This week the Senate is scheduled to hear debate over the latest financial regulation reform bill (also known as the Dodd Bill). Part of the Dodd Bill incorporated aspects from a bill from Senator Schumer introduced last summer, against which I testified, called the “Shareholder’s Bill of Rights.” In light of this week’s momentous events, I thought it might be a good time to post my draft of an “Investor’s Bill of Rights” that I have been thinking about.
I. Investors have a right to invest with managers who treat the company with the same care that a reasonably prudent person would give their own investments. If governments become stockholders in private industry and gain control over a business, they should be held to the same standard of loyalty and care in maximizing returns for investors as any other person controlling a publicly traded company.
II. Investors have the right to disclosure designed to present an accurate representation of the risks they face and the impact of those risks on their investments. Investors have a right to a clear warning when a company is unable to gauge its exposure to potentially catastrophic risk.
III. Investors have a right to redress against managers and investment advisers who commit fraud, and receive just compensation for losses that directly result from that fraud. Investors have a right to rules that clearly define fraud. Investors should not be used as a foil for politically motivated prosecutions that purport to have their interests at heart.
IV. Investors have a right to know when investments are safe or insured and when they are not. Investors have a right not to be lulled into false confidence based on implicit government backing or empty regulation.
V. Investors have a right to permit their companies to craft executive compensation packages that promise to buy the best talent properly motivated to maximize profits at the company during good times and minimize losses in bad times.
VI. Investors have a right to participate in elections for corporate directors by methods they design themselves, free from the tyranny of a minority of investors who may seek to use a corporation toward purposes that might limit returns and free from “one size fits all” federal mandates.
VII. Debt and equity investors have the right to clear and consistent procedures for liquidation when their investment becomes insolvent, no matter how large or complex that business might be. They have a right to know precise criteria a government will use in providing bailouts, with vague references to systemic risk being insufficient justification, and companies should remain free from coerced acceptance of government backing against their wishes. Healthy institutions should not be forced to subsidize unhealthy institutions.
VIII. Investor’s have a right to regulation protecting their rights only after the benefits of new regulation are strictly measured against compliance costs, so that investors don’t pay for regulation generating the appearance of regulatory success merely because more regulations are issued. The sole fact that an industry is currently unregulated is insufficient justification for new regulation.
IX. Investors have a right to choose the analysts they trust to advise them in equity or debt investments free from regulatory pressure to
favor select institutions or regulatory requirements that only select agencies may rate debt for regulatory purposes.
X. Sophisticated investors and institutions have the right to security in their property rights to privately negotiated agreements with other sophisticated investors and institutions.