SEC Hedge Fund Registration: Now Just A Seal of Approval?
Jan 24th, 2007 | Filed under: Hedge Fund Regulation
Today’s supermarket shelves are full of products that enthusiastically display various seals of approval. From the venerable “Royal Seal of Approval” to the American Dental Association’s “Seal of Acceptance” on toothpaste to the “Flipper Seal of Approval” on cans of tuna (signifying “dolphin friendly” fishing techniques), these seals are important tools used extensively in consumer marketing. Such endorsements can give shoppers a false sense of safety that economists might define as a moral hazard since it can disuade shoppers from conducting their own research on a product.
Note, however, that public health authorities issue no such endorsement for products that, say, don’t kill you. In order to sell products in most jurisdictions, a certain minimum standard must be met. In this way, an implicit “seal of approval” (i.e. the law) is offered by the government itself. By demanding that all products meet their minimum standards of safety, governments place all products on a level playing field and thus avoid endorsing one product over another (they leave that task to Flipper). But when governments allow both “okayed” and “not okayed” products to directly compete, they effectively enter the endorsement game - leading people to assume someone else has already done their due diligence for them (another moral hazard).
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[…] A few months ago, we wrote about the “moral hazard” that might result for investors if the SEC were to create a voluntary registration regime for hedge funds ( “SEC Hedge Fund Registration: Now Just A Seal of Approval?” ). Like many other voluntary programs such as the Good Housekeeping Seal of Approval, The American Dental Association’s “Seal of Acceptance”, or Krusty the Clown’s Seal of Approval (”It’s Not Just Good, It’s Good Enough!”), such a registration program would simply become another weapon in the hedge fund marketing arsenal. […]