October 24, 2011
Are We Maximizing the Benefit of Our Securities Regulation Dollars?
The SEC, like every other government regulator, has limited funds. Its challenge is to use its limited budget to achieve the biggest bang for the buck. Or, to move the analysis one step back in time, Congress faces the same challenge in enacting the laws in the first place. The goal in either case should be to allocate those limited regulatory dollars to maximize the net benefit of the regulation.
Lately, I have been thinking about the regulatory tradeoffs our federal system of securities regulation makes. In particular, I have been wondering if we might be better off worrying less about the registration of securities offerings, the purview of the Securities Act of 1933, and more about fraud and industry regulation, the purview of the Securities Exchange Act of 1934.
The question is how to allocate regulation at the margin, but here’s a more extreme thought experiment: what would happen if we junked the Securities Act entirely and devoted all those dollars to antifraud enforcement?
This reallocation wouldn’t eliminate mandatory disclosure requirements. Public companies would still have to file the periodic disclosure required by the Exchange Act. And, as a practical matter, even non-public companies would have to release some information to investors on a voluntary basis or no one would buy their securities.
By itself, the elimination of Securities Act registration requirements would probably result in additional fraud, particularly by first-time issuers. But the enhanced enforcement activities made possible by the resulting reallocation of regulatory dollars would presumably reduce the amount of fraud. The net result is indeterminate.
This reallocation would also redistribute the regulatory costs incurred by businesses. The cost to all companies, honest and dishonest, of offering securities would decrease because of the elimination of the registration requirement. But increased antifraud enforcement would impose increased costs on those engaged in fraud. The net effect on the cost side would be a reallocation of costs from honest companies to dishonest companies.
Notice that this is not an argument about whether Securities Act registration is beneficial. In a world of limited regulatory dollars, one could believe that the Securities Act registration requirement is beneficial and still argue for its elimination if other ways of using the money are even more beneficial.