics and lawmakers have called for the reform of banker pay practices. In this Article, we argue that regulator pay is to blame as well, and that fixing it may be easier and more effective than reforming banker pay. Regulatory failures during the Financial Crisis resulted at least in part from a lack of sufficient incentives for examiners to act aggressively to prevent excessive risk. Bank regulators are rarely paid for performance, and in atypical cases involving performance bonus programs, the bonuses have been allocated in highly inefficient ways. We propose that regulators, specifically bank examiners, be compensated with a debt-heavy mix of phantom bank equity and debt, as well as a separate bonus linked to the timing of the decision to shut down a bank. Our pay-for-performance approach for regulators would help reduce the incidence of future regulatory failures

This is an interesting and well-executed idea which inspired a few thoughts.

First, if private-sector-type compensation for regulators is worthwhile, why not just rely on private sector rather than government regulators?  It would seem that the difference between government and private industry is really all about incentives.  Indeed, if we only semi-privatize by injecting market incentives into government actors, this could create tension in incentives analogous to imposing “corporate social responsibility” on corporate agents.

Second, might this proposal work for other types of gatekeepers, such as auditors?  Of course accounting regulation has moved in the opposite direction, toward making them more “independent.”  The Tung-Henderson analysis suggests that carefully structured performance pay may be a better way to go.

Third, if bank regulators, what about other public servants, including prosecutors? As I’ve written in my recently published Agents Prosecuting Agents (SSRN draft), they are agents too. Would incentive compensation better align their interests with those of the public?  My article discusses some problems with this (footnotes omitted):

Designing incentive compensation for prosecutors presents significant challenges.  Even in private law firms in which lawyers produce a clear financial output in the form of fees, there is controversy over whether billable hours or lockstep seniority-based compensation provides the best overall incentives.  The compensation design challenge is greater for prosecutors because there is no measure of the value of prosecutorial efforts.  Obviously a simple metric such as number of prosecutions would skew incentives, in that it may induce prosecutors to ignore the social costs of misguided prosecutions.  One author has proposed compensation based on convictions of charged crimes with deductions for findings of prosecutorial misconduct.  However, this could skew incentives toward, for example, undercharging defendants and over-caution.  On the other hand, tests that try to take more factors into account would be very costly to apply.

Tung and Henderson show how to overcome these metrics problems with bank regulators.  I’m skeptical analogous devices would work for prosecutors, even regarding purely corporate crime.  You’d have to, among other things, measure the deterrence effects of particular prosecutions. Not sure event studies could manage this.

There’s a lot more in this thought-provoking piece. Read the whole thing.

Posted in executive compensation, financial regulation | 1 Comment »

2011 Illinois Corporate Colloquium: Shadab on credit risk transfer

Posted by Larry Ribstein on September 8, 2011

The 2011 Illinois Corporate Colloquium got off to a good start with Houman Shadab presenting his paper, The Good, the Bad, and the Savvy: Credit Risk Transfer Governance.  Here’s the abstract:

Goldman Sachs and AIG on the eve of the 2008 financial crisis were bound together through a web of credit risk transfer (CRT) contracts in the form of credit default swaps (CDSs) and synthetic collateralized debt obligations (CDOs). Synthetic CDOs enabled hedge funds to profit from the ultimate bursting of the housing bubble due to the funds’ savvy in understanding CRT better than their counterparties. This Article constructs a novel theory of CRT that extends the insights of creditor governance theory to CRT transactions. Creditor governance theory has thus far has been primarily limited to analyzing loans and bonds and not CRT instruments.

Good CRT governance can protect investors (and counterparties) from losses even if the underlying assets whose credit risk is transferred experience significant losses. Bad CRT governance, by contrast, creates transaction structures that leave parties with highly sensitive exposures to losses in underlying credit instruments. I argue that for unfunded CRT transactions such as CDSs, good governance can be achieved through counterparty governance mechanisms consisting of bilateral monitoring, collateralization, and a robust market infrastructure even without the use of covenants, central clearinghouses, or swap execution facilities. Likewise, good governance for funded CRT transactions such as CDOs can be achieved through special purpose vehicle (SPV) governance mechanisms consisting of strong monitoring, substantial ex ante specification of creditors’ rights, performance-based covenants, and active SPV management even with a weak market infrastructure and without risk retention by the issuer or manager.

