Sunday, March 9, 2008
Reinventing a Security: Arguments for a Public Interest Definition, by ERIC A. CHIAPPINELLI, was recently posted on SSRN. Here is the abstract:
The traditional test for evaluating whether a particular investment vehicle is covered under the securities law is in dire need of reform. Under the traditional test, coverage turns entirely on the private needs of private investors rather than on the public needs of the national securities markets. Considerations of the American capital formation and secondary trading markets or those markets' ability to compete in foreign markets remain untouched. The introduction of more sophisticated investment vehicles provides an opportunity to amend the traditional analysis to better address the broader public interest. Considerations of the national markets can be integrated harmoniously into the traditional analysis for the purposes of making securities coverage determinations. Adding a public interest component to the test would provide a useful supplement to the traditional approach. This article analyzes the current approach; moving through a discussion of how the Supreme Court determines what is and what is not a security before delving into the deficiencies of the current approach. An expanded calculus that includes a public interest test is needed so that capital formation, secondary trading markets, and issues of market regulation are explicitly considered. A public interest test is entirely consonant with the traditional touchstones of congressional intention and prior case law. On multiple occasions Congress has acted by amendment to bring a portion of the financial markets under greater regulation in order to protect the public interest. This article illustrates that in the absence of the public interest calculus the traditional test is insufficient. It is therefore important that the courts consider the larger, national implications of securities coverage through the application of a public interest test.