Stupid Rules For Stupid People Struck Down

NASDAQ and Private Company Disclosure

Nasdaq tried to engineer “diversity” on corporate boards by passing a rule that boards must have color-by-number diversity. At the time, I said this was stupid. Why? Because boards have to have qualified people, not just diverse people. They need to be diverse, not in skin color, gender, or sexual orientation, but by the way the people on the board see the world. Diverse by perspective. Diverse by experience. Diverse by background.

Predictably when the NASDAQ passed this rule, the clapping seals were ecstatic. I knew some of them personally, and I made no friends by calling them out. They were stupid virtue signallers because not only was this rule bad for business, but it was bad for the ideas of merit.

First of all, you can only sit on up to three boards and do the work well. Ask any entrepreneur how they feel about an investor who sits on more than three for their firm. Lots of times, these people show up unprepared. They say generic things and have generic ideas. They aren’t additive to the board dynamic.

Second of all, if you do color by number diversity, the pool of candidates is smaller. Hence, that pool will be called upon to sit on a lot of boards. Now see point one.

The en banc ruling by the federal court yesterday was welcome.

Here are two true stories about “diversity”.

Story 1: A CEO of a public company engaged with a private equity firm to go private. They did. My friend was the leader of that effort on behalf of the PE firm. He didn’t tell me this story, the CEO did. That year, at their December board meeting, they did a two hour dog and pony show about company diversity. It was prepared during the time they were a public company and the CEO felt that since they had prepared it, they should do it at the December board meeting. It was a regular part of the December board meeting.

The PE partner pulled the CEO aside and said, “That diversity presentation was nice. I know people worked hard on it. But, we are private now and we never ever have to do that again.”

The CEO asked, “What do you want to see at board meetings?”

The PE partner said, “ First, tell me how you are going to make me more money. Second, tell me how you are going to make me more money.”

The CEO said he would never run a public company again because of all the shackles the government agencies put on you. He really enjoyed just running a business to service the needs of their customers so that they could make more top-line revenue and figure out how to operate the business at a profit.

Story 2: A woman and I were going to raise a fund together. I think it was around 2011-12. We pitched the Illinois Teacher’s Pension Fund. My father was a teacher, and received a pension. I had many friends that were teachers and received pensions. It felt like a good fit since because of my personality, I felt like I had “skin in the game” with this particular fund. Wouldn’t I have an economic incentive to do well by my father?

We pitched. The people on the other side of the table asked two questions.

1. Does she own 51% of the fund? We answered in the affirmative.

2. Is she Hispanic? We answered in the affirmative. Then, the next question.

What brand of Hispanic are you? “Cuban” was the answer. Immediately, the people on the other side of the table said, “You aren’t Hispanic enough.”

So, diversity isn’t diversity. It’s a way of exclusion.

Ironically, my friend Dan Rahill who recently passed away was one of the people who oversaw some of the pension funds in the state of Illinois. He was a CPA/JD, and was in public accounting for his whole career. He used to have to present results of different funds and strategies to the Illinois State Senate.

When he presented, he was never asked about the ROI of the fund. He was asked if the managers were people of color, the sexual orientation of managers, and other subjective questions like that. The three Senator panel didn’t give a crap about returns. The panel was led by a female Senator of Puerto Rican descent.

They knew full well they didn’t need to earn a return. Their job was to dole out money to political cronies. They could always go to the Illinois taxpayer for more.

The second good thing that happened was the revocation of the FinCen rule on shareholder disclosure for private companies. Here is the little email we received.

The Corporate Transparency Act (CTA) requires certain business entities to report beneficial ownership information (BOI) to FinCEN, including entities that are part of fund structures.

For fund managers, compliance with CTA involves identifying whether an entity requires BOI reporting and, if not exempt, submitting a BOI report before the CTA deadlines:

• If an entity was formed prior to January 1, 2024, your deadline is January 1, 2025.

• If an entity was formed in 2024, your deadline is 90 days from incorporation date.

• If forming an entity on or after January 1, 2025, your deadline is 30 days from incorporation date.

We’ve developed an in-app solution to help you comply with the CTA ahead of the deadlines above. Our CTA reporting tool uses information gathered during onboarding and KYC completion to pre-populate BOI for your fund. Plus, we’ve made it easy to collect any missing information, such as control person information.

After verifying that your information is complete and accurate, you can authorize Carta to submit the required filing to FinCEN on your behalf.

It is good that Carta is doing that for me. Makes it more simpler. Side note, Carta is a great platform and if you are in private markets, you ought to use it. On X, I saw that some people said, “It’s simple, all you have to do is send your driver’s license in.” Uh huh.

First, what business is it of the SEC to bully private companies on who their shareholders are? Second, given the lawfare and the current political environment, does anyone trust the government with that information? Won’t it potentially be used to attack political enemies?

We have passed so many AML/KYC laws that they don’t work.

This edict was just a way to exploit the hysteria about Chinese/Russian investment in the US and use it as a wedge to try to gain more information and control over the private market. Fortunately, it has been stopped for now.

Predictably, instead of admitting defeat or that it might have been incorrect in its analysis of the situation, FinCen vows to continue the fight on appeal.

If you are a public official, I am all for transparency. The public official has to engage in actions involving the public trust. Hence, the public official ought to disclose all potential conflicts in return for the public trusting them. They volunteered for the job.

But, private shareholders ought to remain private. Private markets should be able to avoid many stupid rules and regulations passed by the federal and state governments which incentivize companies to STAY PRIVATE.

Every day we get closer to all this bullshit ending. It can’t come soon enough.