In practice, most types of CRT transactions are well governed despite being subject to relatively little government regulation and oversight. This explains why the CDS market remained generally stable throughout the financial crisis and securitizations that transferred the credit risk of assets other than subprime residential mortgage-backed securities (RMBS), such as collateralized loan obligations and commercial mortgage-backed securities, performed relatively well and were not a source of systemic risk. Accordingly, this Article challenges much of the conventional and scholarly wisdom regarding CRT, which overemphasizes a lack of regulation as a primary cause of losses and systemic risk from CRT transactions. To the contrary, the financial crisis of 2008 is best understood as resulting from poor CRT governance. The only transactions underlying the financial crisis were cash CDOs and unfunded super senior tranches of synthetic CDOs whose prices failed to reflect that they were poorly governed yet nonetheless transferring massive credit risk in the form of subprime RMBS.

Policymaking initiatives should thus narrowly target the uniquely bad governance of subprime residential mortgage-related CRT, but not the CDS or securitization markets more broadly. This Article concludes by identifying several implications of CRT governance for financial regulators implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. An important implication of CRT governance is that additional regulation may increase the risk of CRT transactions.

The paper’s main contribution is to extend the “creditor governance” literature to the alphabet soup of credit risk transfer instruments. Well-governed instruments benefit society, poorly governed instruments don’t. The “savvy,” including the likes of John Paulson, can make money from correctly recognizing risks ahead of the rest of the market.

This approach somewhat simplifies analysis of the financial crash by reducing it to a governance problem.  But as we discussed in the Colloquium, this raises another question:  why were RMBS’s poorly governed while collateralized loan obligations and commercial mortgage-backed securities were not?  More precisely, why did the market effectively discipline some types of instruments and not others?  We need to answer this question to effectively regulate future transactions.

The obvious answer would seem to be that the market was able to price some risks better than others.  But why is that?

Houman suggests that the reason may be that the real risk in RMBS’s was in a second tier of securities that were hidden from investors’ immediate view.  I was skeptical of that explanation for two reasons.  First, since investors knew about the existence of the second level, it would seem their ignorance would be priced.

A second reason for skepticism is Bobby Bartlett’s presentation to last year’s colloquium:  Inefficiencies in the Information Thicket: A Case Study of Derivative Disclosures During the Financial Crisis.  Bartlett shows that the market did not appropriately discount disclosed risks of RMBS’s. He concludes by noting:

Reform efforts aimed at enhancing derivative disclosures should accordingly focus on mechanisms to promote the rapid collection and compilation of disclosed information as well as the psychological processes by which information obtains salience.

What specific reform efforts might we consider?  When I concluded the discussion with that question, Houman responded that investors may have over-relied on the credit rating services.  This suggests we should eliminate the official status of credit ratings in financial regulation — something that Dodd-Frank did.  It will be interesting to test whether this has the desired effect.

So maybe Dodd-Frank did do some good.  Of course it also did a lot of other things.

In all, an interesting and timely discussion in the tradition of the CoIloquium to present theoretical perspectives on corporate governance that are both engaging for faculty and useful for students. (And, yes, I think this combination is possible).   I’m looking forward to more great talks this semester, as in prior semesters (see the Colloquium link above for speaker lists).  I hope to get time to blog on most of them.

Update:  Houman’s blog, “Lawbitrage,” notes that the RMBS market apparently has learned from the past.  This reminds us that even if markets don’t always operate perfectly, they at least have the capacity to adjust to mistakes.  Compare government.

Posted in financial regulation, law school | Comments Off

Another move to over-fiduciarize investing

Posted by Larry Ribstein on August 12, 2011

The WSJ comments on a dumb proposal by the Employee Benefits Security Administration to broaden the definition of “fiduciary” to cover brokerage services with respect to retirement accounts.

