Conglomerate Blog: Business, Law, Economics & Society

On Wednesday, GW hosted a conference entitled Madoff One Year Later: What Have We Learned?, which brought together some of the critical players in, and analysts of, the Madoff scandal to discuss what happened and important lessons learned. It was an engaging discussion that touched on a lot of critical themes including the importance of enhanced investor education--starting at the high school level, the need for an SEC with more "street smarts," the need for independent custodians, and a better acknowledgment of the role trust and greed play in our system. As you can imagine, there also was quite a lot of discussion about the SEC and its role in fraud detection and prevention.

One particularly intriguing statement was made by a senior financial writer at the New York Times who is writing a Madoff book. In her words, "regulators are from Mars and investors are from Venus." In other words, regulators and investors have very different views about the market and investment. Some examples. Regulators like fine print, while investors--from retail investors to hedge funds--don't read the fine print. Regulators think they are in a mandatory disclosure world, while investors think they have something closer to merit review. Regulators think investors are rational, careful and want greater disclosure, while investors are waiting to fall in love with an advisor so that they can hand over all of their assets without any worries. Regulators know their limitations (indeed, the SEC has some 3700 total employees and must oversee some 37,000 entities), while investors think regulators have no limitations. In the wake of Madoff and other scandals, regulators seem to be asking, how do we make our regulatory regime better? But one key observation from this dichotomy is that such a question may be the wrong one. Instead, we need to be thinking about creating a regime that better acknowledges and responds to investors expectations; a regime that better appreciates the limits of disclosure, and thus seeks to pick up where disclosure leaves off. Or at least a regime that somehow better bridges the gap between the thought process of regulators and investors.

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On Wednesday, GW hosted a conference entitled Madoff One Year Later: What Have We Learned?, which brought together some of the critical players in, and analysts of, the Madoff scandal to discuss what happened and important lessons learned. It was an engaging discussion that touched on a lot of critical themes including the importance of enhanced investor education--starting at the high school level, the need for an SEC with more "street smarts," the need for independent custodians, and a better acknowledgment of the role trust and greed play in our system. As you can imagine, there also was quite a lot of discussion about the SEC and its role in fraud detection and prevention.

One particularly intriguing statement was made by a senior financial writer at the New York Times who is writing a Madoff book. In her words, "regulators are from Mars and investors are from Venus." In other words, regulators and investors have very different views about the market and investment. Some examples. Regulators like fine print, while investors--from retail investors to hedge funds--don't read the fine print. Regulators think they are in a mandatory disclosure world, while investors think they have something closer to merit review. Regulators think investors are rational, careful and want greater disclosure, while investors are waiting to fall in love with an advisor so that they can hand over all of their assets without any worries. Regulators know their limitations (indeed, the SEC has some 3700 total employees and must oversee some 37,000 entities), while investors think regulators have no limitations. In the wake of Madoff and other scandals, regulators seem to be asking, how do we make our regulatory regime better? But one key observation from this dichotomy is that such a question may be the wrong one. Instead, we need to be thinking about creating a regime that better acknowledges and responds to investors expectations; a regime that better appreciates the limits of disclosure, and thus seeks to pick up where disclosure leaves off. Or at least a regime that somehow better bridges the gap between the thought process of regulators and investors.

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