Lighten the Regulatory Load
by Alan Reynolds
October 21, 2003
Alan Reynolds is a senior fellow at the Cato Institute, a Washington think tank that advocates limited government.
It seems as though federal and state regulators feel obligated to dream up a new financial ''scandal'' every few weeks just to stay in the headlines.
There are renewed allegations of favoritism by former banker Frank Quattrone in giving big customers a first shot at ''hot'' initial public offerings, or IPOs. Never mind that there has been a three-year drought in IPOs, thanks to new hyperactive regulation. To say any IPO is ''hot'' is to say it was knowingly underpriced; but companies peddling IPOs don't prefer less money to more.
IPO investors are professional money managers and sophisticated investors who are not easily duped by analysts' salesmanship. To suggest that regulating the distribution of IPOs ''fairly'' has anything to do with ordinary investors is absurd.
One investment fund stands accused of exploiting small changes in mutual fund prices after normal market hours. This is being seized upon as an excuse by some to impose new regulations. The real fault lies with a few mutual fund companies that welcomed late trades even though their prospectuses claimed otherwise.
Mutual funds need not be prohibited from allowing late trading, but they should disclose that fact honestly. Rushing to ''do something'' to protect investors from risk (and reward) usually leaves most investors worse off. That should be the lesson of last year's hastily enacted Sarbanes-Oxley Act intended to curb corporate abuses. It undermined the customary cyclical profit rebound and depressed stock prices by increasing regulatory uncertainty and expense. Companies now have to pay more for directors and insurance to compensate for threats of imprisonment for bookkeeping blunders. And companies now must pay oodles for consultants to advise them on how to placate increasingly capricious, headline-seeking federal regulators and state prosecutors and the ''class action'' lawyers who feed on their droppings.
Politicians and prosecutors cannot possibly help investors by increasing regulatory expenses and litigation risks for the companies we invest in.
This article originally appeared in USA Today on October 21, 2003.