ABSTRACT This paper uses three alternating changes in hedge fund regulation to study whether regulation reduces hedge funds’ misreporting, and, if so, why regulation is effective. Relative to public companies, hedge fund regulation is relatively light. Much of the regime is a “comply‐or‐explain” framework that allows funds to forego compliance with governance rules, providing that they disclose their lack of compliance. The results show that regulation reduces misreporting at hedge funds. Further analysis suggests that the disclosure requirements led funds to make changes in their internal governance, such as hiring or switching the fund's auditor, and that these changes induced funds to report their financial performance more accurately.

The regulatory framework for financial advisors is fragmented, with multiple state and federal regulators. Prior empirical literature on financial advisors has largely focused on a single subset of financial advisors, but we create a database containing brokers regulated primarily by FINRA, investment advisers regulated by the SEC or state securities regulators, and insurance producers regulated by state insurance regulators. There is significant overlap across the regimes; more than 40% of the advisors in our data are registered with more than one regulator. This overlap has implications for labor allocation and market discipline. For example, of the individuals who exit FINRA’s broker regime, 79% were jointly registered in insurance upon exiting FINRA’s regime. This could be efficient if it reflects bad actors who transition to lower risk work, but our evidence shows that these advisors continue to engage in financial planning after they move to the insurance side, as over 90% maintain licenses to sell annuities. Moreover, those who committed misconduct when regulated by FINRA continue to have heightened levels of misconduct in insurance. Our findings have additional implications for regulatory discipline. In 2018 and 2019, FINRA proposed rules designed to nudge “bad” brokers out of the industry. We show that these proposals caused thousands of high-risk brokers to exit the FINRA broker regime, but that the majority of these individuals did not leave financial services—98% are currently registered with state regulators as insurance producers.

We examine a controversial process, known as expungement, which allows brokers to remove evidence of financial misconduct from public records. From 2007 to 2016, we identify 6660 expungement requests, suggesting that brokers attempt to expunge 12% of the allegations of misconduct reported by customers and firms. When these requests are adjudicated on the merits, arbitrators approve expungement 84% of the time. We show that expungements significantly predict future misconduct; brokers with prior expungements are 3.3 times as likely to engage in new misconduct as the average broker. Further, using an instrumental variable based on the random assignment of arbitrators, we present evidence that brokers who receive expungement are more likely to reoffend than brokers who are denied expungement. We also show that successful expungements improve long-term career prospects.