Markets Need Reform
March 13, 2001
Investment experts say that wild swings in the stock markets could be dampened, and the economic efficiency of the markets improved, with reform of some federal regulations and tax policies. Before the next bull market, they urge fixing the problems with Wall Street that ruined the last one.
Among their suggestions:
- Fix Securities Act Regulation "FD" (fair disclosure), which requires companies to disclose any "material" information to everyone simultaneously; since that is impossible, companies say nothing, causing trading to focus on unstable, short-term trends rather than long-term, underlying values.
- When a company goes public, it only sells 15 percent to 20 percent of its shares because the rest are locked up for 180 days by the underwriter -- whereas a staged unlock of five percent of the shares every week would hasten efficient market trading and dampen wild swings.
- Because stock analysis too often turns from research into entertainment, make analysts own the stocks they follow, directly or indirectly making the majority of analysts' compensation tied to market performance - which would bring back objectivity and thoughtful research.
- Mutual fund holders who never sell their funds are required to pay taxes on capital gains distributed to them in December; tax law should be changed to allow them them to accumulate capital gains until the funds are sold.
These and other changes, critics believe, will make for free and fair markets that promote innovation and capital formation.
Source: Andy Kessler (Velocity Capital Management), "Six Steps to Heal Wall Street," Wall Street Journal, March 13, 2001.
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