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November 01, 2013

The Economist on MLPs: "Gaming" Sarbanes-Oxley.

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Under the U.S. Code, only certain businesses are permitted to become publicly-traded entities known as Master Limited Partnerships (MLPs). Most MLPs are fossil-fuel energy companies. Think major pipeline systems delivering natural gas, crude oil and refined fuels to end markets. MLPs offer the tax benefits of a partnership, the liquidity of publicly-traded stocks, the limited liability of a corporation and, importantly, the governance of a privately-held firm. See The Economist's new piece on MLPs in Subterranean Capitalist Blues and its typically snarky take on American finance "gaming" the corporate governance rules of Sarbanes-Oxley. Excerpt:

Time and again, the imposition of new burdens on businesses distorts the flow of money. Enron’s demise led to the Sarbanes-Oxley act, a well-intentioned law that changed the economic calculus for going public in America. Finance has yet to meet a rule it doesn’t want to game. Before the crisis, regulations that made it relatively expensive for banks to hold assets encouraged them, disastrously, to squirrel them away in off-balance-sheet vehicles.

Since the crisis, the regulatory burden on firms has shot up. Many of the new rules designed to make finance safer—raising capital levels, improving transparency in derivatives markets—are vital. Plenty are laudable: allowing “say on pay” votes for shareholders, for example. But the effect is the same: capital is again flowing to where frictions are lowest. As the constraints on regulated banks pile up, the global shadow-banking system grows: from $62 trillion in 2007 to $67 trillion in 2011.

Even when rules are rolled back, new distortions can easily result. The 2010 Dodd-Frank act permanently exempted smaller public companies from some of the most burdensome elements of Sarbanes-Oxley, for example. But some firms deliberately stay small in order not to pass thresholds that would trigger tougher rules. The perversity is breathtaking: rules to protect investors encourage firms not to grow.

Posted by JD Hull at November 1, 2013 07:32 PM


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