Submitted by Simon Black of Sovereign Man
What happened:
Puerto Rico has long been a safe haven for businesses and investors weary of the Securities and Exchange Commission. Despite the fact that Puerto Rico’s public sector is going through bankruptcy, the private sector has enjoyed relative freedom from the intrusive hands of the U.S. government.
That will change if a bill making its way through Congress becomes law.
Companies formed in Puerto Rico (and other U.S. territories) have always been exempted from the Investment Company Act of 1940 if they only offer investments inside the territory. This means the SEC doesn’t have a say in how investment funds are structured and managed.
But the U.S. Territories Investor Protection Act of 2017 will end the exemption. The act has passed the house and is now being debated in the Senate.
The bill will give the SEC jurisdiction over Puerto Rico and other U.S. territories. The supposed purpose is to prevent companies from making risky investments, or defrauding their investors.
What this means:
Initially that might sound like a good thing, to extend protection to investors in Puerto Rico. But the issue is that the SEC doesn’t have the best track record, and investors may be specifically looking for markets not under their jurisdiction.
For example, the SEC gave Enron a clean bill of health, failing to discover their cooked books before it was too late to save investors. That type of regulation is worse than none at all, because it gives people a false sense of security. If investors know there is no organization watching out for them, they will do it themselves.
In the end it was James Chanos, a short seller, who did the digging into Enron and found out about the fraud. So an entire government agency missed what a single investor discovered. And we trust the SEC to protect investors?
If this bill passes, it means more companies brought under the umbrella of the SEC, limiting choice, and taking power away from the individuals involved. Many of those investors are perfectly capable of doing their own research--and may see a benefit in going with riskier or unique investments.
Alternatively, it also means that various hedge funds who have focused on Puerto Rico as an SEC-exempt territory, and opened domestic offices, will no longer find special exclusion rights and could depart, taking away significant sources of capital away with them.