After Gary Gensler was tapped to head the Securities and Exchange Commission last year, it quickly became apparent that under his watch the SEC would pursue an aggressive agenda unlike anything the world of finance had experienced in decades. One result has been a wave of new rule-change proposals that has stunned Wall Street insiders who fear the end of the easy money enabled by years of lax regulation.
Take, for example, two proposed rules that deal with the disclosure of shareholder activists’ stock and swaps positions — including the SEC’s attempt to broaden the definition of investors acting as a group, forcing even more public disclosure.
Elliott Management Corp.’s Richard Zabel, the firm’s general counsel and former deputy U.S. attorney for the Southern District of New York, set the stage for hedge fund activists’ outrage at these proposals with a 32-page comment letter criticizing the SEC’s new rules with arguments from constitutional issues to conflicts with judicial precedent.
“The commission has inexplicably decided to pursue new regulations that would effectively smother activism in the U.S. capital markets,” Zabel wrote.
In addition to writing letters, Elliott’s Zabel has met with SEC officials to press his case. So have executives from Third Point, Millennium Management, ExodusPoint Capital Management, D.E. Shaw, PDT Partners, Tiger Hill Partners, Marshall Wace, and Citadel, all of whom have met with the SEC as representatives for the Managed Funds Association and the Alternative Investment Management Association, the two hedge fund lobbying groups.
But the hedge funds aren’t fighting the SEC alone: A new organization, which Institutional Investor has learned has at least one hedge fund backer, has enlisted dozens of academics to argue against the proposals, creating something of a firestorm of criticism.
That effort is the brainchild of Frank Partnoy, a law and finance professor at the UC Berkeley School of Law, who decided the SEC’s new aggressiveness was a good reason to create a nonpartisan, nonprofit institute — he named it the International Institute of Law and Finance — that could influence policy by convincing other professors to sign on to comment letters that he, and his colleague Robert Bishop, would draft.
“There’s a gap in terms of academics connecting with policymakers,” says Partnoy, a highly regarded academic and prolific writer, whose work includes several nonacademic books, including F.I.A.S.C.O., his first-person takedown of the derivatives business in which he once toiled as a salesperson at Morgan Stanley. In part, that gap exists because there is no incentive for academics to get involved.
Wonky academic comments on proposed SEC rule changes typically fly under the radar. But Partnoy made them his mission. Now his work — in comment letters signed by himself, Bishop, and other academics — is taking some heat. In part, that’s because the financing of his institute, which pays Partnoy and Bishop for their letter writing, has been shrouded in secrecy.
As a result, the new institute has been thrust into a bigger brawl with the SEC about the activist shareholder proposals.
You can read the rest of my story at Institutional Investor here: