Focus Areas:    Securities Regulation

Jonathan Macey for SEC Commissioner

In a must-read op-ed in today’s Wall Street Journal, Yale Law’s Jonathan Macey weighs in on Goldman Sachs’s decision to allow only foreign gazillionaires — no Americans, regardless of their wealth or sophistication — to invest in new shares of Facebook.

Numerous observers have portrayed Goldman’s move as a “victory for the SEC.”  The New York Times‘ Dealbook called it “a serious embarrassment for Goldman.”  In reality, Macey contends, “[i]t is the SEC that should be embarrassed” for fostering a system in which, as Larry put it,  “the US securities laws exclud[e] US investors from investing in a US company in the US.”

Echoing a number of Larry’s observations, Macey explains:

Thanks to SEC regulation and the litigious atmosphere it fosters — not to mention Sarbanes-Oxley’s onerous burdens on corporate executives — the whole capital formation process is moving offshore. The U.S. share of total equity raised in the world’s capital markets is shrinking, while the number of U.S. companies listing their shares for trading exclusively in foreign markets has risen steadily for the past five years.

Macey then points a finger at the SEC’s overarching regulatory philosophy, which views investors — even rich, sophisticated ones — as needing governmental protection and displays scant regard for the unintended consequences of paternalistic limitations on the freedom of contract:

The SEC’s fundamental approach to regulation involves depriving investors of opportunities in order to protect them. This was not much of a problem in the immediate post-World War II period. Before Japan and Europe rebuilt, and before China emerged as an economic giant, the U.S. had the only large pools of investment capital in the world and dominated the financial scene. During this happy period of U.S. primacy, the SEC, along with most academics, took the rather ludicrous view that it actually deserved the credit for the primacy of U.S. capital markets. That world is long gone.

Still, according to the SEC, all investors large and small must be protected against the danger that they will succumb to a feeding frenzy of enthusiasm when given the opportunity to invest in a new deal. For example, the SEC rules governing the Facebook offering until Goldman pulled the plug include the requirement that the stock being sold “cannot be the subject of advertising, general promotional seminars or public meetings in connection with the offering.” The concern here is that publicity about a deal might, heaven forbid, create interest among investors. …

The investors who supposedly are being protected by the SEC’s rules here are not unsophisticated small investors. Goldman had limited the marketing of Facebook’s shares to the billionaires and large institutions that constitute its wealthiest clients.

Finally, Macey suggests that the Obama Administration, which has recently committed itself to ferreting out cost-ineffective regulations that “make our economy less competitive,” take a long, hard look at the “investor-protective” securities rules that drive capital overseas and prevent American investors from having access to the wealth-enhancing opportunities available to their European and Asian friends:

Ironically, the Goldman decision to move the Facebook deal offshore was announced just as President Obama was acknowledging in these editorial pages that “regulations do have costs” and saying that he would order a government-wide review to eliminate rules that cripple economic growth. That review should include the rules promulgated by the SEC, lest we continue to see U.S. capital markets fade into irrelevance.

If we ever get another President who believes that markets, while imperfect, generally work well, that government intervention often fails to make things better, and that regulations should be narrowly tailored to fix legimitate market failures, he or she should look hard at Prof. Macey for a spot on the SEC.