What's the limit? Can there be too much regulation, if we look for example, in the case of China? Would you say there's too much regulation sometimes, and where do you strike the good balance between? Well, my guess would be that China does not have too much regulation, that they are still a developing, or an emerging country. And they do have a problem with corruption, as a Chinese will tell you. Their opinion opposed there, list that is a high problem for the country. So, they have a need for regulators to, and chairman of president Xi has also launched an anti-corruption campaign. But I think this still has a place to go. It's part of the development of a country, that regulation becomes more thoroughgoing, and that in the stages of growth of any country, corruption is an early stage phenomenon that declines through time. In the United States, in the 19th century, corruption was much more widespread than it is now. It's something that is gradually taken care of. It takes resources to do proper regulation, and enforcement of anti-corruption laws. And a early emerging country doesn't have those resources. But as time goes on, it develops those resources, and it encourages a culture which itself is inimical to corruption. After the sense that you can't regulate financial activities at the local government level, because they spread across state borders, The Securities and Exchange Commission was set up in 1934. It was highly opposed by many people in the business community, thinking that it was usurpation of powers. The Constitution grants to the states anything not enumerated in the Constitution as federal, and the Constitution doesn't mention financial regulation. But, somehow they passed the Supreme Court as constitutional. And the idea of a Securities and Exchange Commission, is an essential U.S. invention. The critical thing is that the Securities and Exchange Commission following Louis Brandeis, emphasized disclosure. So, Louis Brandeis said in that book that, "If you force people to be seen, if you force people to come out with all the details of what they're doing, that will expose manipulations and frauds." So, his famous quote is, "Sunshine is the best disinfectant." I don't know if that's true in medicine, but it's true in finance. So, the idea of the Securities and Exchange Commission, was to put out, was to require securities issuers to submit standardized forms about what they're doing, statements about what they do, and public corporations to put up for public view, balance sheets and profit and loss statements regularly. And Louis Brandeis said, "It's not enough that they file them in Washington D.C. They have to be theirs for people to see. Otherwise, it's not real. It has to be easy for people to come and see these things". The way we do it now is on the internet. So the Securities and Exchange Commission Website, sec.gov, you get on their website, and you look for Edgar. Edgar is the name of their program that dispenses financial statements, and you can get financial statements that were reported by law to the SEC for all public corporation, and even for others to a certain extent. William O. Douglas, was a Yale Law School Professor, who at that time was a leader in what was called the "Legal Realist Movement". It's something like the behavioral economics revolution that came much later, but this is a revolution in law schools. And as we know from Gillian Tett, different divisions of a university don't speak to each other generally. That's what she calls The Silo Effect. So this was a law school movement, which I think enhanced the law enormously, recognizing human limitations. That there was too much of putting in legal documents, things in the fine print, that you know nobody is going to figure out. So, the idea is that you have to force companies, or financial institutions to put it out in a clear and consistent standardized way. So, that was partly his doing, as well as Louis Brandeis'. So, he actually replaced Brandeis on the Supreme Court when Brandeis retired. He wrote a book in 1940 called, "Democracy and Finance", about his adventures as chair of the Securities and Exchange Commission. And it is an adventure, because you have a lot of devious people trying to play games with you. Arthur Levitt was another chair of the Securities and Exchange Commission, who after he retired, wrote a book called, "Take on the Street", meaning Wall Street. It was sort of like up against the wall on the street type thinking. He had a tough time as SEC commissioner, because his effort to police what he thought was clear wrongdoing, led to attacks on him. Congressmen would call him up, who had been bribed essentially by some financial interest, would call him up and try to threaten him. Not mafia-type threatening, but some sort of government regulation threatening. So, one thing that happened in regulation was, some of the regulation was captured. The regulators until 1975, allowed stock exchanges to fix commissions that brokers would charge. We talked about this last time with the Original Buttonwood Agreement for the New York stock exchange, which was signed outdoors underneath the Buttonwood tree, and became known as the Buttonwood Agreement. These guys all were into fixing commissions to make a good amount of money, but that was anti-competitive. A major thing that the SEC did, was to define the distinction between public and private securities. Public securities are securities that the SEC has approved for general public investment. And it had to go through an approval process through the SEC. If you want to be listed, your company shares to be listed on the Stock Exchange, you have to get approved. You have to make the appropriate filings and get approval as a public company on the SEC, and then you have to make these quarterly filings that appear on the Edgar database. And initial public offering, is the procedure of going public. It means, all companies I guess, start as private companies, but there's a point in the life of a company when they do an IPO, which means they issue stock to the public, whether or not on an exchange. And the SEC has an unannounced procedure for going public. Companies can also go private. That is a public company may not want to stay public. Why wouldn't they? Well, may be because they have secrets. They feel that having their stock traded in the public domain requires filing all these statements, and they may feel that their business is threatened by that. For example, it's easier for someone to take them over, if they're a public company. And they think that, "I don't want this roller coaster ride of all of our secrets out there. We have a good company, we're a family, maybe even a family owned company, we don't want that." So, sometimes companies are taken private through a procedure, again which the SEC recognizes. Hedge funds are examples of companies that are private. Moreover, they are for wealthy investors only. You have to circumvent the SEC rulings as an investment company, if you want to do certain things like charge high commission, or high salaries for your leaders. So, there are different kinds of hedge funds. One of those are called 3c1s. A 3c1, that refers to some line in the SEC regulations, is a kind of investment company that the SEC requires, takes no more than 99 investors, and all of the investors have to be accredited investors. I mentioned this before, but it means income of $200,000 a year or investable assets of $1 million a year. Now they've left it at this level a long time. I don't remember when it received this definition, but it was decades ago. So, a million dollars was worth a lot more than it is today. And now, it's not that uncommon to have a million dollars. These investable assets doesn't include your home, but the median home price is up to something like 300,000. If you live in a nice neighborhood, it wouldn't be hard for your home to be worth a million dollars. It's just now a million dollars isn't what it used to be, because the price level has gone up, something like 20 times in recent decades. So the SEC proposed in 2006 to raise the million dollars to 2.5 million. They always do these things this way. They raise proposals, and they put them up on their website, and they invite comment. They got an awful lot of negative comment. People were saying, "It's hard enough for us to invest in hedge funds anyway, I've got to have a million dollars besides my house. You may say that's not much money, but it seems like a lot of money to me." So, they didn't change it. So, it's still only a million dollars. It gets you into this. So you have to go to your broker, and prove to the broker that you have a million dollars, or your income is 200,000, and then you can invest in 3c1, but no more than 99 people can invest. Has to be under 100. So, it kind of limits them. Again, this is to protect the small investor. So, that's their motivations, who can't afford financial advice. There's another kind of hedge fund called the 3c7, that can take 500 investors, but there is another standard for that, as a qualified purchaser, with a net worth of at least 5 million, or institutions with net worth of at least 25 million. The law wants to protect not just poor individuals, but also poor institutions, like a church or something, they might have $20 million dollars. But the SEC thinks, "That's not enough for you to participate in this hedge fund." You got to get more contributions before you reach the level. So, the SEC rules that every broker must register with the Securities Exchange Commission, every Stock Exchange must register, every Security Issue must be registered. Now, the registration doesn't mean approval, although it's some form of approval, but it's not guaranteeing that this is a good investment or anything at all like that. It's just that they've kept by the rules that satisfy Louis Brandeis' instructions about disclosure, so that it's just all out there.
