Regulating Asset Management: A Conversation with William Birdthistle

HAOXIANG ZHU: William, my first question for you is: The world is changing fast, not only in technology, but also in regulation. A lot has happened in the last two years. I wonder if there are particularly consequential actions from the SEC and other parts of the federal government that you think are good ideas or bad ideas, and why? 

WILLIAM BIRDTHISTLE: Yes, definitely. Starting inside the world of the regulators, one of the biggest initiatives that I think you're going to hear a lot about, if you haven't already, is the attempt to dissolve the boundaries between public and private funds. Much of what the current administration is attempting to do, through a variety of different federal agencies, legislation, and litigation, is to encourage retail investors to invest in private funds.

The traditional bargain from these rules is: If you want to sell investments to a large number of people, you need to disclose a lot of information. If you don't want to disclose that information, you can still sell your shares; you just need to confine the offer to people who can fend for themselves. That was the legislative bargain.

The current administration is saying, well, that's unfair. We're going to democratize access by allowing unsophisticated investors to put their money into private funds. And I think that could be a dangerous project.

If you look at the 1920s, you don't need to guess what could happen. It's all happened before. Most of what motivated the '33 [Securities Act] and the '34 Act [Securities Exchange Act] were enormities from the 1920s, and the same is true with mutual funds and the ’40 Act [Investment Company Act]. If we're going to run that playbook again without a lot of differences, I'm not confident it's going to turn out terribly well. 

So there's regulation from the Department of Labor that would allow private funds in people's retirement plans. There's regulation from the SEC that would allow more retail investors into private funds. There's legislation being considered by the Senate Banking Committee that would also allow greater access. 

And then there's some litigation, including a case involving people who worked at Intel. Intel's retirement plan included exposure to some private fund offerings, which is very, very rare. The investments didn't do very well, and the employees have sued because ERISA—the law that governs retirement plans—is very strict about making sure that those options are prudent and usually very safe. But the plaintiffs are having a hard time winning this case because to win, they have to prove that the array of their investments underperformed a benchmark. We only have benchmarks for pretty conventional investments. If your investments are unorthodox, then it's very hard to find a benchmark. 

But that scheme may have it backwards. It seems to suggest the riskier and the weirder and the more idiosyncratic a set of investments, the easier it would be to get away with their being imprudent because there's no benchmark. The Solicitor General from this administration has asked for time at oral argument in just a couple of weeks, October 6th at the Supreme Court, to argue on behalf of Intel, to say that that's fine, there’s nothing wrong with requiring a benchmark.

If you put all those developments together, you get a lot of retail investors investing in things that are very opaque, things that are very difficult for them to assess. And, as you should probably bear in mind, the '40 Act doesn't apply to private funds. There's no requirement for valuation, for liquidity, the whole array of prohibited affiliated transactions and so forth.

So that's one thing that concerns me.

The other big thing that I think is proliferating outside the regulatory space is the growth of what I will call "innovation by inundation," which is a series of business models, some financial but some not, that are basically an aggressive version of Uber, where the model is to flood the zone with a new instrument as quickly as possible. If that behavior is dubious, illegal, or questionably illegal, just do it. And if you amass enough money quickly enough, then you can afford to lobby to change the rules.

It's also prediction markets and arguably AI. AI is growing very quickly and sort of daring people to regulate it. So those are two big phenomena, I think.

HZ: I think retail investor access to private assets is really a fantastic question. If you ask me, what about the students in this room? Do they have the capability to analyze these markets? I would say absolutely, you have the capability to analyze all the investment returns. However, the problem is you don't have the data. Rather than incentivizing portfolio companies to provide more data, the incentive today is the other way around: Hide as much as possible because that just makes the legal burden of proof impossible to meet.

WB: Yes, opacity is a real issue. You put your finger on the point. Actually, I think sophistication is itself an insufficiently sophisticated concept.

How would all of you do investing in private? Well, first of all, you have busy lives. You've got to spend some time here at school. So even if you have the capability, life may just take over, and you have other responsibilities. Plus, as Haoxiang said, how much information do you actually have?

Also, what investments do you think you're going to get? You're in line behind CalPERS [the California Public Employees' Retirement System, the United States’s largest public pension fund]. You're in line behind the Saudi sovereign wealth fund. You're in line behind the Yale endowment. What quality of private-fund investments do you think you're going to get?

Assuming you have the ability, you also need the information to process it, and you need some market clout to make sure that the kinds of things you're offered are any good. I think it's very hard to imagine ordinary individuals, even those as sophisticated as yourselves, thriving in that world.

HZ: I think this adverse selection point is really good. They must have run out of other investors before they came to me.

WB: Yes, there's been a lot of talk about that. I mean, for a long time, there was a velvet rope in front of private equity, hedge, and VC [venture capital] investments. If they're desperate for you to join the club now, how good a sign is that?

