Sunday, September 7, 2008
The SEC, Retail Investors, and the Institutionalization of the Securities Markets, by Donald C. Langevoort, Georgetown University Law Center, was recently posted on SSRN. Here is the abstract:
The last thirty years or so have brought a rapid shift toward institutionalization in the financial markets in the U.S., i.e., investment by mutual funds, pension funds, insurance companies, bank trust departments and the like. This paper focuses on the institutional role of the SEC as a seventy-five year old agency in a capital marketplace far different from that of the 1930's. A baseline question about the future of financial regulation in the U.S. is whether the SEC, with such a long and weighty legacy of law-making from a time when public markets were retail markets, is competitively fit to act as a regulator in a capital marketplace that is now so institutional and global. Part I asks whether there is a coherent theory or approach to retail investor protection in today's marketplace, either in terms of enforcement intensity or rule-making. This Part considers two very different contemporary challenges to SEC's orthodoxy: the emergence of the British "light touch" to securities industry regulation, which favors informal suasion to heavy-handed enforcement, and the expansion of knowledge about consumer and investor behavior from research in behavioral economics. Neither, it argues, maps well onto the SEC's mission. Part II then moves to the institutional marketplace for issuer securities and engages in a thought experiment about whether, as many assume, markets that have no appreciable retail participation should properly be governed as "antifraud only." This Part considers what antifraud-only means, and again expresses some skepticism about whether we can expect to see the development of private markets, largely free of regulation, that substitute for the public ones we observe today. Finally Part III takes up whether the SEC's regulatory orthodoxy is stable enough as markets become not only institutional but global. It suggests, contrary to what many believe, that globalization leads to increasingly territorial (rather than listings) based exercise of regulatory jurisdiction over issuer disclosure. It also places the SEC's recent initiatives toward mutual recognition in this context. The unifying theme in all three Parts stems from a long-standing interest in studying the behavior of the SEC: why it acts as and when it does and (often more importantly) what limits it imposes on itself or has imposed from outside.