Hedge Funds and Caviar - The Mind of a Regulator

Hedge funds and caviar. I doubt that these industries elict any sympathy from mainstream society given that they are associated with the wealthy, but recent or impending regulation of these industries provides us yet another, as if we needed it, glimpse into the dangerous workings of the regulatory mind.First, the US Fish and Wildlife Service is banning the importation of beluga caviar that comes from Caspian Sea beluga sturgeon. Yes, that would be the Caspian Sea that is halfway around the world from the United States. Now, the Caspian beluga sturgeon may be falling on some hard times (mostly because of corrupt business climates in post-Soviet nations and Iran) but is it really the place of the US Fish and Wildlife Service to do something about it? Even though this US government agency has no jurisdiction outside of the US and no scientific resources to evaluate or apply to the situation in the relevant geography (there is no USFWS office in Baku), the answer apparently is still yes. Putting aside the question of jurisdiction for a moment, without any scientists on the scene, how does the USFWS understand what is happening to the beluga sturgeon and how can they assess in a rigorous way that regulation is needed? Easy, they take other people's word for it. They rely on the word of 'conservationists' who tell them that it is a problem. So basically you have an arm of the US government applying none of its own evaluative resources but nonetheless proceeding to influence an industry in another part of the world.

Such is the mind of the regulator that the belief in their mission is so great that they can't possibly perceive of any rational limits on their reach and power. The same was evident in the words of Harvey Goldschmid, Columbia Law Professor and former SEC Commisioner, at a small gathering in New York to discuss the SEC's impending regulatory regime for the hedge funds. Goldschmid admitted that the SEC hadn't a clue about the size and scope of the industry or how it worked. Even so they were sure they knew that the industry had a fraud problem that was sufficiently bad enough to regulate. How did they know? They read the papers and got complaints. How many complaints and how serious were they? How pervasive was the apparent fraud relative to the size of the industry and compared to other areas of the asset management business like brokerages? Well, they didn't know. But they chose to regulate anyway. When discussing the cost of complying with the regulations, Prof. Goldschmid poo-pooed the notion that the $100,000+ cost was a burden to industry players, saying "for most hedge funds, $100K is a drop in the bucket." So he confirmed that the SEC knows next to nothing about hedge funds, because clearly he doesn't know that over 70% of hedge funds are small ('mom and pop' you could even say) operations for whom $100,000 in regulatory compliance costs would put them out of business. He went on to say that, contrary to all previous experience, the new SEC inspections of hedge funds would not be a "game of gotcha" and that the SEC would take on work that the CFTC already does because the CFTC stinks and the SEC is, well, just a really top-notch agency. Thank you Prof. Goldschmid for a profile in the regulatory mind, which believes it should regulate despite a lack of data to suggest it should, which imposes costs the burden of which it cannot gauge and is indifferent to, and which feels uniquely qualified to do something even though it is currently being done by others.