Monday, December 11, 2006

Two Tomes

Funny how the Interim Report of the Committee on Capital Markets Regulation came out just a few days before that Iraq Study Group Report. Apparently the SEC didn't enjoy being criticized any more than Mr. Bush did; it didn't even post on its website the normal polite/insincere press release thanking the critics for their efforts. I hadn’t realized it was National Downplay-A-Critical-Report Week, though my kids, handing over their first-quarter report cards, seemed well aware.

If you'd like to know how some bigshots feel about the report (not the Iraq one, the other one), check out Broc Romanek’s summary today on Blog. But if you're interested in the views of a complete nobody, keep reading this post.

I don’t feel qualified to comment on every recommendation, and some I’m saving for later, but here are a few reactions:

Paraphrased Committee Recommendation #1: "SEC, cut out all this nasty rule-mongering and adopt ‘principles-based’ regulation."

What I think: To try to make the SEC feel bad, the Committee speaks lovingly of banking regulators, who use a touchy-feely "safety and soundness" approach and rely less on enforcement. But as a lawyer I found the bank regulators even more annoying than the securities folks, and often scarier. With principles-based regulation, the guys being regulated get to interpret the principles, but so do the regulators, and arguing gets expensive. Subjecting yourself to this type of regulatory scheme is like putting on leggings to go out- it sounds cool, but after you do it you realize it was a mistake.

Paraphrased Committee Recommendation #2: "SEC, do a real cost-benefit analysis before you adopt more of your stupid rules."

What I think: I don’t have a clue whether regulatory cost-benefit analysis is a real science. If it is, I’m all for it. Whatever. What interests me more is one amazing sentence I found buried in this section. Discussing how the SEC might get these analyses done, the Committee helpfully suggests that “the use of seconded personnel with experience from securities firms could speed the development of an in-house analytic capability and make it more effective.” I believe this roughly translates to "hey, let’s get Goldman Sachs in here to second-guess the SEC." Thank you, Mr. Paulson, for your generous offer.

Paraphrased Recommendation #3: "SEC, stop forcing companies to treat institutions as if they were normal clueless investors."

What I think: I mostly agree. In my past life I was involved in several futile efforts to convince the SEC to do just that, and never understood why they hated the idea so much. The concept makes sense, so go for it.

Paraphrased Recommendation #4: “Someone please fix this wacky system with all these different regulators overseeing the same companies. The Europeans are making fun of us.”

What I think: Same as #3.

Paraphrased Recommendation #5: "Maybe if we strengthen shareholders’ rights for real, say with majority voting, we won't need to rely as much on regulation."

What I think: Duh.

Paraphrased Recommendation #6: “Hey, Justice Department, did you ever think maybe it’s not such a good idea to prosecute corporations under criminal statutes and force them to waive attorney-client privilege?”

What I think: Good point. I said so before, here and here.

Paraphrased Recommendation #7: "SEC, don’t be so hard on those nice outside directors. You’re scaring them."

What I think: This one is so yummy it deserves its own post, to be drafted in the near future.

If nothing else, the report succeeded in acquiring a nickname - the "Scott Report" - after Harvard professor Hal Scott, the Committee’s director. Mr. Bush, known for creative nicknames, no doubt has a much better one for his awful Iraq report card.