Thursday, March 26, 2015

Healthy Indifference: How Regulators Should Behave

Healthy Indifference:  How Regulators Should Behave

During my tenure as Chief Investment Officer for North Carolina, I tried to avoid industry conferences.  As a government official with the potential to award investment mandates, I knew I was going to be hounded by money managers.   I turned down dozens of invitations from conference organizers begging me to share my wit and wisdom in speeches and panel discussions.  Every now and again, however, I was forced to attend a conference as a stand-in for the State Treasurer.    Whether I was merely crossing the hotel lobby or going to the gym, marketers couldn’t resist the opportunity to invite me to dinner or a round of golf.  Moreover, they acted as if I was their long lost best friend.  Some folks like that kind of attention.  I preferred my hotel room. 

I quickly learned that industry conferences, at least in the money management industry, would quickly disappear if pension officials and regulators didn’t show up.  While these conferences are usually advertised as educational opportunities, they are really fishing expeditions in which public officials are the bait.

Apparently my wit, wisdom, and value as bait diminished considerably when I left my position, because the invitations ceased with one exception.  One organization had me mistakenly identified in their database as the state treasurer.  To this day, I get invitations to speak at their events.

I’ve written about my experiences at conferences because Andrew Bowden’s remarks at a private equity conference continue to draw attention.  Mr. Bowden is the Director of SEC examinations and my former colleague at Legg Mason.  The latest comments about Mr. Bowden’s remarks come from Matt Taibbi of Rollingstone.[1]  Mr. Taibbi summarizes the same set of facts first set out by Naked Capitalism, including Mr. Bowden’s speech last May in which he revealed that his examiners had uncovered numerous problems during their audits of private equity firms.  Mr. Taibbi rightly points the change in Mr. Bowden’s demeanor since last May, as well as the inappropriateness of Mr. Bowden’s comments at the private equity conference, even if they were intended to be lighthearted.

Mr. Taibbi makes a big contribution to this discussion by setting the appropriate standard of conduct for a public official’s demeanor when appearing before industry:

We don't need regulators to be out to get anyone. But is a healthy indifference too much to ask? Do we really need for even the regulators to slobber over these people?

I think “healthy indifference” is a superb way to describe the appropriate standard of behavior for regulators and pension officials.  During my tenure as CIO, I aspired to that standard.  Interestingly, money managers, especially politically connected ones, would often complain that I was hard to read, aloof, or indifferent.   Thus, I have a bit of sympathy for Mr. Bowden’s lighthearted, but inappropriate comments.  It isn’t easy maintaining an air of healthy indifference in a room full of industry executives.  However, it is necessary.  Like Mr. Bowden I suspect I let my guard down every now and again.  Fortunately, no one was recording my comments.

As I opined earlier this week, I think SEC regulators and public pensions would be well served to stop attending conferences.  It’s a lot easier to maintain an air of “healthy indifference” if you aren’t sharing a golf cart, filet mignon, or panel discussion with the industry you are trying to regulate.


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