The humiliation the Securities and Exchange Commission has faced over the its failed attempts to regulate mutual funds and hedge funds is the result of too much lawyering and too little economic analysis, says Harvey Pitt, former chairman of the SEC. Writing in The Wall Street Journal, Pitt, now the CEO of Kalorama Partners, put it this way: “The SEC’s troubled can be traced to a mentality that often plagues regulatory bodies and legislative efforts: that any time a problem arises, the solution is to toss another regulation or statute at it.” It doesn’t work, he says, especially since usually there is no proof that more regulation actually works. Pitt goes on to say that regulatory agencies, such as the SEC, have a dual role to protect investors and to improve the functioning of capital markets through innovation and competition. The latter, he says, “far too often gets lost in the rush to promulgate new rules and new obligations.” The failure, Pitts notes, is that the agency “relies too heavily on legal doctrinarism.” The SEC’s “sometimes excessive reliance on lawyers and rules,” he concludes, “instead of economists and analysts, has caused the commission to stumble badly.”