As the WSJ notes,

For decades the finance industry has provided investors roughly two kinds of services: the “advisory” model, in which an investment professional makes trading decisions, provides specialized advice and charges savers an annual fee; and the “brokerage” model, in which the saver makes the decisions and pays a fee for each trade and occasional advice. The latter model can be cheaper because the broker is often compensated by the company whose products he’s offering.* * *

The rule would have huge consequences for the retirement savings industry. Brokers would have to weigh the cost of higher regulatory compliance against staying in the business. Investors would pay more for trades and advice and have fewer investment choices. Investment educational seminars would likely halt in many cases, lest organizers think they’ll be held liable as a fiduciary for giving general investment advice.

Many firms would raise minimum investment amounts to cover their higher costs, cutting off access to lower-income savers. Consultancy Oliver Wyman surveyed about 40% of the investment retirement account market and estimated the proposed rule could “eliminate access to meaningful investment services for over seven million IRAs.” Investors could see “direct costs” rise between 75% and 195%. * * *

Moreover, the SEC is still studying the broker-dealer fiduciary issue pursuant to Dodd-Frank.  Despite its failings, the SEC is the more appropriate agency to consider this sort of move.

The big problem here is that the proposal seeks to apply a fiduciary duty to a relationship that is simply not fiduciary, resulting in massive confusion.  As I said in my recently published Fencing Fiduciary Duties concerning moves to make brokers fiduciaries:

Customers generally do not delegate fiduciary-type open-ended power that would justify fiduciary-type selflessness consistent with this article’s analysis.  Brokers, dealers, and advisers usually lack authority to commit the customer’s property without further instructions.  Nor should customers expect unselfish conduct from people who are selling securities for a commission or profit.  Thus, application of fiduciary duties to brokers, dealers, and advisers would not be consistent with customers’ expectations and would create a potential for confusion.

The Supreme Court’s recent Jones v. Harris provides a good example of the “potential for confusion” in the context of fiduciary duties for mutual fund advisors under Section 36(b) of the Investment Company Act of 1940.  I recently discussed this case and the misbegotten history of this regulation.

Another day, another industry targeted for crippling regulation — in this case smothering investor choice with a wet fiduciary blanket.  The haphazard expansion of fiduciary duties is a senseless move by a regulator that seems to have no idea what it’s doing.

Posted in fiduciary duties, financial regulation | 2 Comments »

Short-selling and market efficiency

Posted by Larry Ribstein on August 10, 2011

Another day, another paper showing evidence of the negative effect on market efficiency of bans on short-selling.  Today it’s Yerkes, Regulatory Trading Restrictions, Overvaluation, and Insider Selling.  Here’s the abstract:

A contentious debate is emerging over the regulatory response to the financial crisis. This paper takes advantage of a rare opportunity to empirically test sweeping short sale constraints. Specifically, I analyze 2008 trading restrictions which prohibited short selling in all U.S. financial stocks. It is not clear whether restrictions keep negative sentiment off the market, sending prices up, or discourage ownership by stock lenders, sending prices down. It is also debatable how coincident events such as TARP affect prices, since avoiding bankruptcy is beneficial, but equity issuance and poor capitalization is not. The findings in this paper have three important implications for market participants. First, positive abnormal return and increased insider selling are consistent with an overvaluation hypothesis. The possibility of overvaluation due to TARP is ruled out since only a small percentage of restricted firms receive TARP funding and prices react negatively when they do. The overvaluation finding is consistent with prior studies of trading restrictions, such as IPO lockups. Second, additional evidence is provided on the documented relationship between institutional ownership and short sale constraints. Firms with low institutional ownership, low short interest, small market cap, and firms traded on the NASDAQ were least affected by the ban. This is relevant since 95% of stocks are not constrained by institutional ownership levels. Finally, short selling is known to facilitate information revelation and I find large declines in short interest result in less market efficiency.

Want more evidence of the efficiency effects of short-selling and the inefficiency of banning it?  Try this, this, and this. Here’s one of many posts on government’s war on the shorts (aka killing the messenger). And Bruce Kobayashi and my broader criticism of regulation of “outsider trading.”

