Using a fight scene from the classic film "Butch Cassidy and the Sundance Kid" and references to this year's "The Dark Knight" to illustrate his point, West Coast Asset Management President Lance Helfert says knee-jerk regulation is like establishing rules to change a fight's result rather than "ensure fair competition."
In his post on SeekingAlpha, Helfert points to the Securities and Exchange Commission's July 29th emergency order addressing short sales as a prime example of knee-jerk regulation -- an overreaction to economic hardship. He says such regulation works not to maintain the market, but to interfere therein. That, Helfert says, is not the SEC's job. He quotes former SEC Commissioner Arthur Leavitt as follows:
...the Fed's duty is to prevent bank failures and bank runs, to protect the banks. The SEC's duty is to investors, protecting investor's cash and securities, and working to prevent securities fraud.
In this instance, the SEC compromised the integrity of the markets by protecting a select group of investors rather than treating every company the same, thereby protecting all investors equally.
Sarbanes-Oxley is another example of knee-jerk regulation, but it that case it resulted in some good and has had some staying power because, even though it was enacted in response to a scandal, the legislation is drafted to treat companies equally and "grounded in... disclosure, transparency, fairness and accountability," Helfert says. There is no appearance of favoritism for large companies.
What's more, even though Sarbox has been cast in a bad light because of its burdensome compliance costs, many company leaders also see its requirements as valuable to their organizations.