April 9, 2008
This proposed rule and the industry propaganda reflected in the SIFMA white paper is reminiscent of the Tobacco Institutes disinformation on behalf of the Tobacco industry in the 1960-80s. It is another step towards the erosion of individual property rights on investors. It is another step towards market inefficiency. It illustrates the true issue underlying this proposed rule change.
The history of our financial markets is one of caveat emptor (buyer beware). Every attack on this principle has been met with shrill warnings that changes to the status quo will endanger the efficiency of markets and thus, our privileged way of life that derives from our economic system.
Reality is the exact opposite. With each measure of increased accountability and transparency has come a commensurate increase in market efficiency and thus an increase in our financial quality of life.
Several historical examples serve as illustrations. The Securities and Exchange Act of 1934 abolished stock pools, insider trading and deliberate disinformation, all designed to fraudulently manipulate stock prices. This legislation was met with a boycott of the capital markets wherein underwriters refused to issue new stocks. The President of the New York Stock Exchange proclaimed that the nations securities markets would dry up if enacted.1 This position had been clearly articulated years earlier by Barrons Financial Weekly that argued that short term manipulation of stock prices was not a concern to long term investors and therefore not a concern for regulation. Even the creation of the Federal Reserve in 1914 was met with concern by Wall St. for interference of outsiders in the financial markets. We know that begrudging changes towards respect for individual property rights and transparency have increased market efficiency.
Studies show that the individuals efforts to protect their property rights leads to the greatest degree of market efficiency. Uncertainties that stem from the arbitrary enforcement of the body of prevailing rules are reflected in higher risk and cost of capital which, in turn, inhibit economic growth. 2 Indeed the rise of America as a haven for investors and flight capital exists only because of our respect for and enforcement of property rights.3
Arbitration forced upon investors, without the alternative of courtroom litigation, is already a diminution in the individuals ability to vindicate property rights. This new proposed rule allowing for Motions to Dismiss is another step along the path of diluting property rights. It is a threat to market efficiency. It is a step backwards towards caveat emptor. It is yet another small step that threatens our financial system and way of life.
1 Opposition continued for 4 years after the creation of the S.E.C. until its chief protagonist, N.Y.S.E. President Richard Whitney field for bankruptcy and was indicted for fraud.
2 What Works in Securities Law, ABSTRACT: We examine the effect of securities laws on stock market development in 49 countries. We find little evidence that public enforcement benefits stock markets, but strong evidence that laws mandating disclosure and facilitating private enforcement through liability rules benefit stock markets. Published in the Journal of Finance, http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2006.00828.x
3Market transactions are inhibited if we cannot trust the reliability of counterparties' information. The ability to rely on the word of a stranger is integral to any sophisticated economy. ...To be sure, the history of business is strewn with Fisks, Goulds, and numerous others treading on, or over, the edge of legality. But they were a distinct minority. If the situation had been otherwise, the United States at the end of the nineteenth century would never have been poised to displace Great Britain as the world's leading economy.
Alan Greenspan Capitalizing reputation At the 2004 Financial Markets Conference of the Federal Reserve Bank of Atlanta, Sea Island, Georgia (via satellite) April 16, 2004