Academic journal article Washington and Lee Law Review

Quacks or Bootleggers: Who's Really Regulating Hedge Funds?

Academic journal article Washington and Lee Law Review

Quacks or Bootleggers: Who's Really Regulating Hedge Funds?

Article excerpt

Table of Contents

I. Introduction..................368

II. The Quackery Critique...................372

A. Quacks in SOX...................373

1. The Snake Oil...................375

2. The Salesmen...................378

B. Dodd-Frank Also Quacks...................380

1. Say-on-Pay...................383

2. Independent Compensation Committees...................385

3. Expanded Clawback Provisions...................385

4. Shareholder Access Rule...................386

5. Disclosure Requirements...................387

6. The Salesmen...................389

C. The Quackery Hypothesis...................391

III. Bootleggers and Baptists.................. . 397

A. Bootlegger Theory...................401

1. What's in it for the Baptist?...................402

2. What's in it for the Bootlegger?...................404

3. What's in it for the Regulator?...................406

B. How to spot a Bootlegger...................411

C. Bootleggers or Quacks? ................... 413

IV. What is a Hedge Fund?...................414

V. The Great Recession and the Birth of Dodd-Frank...................416

A. Overarching Goals...................417

B. Criticism in the 111th Congress...................418

C. From Criticizing to Legislating...................426

1. Action in the House...................428

2. Meanwhile, in the Senate...................429

VI. Who is Dodd-Frank Protecting?...................434

A. Investors...................435

B. Public...................437

VII. Bootleggers in Dodd-Frank...................441

A. What Would Big Finance Gain?................... 443

B. Intra-Industry Conflict?...................445

C. Any Other Bootleggers Hiding?.................. . 446

VIII. Conclusion...................446

I. Introduction

On February 3, 2017, President Donald Trump issued an executive order, entitled "Core Principles for Regulating the United States Financial System,"1 described by then Press Secretary Sean Spicer2 as part of an intended effort to rescind some of the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).3 Dodd-Frank is viewed by many as "a disastrous policy"4 for our financial markets and our economy, but what makes it disastrous? Professor Stephen Bainbridge has argued that Dodd-Frank's corporate governance regime is quackery, an ineffective remedy that could even cause harm.5 This paper argues that the quackery may extend to DoddFrank's hedge fund regulations, as well. The paper then goes one step further and argues that things may be even worse, that DoddFrank's regulatory regime may be the work of bootleggers.6

Quackery would be bad enough, as the term conjures images of bloodletting, lobotomies, leeches, glysters,7 and the like. These were all once respected medical practices, yet the passage of time has revealed that they were not only useless as medical remedies, but often far more likely to kill or injure the patient than the apparent malady being "cured."8 Other supposed remedies-snake oil,9 miracle salves,10 etc.-have always been recognized for the frauds that they are by most individuals in the United States. These forms of quack medicine seem absurd today, yet many homeopathic remedies without any evidence of effectiveness continue to plague desperate patients seeking a cure for what ails them.11

The same can also be said of much of our legal and regulatory regime. Bainbridge and Romano argue that federal attempts at regulating corporate governance, an issue normally left to state legislatures and courts, shares the characteristics of quack medicine.12 There are reasons to be skeptical of the effectiveness of federal regulation, particularly as responses to crises when political pressures are high and a sense of caution may be a political liability. …

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