And there's a lot of pressure, a lot of stress in that space, a lot of unconsummated deals, a lot of exits that haven't gone well. Why does the $35 trillion side [private funds] of the industry now want access to the $45 trillion side [public funds]? The answer is: Because there's money there.

So yes, adverse selection, I think, is a profound issue.

HZ: Maybe turning to the other side: You were with the SEC between 2021 and 2024. I know you worked on a number of rules, some of the really consequential ones. I wonder which of these rules you're proudest of and would say were very positive for the market. Do you have a favorite?

WB: Yes. I mean, it was a busy time, as of course you recall. We spent a lot of time on phone calls working on a lot of projects.

The one that I like the most, that I'm proudest of—and I think it's a surprising selection because it's a rule that was very quickly struck down—was a quintet, a suite of five rules for private fund advisers [known as the PFA Rules].

It would have said, among other things, that private fund advisers need to provide their investors—so GPs [general partners] need to tell LPs [limited partners]—they need to give them a common, comparable quarterly report that discloses performance and the fees.

Now, a lot of GPs do offer quarterly reports, but they're not comparable. That means LPs have a hard time comparing them and deciding which ones they should pursue.

Generally speaking, even under a pretty libertarian view—which is not keen on a lot of regulation—one of the lowest thresholds for regulation is whether it's efficient. And making things standard is a high-efficiency piece of regulation. We're not telling you that you have to do something you don't do. We're just saying, if you do something, please do it in the following way so that everybody can see it similarly.

Imagine one of those FDA [Food and Drug Administration] labels with calories on the side of your Coke can. If every producer of a soda could make those labels differently, they would very quickly be useless.

So that was one: comparable quarterly reports.

Another was annual audits from a third party. As you can probably tell, the way that Fidelity, Vanguard, and State Street get paid is they receive a percentage of AUM [assets under management]. That's true for private funds, as well. The standard fee table there is two and twenty: two percent of the assets and twenty percent of the profit.

In both cases, determining the AUM is critical. There are many, many cases in which advisers have succumbed to the temptation of inflating their AUM because obviously the larger the AUM is, the larger the fees are.

Having a third party assess that is key. It doesn't matter so much to the public funds. The fund invests in a portfolio of publicly traded securities. They'll tell you how many shares there are, and you can figure out what the price is. It's very easy to ascertain and double-check what the AUM actually is.

It's very, very difficult in a private fund. Our portfolio is a couple of loans we made to some businesses you've never heard of, or some real estate on the other side of the world. You have to go with what the adviser says the AUM is.

So those are just two of the five rules. And six days after the SEC adopted the quintet, a trade association of private fund advisers sued in the Fifth Circuit, which is very friendly to business interests. The PFA Rules were struck down.

They were struck down for the following reason: There are no retail investors in this space, so we don't need to offer these protections.

What's happened in the 18 to 24 months since that rule was struck down? Industry has launched the largest initiative in history to get retail investors into that space.

So that's one. Even though we lost and the rule was vacated, I still feel like we're going to see and hear a lot from that rule in the future. A lot of energy and effort was put into coming up with it, and it looks better and better every day as more and more retail investors move into the space.

HZ: Let's open the conversation up.

William Birdthistle | Professor from Practice | University of Chicago Law School

What people don't talk a lot about with American regulation is: The regulation in America is what is attracting the investors.

STUDENT: I think the argument is actually to allow private investors and unsophisticated investors to get into the private funds.

WB: Yes, there are a lot of different ways you can imagine private—retail investors and retirement investors—getting into these spaces.

The most obvious is: Ken Griffin comes and offers you a deal. That's not going to happen. That's not going to be how it happens. What's more likely is through some intermediaries.

Now, on that I'll say two things. First is to respond to the idea that we can allow retail investors to get access to private funds by making them go through a public fund, and that public fund will cure things because the public fund has to provide a lot of disclosure. That doesn't make sense to me. That's a little bit like saying: Look, there's a black box, but if we put the black box inside an aquarium, we can all see what's in it. No. 

So that's one. I'm concerned that putting it in a '40 Act wrapper doesn't cure the opacity.

On tokenization, I'll confess, I try very hard to read about tokenization, and I'm still not sure I understand how it's materially different than—let me give you the standard definition I hear—"a digitized version of fractional ownership in stocks and bonds." Which I think and say: Yeah, exactly like what we have.

Nobody here owns stock certificates or bond certificates. You own digitized versions of fractional ownership of them. Now, we do have fractional-share ownership. So the key difference is the ledger, and the ledger being somewhat public.

