Academic journal article William and Mary Law Review

Reconsidering the Institutional Design of Federal Securities Regulation

Academic journal article William and Mary Law Review

Reconsidering the Institutional Design of Federal Securities Regulation

Article excerpt

ABSTRACT

The institutional design literature is interested in the optimality of particular legal institutions, for example, judicial review of agency actions, corporate federalism, and environmental policy. This Article brings such an analysis to bear on federal securities regulation and argues that we could improve upon the current institutional structure. In particular, the Article proposes that the Securities and Exchange Commission (SEC) be given even more decision-making authority than it currently has under the statutory scheme, effectively authorizing the agency to create disclosure rules for any firm that operates in interstate commerce. At the same time, the Article proposes that we place greater controls on the risk of regulatory error at the SEC by creating a statutory scheme that would place limits on the level of regulatory costs that the agency is permitted to impose on the firms that it regulates. By granting the expert agency more decision-making authority, while at the same time controlling the risk of error inherent in the SEC's complicated regulatory task, the Article argues that we could create an institutional structure that generates disclosure rules that are both smarter and less error-prone. The Article also sketches a possible policy approach along these lines.

TABLE OF CONTENTS

INTRODUCTION
  I. ALLOCATING DECISION-MAKING AUTHORITY AND MANAGING
     ERROR IN THE EXCHANGE ACT
     A. Allocating Decision-Making Authority in the
        Exchange Act: The Public-Private Divide
     B. Managing Regulatory Error in the Exchange Act:
        Reliance on Judicial Review
 II. CRITIQUING THE STATUTE: ALLOCATING
     DECISION-MAKING AUTHORITY
     A. Critiquing the Original Justifications for the
        Public-Private Divide
        1. Critiquing the Leveling the Playing Field
           Justification
        2. Critiquing the Investor Protection
           Justification for the Public-Private Divide
     B. Critiquing the Revisionist Justifications for the
        Public-Private Divide
     C. Expanding the SEC's Decision-Making Authority
III. CRITIQUING THE STATUTE: MANAGING RISK OF
     REGULATORY ERROR
     A. Four Sources of Error
        1. Psychological Biases
        2. Public Choice Dynamics
        3. Sophistication Constraints
        4. Epistemic Limitations
     B. Judicial Review's Inadequacy as a Tool for Managing
        Administrative Error Arising from These Four Sources
 IV. POLICY IMPLICATIONS
     A. Deferring to the SEC on the Public-Private Divide
     B. Controlling for Regulatory Error at the SEC
     C. What About Decision Costs?
CONCLUSION

INTRODUCTION

The Securities Exchange Act of 1934 (Exchange Act) created the Securities and Exchange Commission (SEC) and the modern framework for regulating the securities markets. (1) As is the case with questions of institutional design more generally, (2) two central goals of the regime are allocating decision-making authority to the most expert institution and minimizing the costs of policy error. This Article argues that these two facets of the institutional design of federal securities regulation need to be reconsidered.

With respect to the allocation of decision-making authority, this Article argues that there are likely benefits to be reaped from giving the SEC even more decision-making authority than the statute already does. (3) This claim is likely to be surprising to many, if not most, securities law practitioners and scholars. After all, the delegation that Congress made to the SEC in the Exchange Act is expansive to say the least. Regarding what are typically referred to as "reporting" or "public" firms, the SEC is empowered to require all, some, or none of those firms to disclose whatever information the SEC decides is "necessary or appropriate in the public interest or for the protection of investors." (4) However, the grant of decision-making authority is not absolute. This is because Congress retains the all-important task of determining what types of firms are subject to the SEC's regulatory decisions. …

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