They call themselves the “Shadow Financial Regulatory Committee.” But that’s a bit of a misnomer: the “Shadow Deregulatory Committee” would probably be more accurate.
Robert Sherretta was quick to grab the mike after the Shadow committee opened up its panel to questions from the audience. After 20 years on as an investment adviser on Wall Street, “I can tell you that there are those who are chomping at the bit to get their boiler rooms started, to take advantage of the act,” Sherretta told the audience. “They’ll keep it hidden for five to 10 years, and it will resurface in investors lawsuits. I can assure you of that.”
The room fell silent for a moment while Chester Spatt, a white-haired professor from the Carnegie Mellon University and committee member, turned to his microphone. “The broad view--we appreciate your perspective--the broad view is that there are potential suitability issues and questions regarding fraud and risk enforcement,” he said. “It’s the reason we framed the issues the way we did, emphasizing the importance of future cost-benefit analysis.”
Translation: Yes, there may be folks out there who take advantage of the new rules for raising capital to dupe guileless investors. But if and when that happens, the appropriate folks should take the appropriate measures to add up the pluses and minuses.
Sherretta told me later he didn’t leave convinced by Spatt’s comeback. But in Congress, at least, has finally begun to warm to these kind of arguments. The JOBS Act passed in early April with major bipartisan support and the president’s signature. Initially a GOP proposal, the law makes it easier for startups and other young, emerging companies--most of which begin as small businesses--to fundraise from ordinary Americans, among other investors. Like Sherretta, federal regulators and state watchdogs warned that the law could make it easier for unscrupulous companies to dupe mom-and-pop investors. But the dual promise--to create jobs and help small businesses raise capital while banks remain reluctant to lend--proved irresistible to members of Congress.
Heartened by such victories, Republicans are now pushing aggressively for repealing major parts of Dodd-Frank. AEI’s Shadow committee, by contrast, has struck more moderate tone, taking time to suggest ways to ensure that smaller efforts like the JOBS Act ultimately succeed. The legislation, for instance, allows some non-accredited companies to raise major sums of capital through crowdfunding. “We do think the SEC should monitor those for abuses,” Spatt suggested. “The committee encourages Congress to hold hearings annually, or to ask Government Accountability Office to deliver a report annually” on the legislation.
But to critics, the Shadow committee is simply offering a fig leaf--albeit one full of technical details and white papers-- that hides the real risks of deregulation. “Those of you who think that a couple of congressional committees or a GAO study is going to scare anybody off is mistaken,” Sherretta explained. Another financial industry veteran at the event, Bonnie Watchtel, raised concerns that the JOBS Act would let inexperienced investors getting fooled into thinking they were backing the next Facebook. “These are very, very speculative investments, and they are going to lose all their money,” Watchel told the audience. “That’s where the tears are going to be.”
The Shadow committee members assured the financiers that they did, in fact, hear their concerns. “That’s why this thing was entitled ‘Two Cheers for the JOBS Act!’” said Peter Wallison, AEI’s chair of financial policy studies, referring Watchel to the group’s new position paper on the law. Congress, for example, could make future changes to law to address any shortcomings, he added.
But that’s assuming that the federal government is willing to undertake the long slog of crafting carefully calibrated regulations--the Great White Hope of think-tanks across Washington--and that the financial industry will respond accordingly. That, Sherretta believes, is anything but reality.
“I come from the practitioner side of things, and I see in people in academia try to view a kind of utopia. They don’t understand that carnivorous mind that Wall Street has,” he said, cutting out of the panel early for a meeting on Capitol Hill. “It has the mindset to look for every possible loophole.”