Okay, well, many experiences with crypto relate to the fact that even the crypto entities didn't want to put transactions on the public ledger because it's expensive. If you look at Sam Bankman-Fried's smoking crater [at FTX], they weren't registering all of those trades onto the ledger. It's very expensive and time-consuming and energy-intensive to do that. They would net it out internally. So, they'd do it once every now and then.

That tells me it's an expensive, not terribly efficient way of doing this.

STUDENT: You are concerned about retail investors gaining access to, tapping into, like Roths, 401(k)s, things like that—it’s really interesting. I'm just trying to think about what the difference is between that and a product like a fund of funds. Some retail funds—a retail investor wants exposure to hedge funds, so they give money to a company like Blackstone and they run fund-of-funds businesses. So I'm wondering what the nuance is between those two.

WB: Yes, heretofore they haven't been able to do that. If you showed up as an unsophisticated investor and said, "Well, I want to invest in a mutual fund that invests in Citadel," the SEC's position was that you're just interposing a fig leaf. That's not going to work. We're going to look through and see your level of sophistication.

So usually, to the extent that that was permitted, it was restricted only to top-layer funds of accredited investors, somewhat sophisticated—the lowest rung of wealthy investors. So no, it hasn't actually been done that much in the past.

Now, every '40 Act fund, every public fund, is allowed to have 10% of its investments illiquid. So you do end up with these kinds of fund situations where, if you invest in a US equities fund by Fidelity—and remember, it's just all of us in there, just unsophisticated investors—they might own some of Stripe. They might own some of pre-IPO SpaceX or Anthropic. But a very small amount, so it's capped.

Funds of funds are problematic for a variety of reasons. One is, as I said a second earlier, if the underlying investment is still opaque, then all the overlying transparency doesn't do anything.

Second, funds of funds impose different layers of fees. In fact, there's an SEC requirement that you can never go more than three layers on a fund of funds because each fund will impose fees.

And third—and this is the lesson from Bernie Madoff—if you really want to get away with a swindle, make sure that most of your investment is coming through a fund of funds. That way, the doctors and lawyers who are being clowned by this enterprise are a long way away from the actual bad activity. Bernie loved feeder funds; they kept dupes away from what was actually happening.

So funds of funds have some purposes. Most target-date funds are structured as funds of funds because it's elegant. You could just have an underlying bond fund, an underlying equity fund. But there are problems with them, as well.

STUDENT: Back to the tokenization question. You mentioned—and I might be mistaken—that tokenization is very similar to stocks because you basically say the company has electronic shares. But in my view, there's a difference, that you basically can digitize specifically the asset and get paid specifically on the return of that asset. I was wondering for your further overview on the asset digitalization; someone can actually regulate that specific asset.

WB: No, I take the point. To me it's very reminiscent of prediction markets. There, what people are saying is, "This is not gambling."

I hear what you're saying. I think what you're doing is using a different word for the same activity to get a different legal conclusion.

A large part of corporate law in America and in history has been saying: You can do that. We're highly formalistic. If you tick a box saying you're a company, you'll get company rules. Tick a box saying you're a partnership, you get partnership rules.

And there's an even larger portion of Anglo-American law that's based on concepts of equity, which is: You can't just say it's something different when that's not the reality.

So if it's as simple as saying, "We're not tokenizing the equity; we're tokenizing an asset of the equity," if that leads to a radically different legal outcome, that seems dramatic. It seems more than what we'd have to assume Congress intended.

But we'll see. I mean, Congress had a chance last week—actually Tuesday of this week [September 15, 2026]—to pass the Clarity Act, and they declined. So I don't know. Maybe they think it's sufficiently different, too.

HZ: On this point, maybe using more abstract language, I guess the idea is that law should not admit dramatic arbitrages. Otherwise, you can just run these arbitrages by going to a completely different category and then running essentially the same function. And that would basically make the whole thing dysfunctional and kind of pointless.

WB: Yes. I'm not sure what your verdict was, but when I thought about what I took away from time in government, a large part of it was this concept that America has a very strong adherence to federalism. Like, why one government? Why not 51?

And the same is true with intelligence gathering. We've got something like 17 intelligence gathering agencies. And financial regulation: We've got about a dozen federal financial regulators.

And one of the things that tends to happen is, if you have a big, big issue, you will find a lot of arbitrage across the gaps in those dozen federal financial regulators.

Some people love it. They think federalism inspires competition. It does make laboratories of democracy possible, laboratories of experimentation. But if you think things are seriously problematic, then yes, slapping a slightly different label on the same underlying activity just doesn't seem like a strong basis for massive arbitrage. But we do get those kinds of arguments.

STUDENT: When it comes to tokenization of private markets, don't you think that that's a reflection of the way companies and financial markets have evolved, to the point where you get a company like Stripe, which is far safer than some of these public companies that don't even have any revenue, let alone profit? So it's not necessarily that companies that are private are necessarily riskier than the companies that are public.

