Wednesday, June 17, 2015
In response to one of my posts last week, co-blogger Josh Fershee raised concern about making minor changes to securities regulation--in that case, in the context of the tender offer rules. Specifically, after raising some good questions about the teaser questions in a marketing flyer regarding a program I am moderating, he adds:
This reflects my ever-growing sense that maybe we should just take a break from tweaking securities laws and focus on enforcing rules and sniffing out fraud. A constantly changing securities regime is increasingly costly, complex, and potentially counterproductive.
Admittedly, I am not that close to this, so perhaps I am missing something big, but I’m thinking maybe we should just get out of the way (or, probably better stated, keep the obstacles we have in place, because at least everyone knows the course).
Although I pushed back a bit, I generally agree with his premise (and I told him so). I will leave the niceties regarding the tender offer rule at issue for another day--perhaps blogging on this after the moderated program takes place. But in the mean time, I want to think a bit more out loud here about Josh's idea that, e.g., mandatory disclosure and substantive regulation should be minimal and fraud regulation should be paramount. Not, of course, a new idea, but a consideration that all of us who are honest securities policy-makers and scholars must address.
Josh's point and this post both are premised on the reality that it is unlikely we can undo the basic structure of securities regulation in the United States, which consists of rules that provide for mandatory disclosure, anti-fraud and other liabilities, and substantive regulation of the payers and the game. Among other things, a move that is too bold may have catastrophic effects on the very capital market that securities law exists to support. This surely goes without saying, but I said it anyway.
Also, I will assume for purposes of this post that securities regulation will continue to pursue the same underlying policies--investor protection, the maintenance of market integrity, and the encouragement of capital formation. Any change in these policies would require more fundamental re-thinking than I will engage in here. That could be a nifty project for another day, however. (As could just sorting out how the existing policies interact and should be prioritized . . . .)
So, the question is when and how to engage a regulatory process that effectively and efficiently uses the chosen tools to meet the acknowledged objectives . . . . Sure, there are things that could be done better (and we write articles about them all the time), but is the cost of doing them too steep? Is there a single way we should be thinking about this issue, or do we need to evaluate each potential regulatory change independently?
In the past, when I have promoted a specific idea for changing legal rules, I often have relied on Michael P. Van Alstyne's article, The Costs of Legal Change. I find it a compelling article. The framework it provides has been useful to me in considering cost/benefit issues.
A forthcoming article authored by Susanna Kim Ripken also may be helpful in thinking through changes to the existing securities regulation regime. The article, entitled Paternalism and Securities Regulation, was recently promoted on the CLS Blue Sky Blog and caught my attention. I have only had a chance to skim it so far, but it covers some interesting ground. For example, from the introduction I offer the following tidbit:
Although on its face the federal securities regime appears to reflect an anti-paternalistic philosophy of regulation, the reality is that the federal securities laws have always contained significant elements of paternalism, and over the last eighty years, have become increasingly protectionist and paternalistic. Examples of the paternalistic nature of modern securities rules abound, including bans on sales of securities to unsophisticated investors in private placement offerings, limits on the number of unaccredited investors in Regulation D offerings, dollar ceilings on how much a person can invest in crowdfunding transactions, and prohibitions on waiving or contracting out of the federal securities laws.
(footnotes omitted) And from the conclusion:
[G]iven all of our shortcomings and vulnerabilities, some interventions on our behalf might be tolerated without our integrity being eroded. When those interventions save us from grave harm, we might look back and be grateful for the protections, rather than indignant about the intrusion. In some respects, living in a highly complex and interconnected society makes some degree of paternalism unavoidable. It is imperative that we implement it judiciously if we are to value and uphold both the autonomy and welfare of our fellow citizens.
This soon will be at the top of my reading list, and I will look forward to digging into it. It may not solve the problem Josh identified in his comment, but I hope it will give me more food for thought . . . .