Paredes for Commissioner

The WSJ reports that the White House is interviewing Wash U's Troy Paredes among three candidates for the Republican SEC commissioner slot that will open on the expiration of Paul Atkins's term.

That's good news.

Paredes is a prolific writer and current co-author on Loss & Seligman. And he has some intriguing ideas about the SEC's business. Consider his paper, On the Decision to Regulate Hedge Funds: The SEC’s Regulatory Philosophy, Style, and Mission, 2006 University of Illinois Law Review 975, in which Paredes criticizes the SEC's decision to regulate hedge funds. Per the abstract, Paredes notes that the SEC

did not want to get caught flat footed and embarrassed again, as it had been by Enron, WorldCom, the mutual fund abuses, and securities analyst conflicts of interest

and that

the risk of fraud and other hedge fund abuses weighed disproportionately on the agency, prompting it to act when it had not in the past.

As Paredes points out, "[t]he particular concern is that such political and psychological influences result in overregulation."

And then Paredes suggests what the SEC might do about that concern: 

To mitigate the risk of overregulation, the SEC should increasingly consider using default rules instead of mandatory rules. Defaults at least give parties a chance to opt out if the SEC goes too far.

I've made both these points in papers that Paredes cited. As to the risk of overregulation when bubbles pop, see Bubble Laws, 40 Hous. L. Rev. 77 (2003). As to the use of default rules to mitigate overregulation, see Sarbanes-Oxley after Three Years.

It would be great if somebody who understands both the causes and possible cures of excessive regulation of financial markets were actually in a position to put that understanding into action.

Comments

[M.D. Fatwa]

Since the pressure for this over-regulation is political, and often driven by Congress, what makes you think a mere SEC commissioner would "actually in a position to put that understanding into action"? (For that matter, when is an SEC commissioner ever in a position to put much into action?)