Scholars – of both neoclassical and behavioral economic theory – have long insisted that transparency and disclosure play essential roles in ensuring efficient capital markets and sound financial regulation. Professors Gilson and Kraakman notably argued that the efficient capital market hypothesis, and its reliance on a market for information, “is now the context in which serious discussion of the regulation of financial markets takes place.” The SEC itself subscribes – at least publicly – to a corresponding regulatory framework: its mission statement declares that “[o]nly through the steady flow of timely, comprehensive, and accurate information can people make sound investment decisions.”

Yet in newly promulgated regulations addressing the “breaking of the buck” in the $3-trillion money market – an unstudied debacle at the fulcrum of the 2008 financial meltdown – the SEC endorses practices that obfuscate rather than illuminate the capital markets, including fixed pricing for money market funds and the continued use of discredited ratings agencies. These policies, premised implicitly upon doubt in the ability of markets to process information effectively, obscure true perils of money market funds. Rather than swaddling investment risks in these misleading, self-sabotaging regulatory buffers, the SEC should emphasize the menace of these funds. This Article offers transparent solutions to alleviate moral hazard and systemic risk in the broader market and to end the regulatory subsidy of these specific investments.

In this essay, we identify and explore these various new tensions that have begun to arise in the private equity industry. We then propose and examine an array of possible ways to eliminate or alleviate those conflicts, exploring the regulatory, fiduciary, and pragmatic strengths and weaknesses of each approach. General partners can seek investor unanimity or consent for follow-on investments, but certain tax and practical barriers complicate that approach. Alternatively, they can opt for a range of architectural prophylaxes to protect against conflicts. These add costs on everyone, however, and, experience in related fields shows, they do not work. Investors, for their part, can attempt to diversify their own investment holdings to counterbalance risk, but this still leaves some vulnerable to opportunistic fund managers, and may increase costs for all investors as well. We propose a less costly and more efficient solution: advisers and investors should work together to create a vibrant secondary market for private equity interests to create a salutary exit option, which would in turn discipline the investment behavior of fund managers in this turbulent new investing environment.