Posted in financial regulation, securities regulation | 2 Comments »

Levin and Goldman

Posted by Larry Ribstein on June 8, 2011

Pandering and scapegoating are not new activities for politicians, but Carl Levin has perfected these dark arts.  Most recently the Senator’s game has been to demonize Goldman, culminating in accusations that its ceo, Lloyd Blankfein, engaged in criminal behavior.  Per WaPo last April, Levin

said federal prosecutors should review whether to bring perjury charges against Goldman Sachs Chief Executive Officer Lloyd Blankfein and other current and former employees who testified in Congress last year. Levin said they denied under oath that Goldman Sachs took a financial position against the mortgage market solely for its own profit, statements the senator said were untrue.

A spectacular show trial for perjury, complete with perp walks, would have been a great distraction from public questions concerning the government’s and Levin’s own role in creating the financial crisis and their floundering and inept regulation in its wake. 

Levin had plenty of help from kindred spirits in film and journalism and even in the executive branch.  And the underlying story played into the longstanding narrative of evil shorts.

But fortunately not everybody played along. Holman Jenkins and Andrew Ross Sorkin have now exposed gaping holes in the Senate subcommittee report that launched Levin’s accusations. Turns out Goldman didn’t have a “massive short” on the mortgage market after all, just as Blankfein had said.

So Levin is quietly slinking away from his current ploy, no doubt to hatch another one. In the meantime he’s demonstrated that politicians can misbehave even when they keep their pants on.

Posted in corporate crime, financial regulation, politics | Comments Off

Dodd-Frank’s regulatory vacuum

Posted by Larry Ribstein on June 7, 2011

There’s been a lot of talk about the regulatory impact on job-creation.  Add this: the regulatory vacuum resulting from an absence of rules under Dodd-Frank.

A WSJ article notes that

More than 100 new derivatives requirements in the law take effect on July 16, even though regulators have yet to issue final rules in the affected areas. The holdup raises concerns that a large swath of the financial system might be thrown into legal gray areas.

So what will happen? 

  • DF requires most swaps to be traded on an exchange, but regulators haven’t decided the rules that govern all this. 
  • There are no forms, systems and procedures for complying with proposed business-conduct rules for swap dealers.
  • It’s not clear who can be a swap dealer.
  • An exemption for OTC derivatives trading by corporate end users may end on July 16.

Even if regulators issue guidance for the unregulated areas, Rep. Frank Lucas, chairman of the House Agriculture Committee, said “these contracts won’t be protected from the trial bar. This could prove hugely disruptive to businesses.” One lawyer notes that “any company that takes their compliance obligation seriously faces an awful lot of dilemmas as to what do you do to be in compliance with the law when the law is murky at best.”

With the result noted by a corporate treasurer: “Any uncertainty about the future environment is one more hurdle to get over for a company to make a decision to invest and grow their business and ultimately sustain and grow jobs.”

Posted in financial regulation | 2 Comments »

The whistleblower rules and insider trading

Posted by Larry Ribstein on May 25, 2011

The SEC has adopted Dodd-Frank whistleblower rules (see Law Blog story) which have sparked controversy because they award bounties without requiring use of internal corporate reporting mechanisms. Whistleblower organizations are happy, corporations not so much.

It’s a good time to remember my proposal last year to let the whistleblowers trade:

The beauty of the insider trading approach to uncovering fraud is that it reduces the need for a lot of the Dodd-Frank whistle-blowing apparatus. The market decides through its price movements how important or original the information is and computes the insider’s compensation for disclosing it. While the insider might still worry about protecting his job, rewards from selling the information could make the disclosure worth the risk.

Another advantage of the insider trading approach is that it does not necessarily bypass the corporation as a first line of defense against employee fraud. The selling-induced stock drop could motivate honest executives to look into the cause of the decline and take action. The Dodd-Frank procedure always bypasses the corporation by rewarding only whistleblowers who bring new information to the SEC. * * *

This idea would not sit well with the SEC, which seemingly has made insider trading rather than Madoff-scale fraud its main target. There is a separate and broader issue whether the SEC’s and Congress’s obsessions with insider trading and short-selling perversely reduce the amount of information in the market and divert it from its main task. But whatever the SEC and Congress do about insider trading generally, they should at least consider using it as a weapon in the war against corporate fraud.

Posted in financial regulation, insider trading | 2 Comments »

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