Nomination of Professor Troy Paredes as SEC Commissioner

President Bush recently announced the appointment of law professor Troy A. Paredes as a Commissioner of the Securities and Exchange Commission. Pending confirmation by the Senate, Paredes will commence a five-year term on 6 June 2008, filling the seat Paul Atkins will vacate after almost six years in office.

Professor Paredes’ CV outlines his broad experience teaching, writing and practicing in the areas of corporate and securities law. After five years with major law firms in San Francisco and Los Angeles, in 2001 Paredes joined the Washington University School of Law. His scholarship has spanned a broad and varied mix of topics in law and related disciplines. The topics include: securities regulation; corporate governance; corporate control transactions; corporate finance; the theory of the firm; law and economics; behavioralism; and intellectual property transactions. Paredes joins Harvey J. Goldschmid as one of the few Commissioners who have been appointed from the legal academy.

In his writing, Paredes’ supports the use of market discipline – rather than mandatory rules – to protect investor interests, and has recommended that SEC Commissioners attempt to shape market practices through speeches, op-ed pieces, and other public statements. His recent papers, entitled Hedge Funds and the SEC: Observations on the How and Why of Securities Regulation (2007) and On the Decision to Regulate Hedge Funds: The SEC’s Regulatory Philosophy, Style, and Mission (2006), deserve attention since, in many respects, they reflect his approach to securities regulation more broadly. He says that concerns about “empty voting” and other “abuses” by hedge funds should be “kept in proper perspective”. Rather than engaging in illicit behavior, “the vast majority of hedge fund managers are disciplined traders who make informed, although risky, trades.” He takes issue with the SEC’s 2004 decision to regulate hedge funds and expresses concern that the SEC “will at some point regulate venture capital and private equity funds”. Instead, he recommends that the SEC facilitate market discipline of hedge funds by adopting default rules or expressing its view on best practices, leaving the final decision to hedge funds themselves on which practices to adopt. As to the role played by SEC Commissioners, Paredes explains:

“Imagine the potential impact on the industry if the SEC chairman, particularly if joined by other commissioners and the directors of the Divisions of Investment Management and Corporate Finance, pushed a set of hedge fund best practices in a series of speeches, interviews, and op-eds in publications such as the Wall Street Journal and the Financial Times.”

Paredes also explains that when making rules the SEC – like other regulators – may exhibit unconscious biases that can frustrate good decision making. To guard against this and to avoid over-regulation, he recommends more rigorous use of cost-benefit analysis and “new organizational structures that might be mined from the experiences of companies,” among other tools.

In another relevant paper, The Firm and the Nature of Control: Toward a Theory of Takeover Law (2003), Paredes outlines his views on Delaware corporate law and his respect for greater shareholder choice in some contexts. He advocates greater respect for shareholder control in change of control transactions and limits on defensive tactics by target boards. More specifically, he advocates that Revlon duties be stiffened; that in considering Unocal’s “threat prong” Delaware courts should “take a hard look at a target board’s determination that a hostile bid poses a threat to the company” and thereby limit the “just say no” defense; and that “a change of board control should trigger Revlon, even without a change of ownership or voting control at the shareholder level.” These changes, Paredes argues, would result in a more robust takeover market, making directors and officers “more accountable for their actions” and “curb any future outbreaks of greed, disloyalty, and mismanagement on the scale of the [Enron, WorldCom, etc] abuses.”

His current research includes an empirical and theoretical assessment of what causes CEO overconfidence.

Many of Paredes’ other papers may be accessed here.