WB: I guess there are a lot of different risk measures you could use. I think, generally speaking, things on the private side of the ledger are going to excel on all of those, being riskier by almost any measure. Does that mean every single one will be? No, of course not.

I don't think you quite asked this question, but you raise a good point, which is: Why private funds? What's their allure that's attracting so many people?

One, I think, is a misplaced sense of just how well they perform. I think there's a lot of received wisdom that the private stuff is all outperforming the public stuff. It’s really not true.

STUDENT: If you're allowing retail investors to invest in basically junk companies, some of which are trading on public markets, why restrict that for private companies, which I'm sure as a whole are risky, but over time they have increased quality.

WB: I think what you're suggesting is we need to allow some investment in private. Which ones? You're going to need to come up with some sort of measurement.

You can never guarantee success, and we don't require success of our companies, public or private. I think what we have concluded after our experiments with the alternative is information is helpful.

And yes, you may have low-information, high-opacity companies like Stripe that do well, although of course we have to take their word for it. Well, we don't actually know; they kind of get to assert it.

So I think, yes, if you wanted a very, very granular set of federal securities regulations, you could say these are the general rules, but companies that satisfy the following rules, though private, may still be available. You could do that. It would require a very, very detailed set of rules. And generally speaking, my experience with industry is they don't like that.

HZ: Last question for William. 

STUDENT: How do you strike a balance between regulating and actually encouraging firms, fostering flexibility, as well? How do you look at that balance? Because if you overregulate, you're going to strangle the firms, and maybe all of a sudden they don't want to trade their security anymore.

WB: Yes, great question. I'll just offer some concluding thoughts.

The degree to which people will say, "You're regulating companies to death"—I would say the following.

My family—I'm from Ireland originally—some branch of my family used to run a little funfair in Ireland, to which they offered me free tickets. And I remember as a kid being excited about it and going to see it. When I saw the rusty, sketchy merry-go-round, I was like: I'm not getting on. I'm willing to spend five times that amount to go to Disney World, where I know I'll live.

And I think what people don't talk a lot about with American regulation is: The regulation in America is what is attracting the investors.

I think it's often looked at as, "Well, look what you're doing to the issuers. Look what you're doing to the companies." Other countries do that, too. But if you're the Norwegian sovereign wealth fund, the Saudi Arabian sovereign wealth fund, or you're an investor from anywhere in the world, the reason you come to America is the rules are effective. Would you want to watch a soccer game with no referees?

I think we don't appreciate the value of regulation and the refereeing as much as we should.

What do I think is going to happen in the next 20 or 30 years? I don't know. I do know this: American markets are very, very resilient, with an occasional crisis. We kind of need an inoculation every few years.

I'm older than you are. I've seen March of 2020, which most people don't appreciate as a financial crisis, but it was. We missed the bus very narrowly in 2008, which some of you may have been alive for but probably didn't appreciate, and the dotcom crash [of 2000].

We keep doing it. We'll do it again. We're insatiable about our ability to keep experiencing financial crises. But also, we keep coming back.

And one of the weird things that happens in this space: Ironically, when things get really bad, America tends to do better. As pessimism around the world plummets in finance, most people think, well, what is the one safe haven?

So oddly, America has done really well through most of those crises. I'm not sure that's something we can count on forever. And I think with this $40 trillion debt, we're pushing our luck.

Generally speaking, America has very, very resilient markets. It's just in that, as in other things, America has figured out a cheat code for the rest of the world, which is: We'll just skim the best the rest of the world has.

I'm an immigrant here, so I love that model. I think that it's a great one. And I’d be astonished if we would turn away from doing that—that's how America continues to thrive.

About the Authors

William Birdthistle

Professor from Practice, University of Chicago Law School

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William Birdthistle is Professor from Practice at the University of Chicago Law School. He is the author of Empire of the Fund: The Way We Save Now (Oxford University Press, 2016) and co-editor of the Research Handbook on the Regulation of Mutual Funds (Elgar, 2018). From 2021 to 2024, Birdthistle served as the Director of the Division of Investment Management at the U.S. Securities and Exchange Commission.

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Haoxiang Zhu

Gordon Y Billard Professor of Finance, MIT Sloan School

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Haoxiang Zhu is the Gordon Y Billard Professor of Finance at the MIT Sloan School of Management, a Research Associate at the National Bureau of Economic Research, and a Co-Director of the MIT Golub Center for Finance and Policy. From 2021 to 2024, Zhu served as the Director of the Division of Trading and Markets at the U.S. Securities and Exchange Commission.

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• Authors’ Disclosures: The authors report no conflicts of interest. 
• The views expressed in this article are those of the authors and do not necessarily reflect the views of the MIT Golub Center for Finance and Policy, MIT Sloan, or the Massachusetts Institute of Technology.

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