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The fiduciary law that governs our business culture reaches back to the 15th century and requires those who are entrusted with managing our largest corporations or pools of money to act in the best interests of their shareholders or clients. But the evolution of fiduciary law has developed into a mode of thinking that privileges short-term, single-company results over long-term, society-wide results. Consequently, fiduciaries are driven by a logic that dictates a focus on the short term, which can be more accurately predicted than the long term.

But there is something deeper at work in this mindset. Fiduciary thought privileges form over substance, procedure over justice. Decisions that serve a single corporation's shareholders may cause significant harm to a wider array of interests. The entire concept of fiduciary duty must be rethought if capitalism is going to flourish in a borderless, digitalized world. Instead of a narrow focus on the interests of a single firm's shareholders, the fiduciaries of our large business enterprises are going to have to widen their arc of concern to a wider group of constituencies. Without such a broadening of focus, narrow interests will continue to place the entire system in jeopardy because of the networked nature of today's financial markets.

-- Michael Lewitt, "How to Fix It"
HCM Market Letter, April 1, 2008

I open with that quote from my good friend Michael Lewitt because as we contemplate restoring the uptick rule, it is important that we get it right -- there is more at stake than just another regulation. What we do not need is form over substance -- some toothless directive designed only to placate the elected officials, provide a great sound bite to make it look like we are being proactive, but in reality does nothing to solve the original intent of the rule. A watered-down version will only further the lack of faith the markets have in our regulators and will contribute to the lack of confidence in the markets overall.

Let me start by saying I do believe short-selling has value in the market, so I do not wish to ban the practice. There is a thought rumbling through my head that was sparked by a comment Scott Rothbort made regarding shareholders' rights vs. the rights of the short-seller. It got me thinking about whether short-selling is a "right" or a "privilege." A privilege extended because short-sellers can provide liquidity to the market ... but without an uptick rule, the short seller becomes a liquidity taker, not a liquidity provider.

I don't want to stir the pot and be overly controversial -- because again, I believe short-selling has a place in the market -- but it would be very interesting to examine the rights of the speculator to profit vs. the interest of the government to protect interstate commerce.

Any market wants -- maybe even needs -- speculators to provide liquidity, so let's not go into the competing interest debate. However, the capital markets serve broader purposes than speculation; they are about capital formation so that we can build commerce, create products and services, employ people, pay taxes and enhance our society through the economy. The last decade or so, we seem to have lost sight of that broader purpose -- people speculating on homes, hedge fund proliferation, the prop trading desk more influential than the customer trading desk, people spending time figuring out if they "could" rather than if they "should." The markets should be about investing in our collective and individual futures, and allocating capital to businesses that can contribute to that future.

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