Academic journal article Fordham Journal of Corporate & Financial Law

Another Role for Securities Regulation: Expanding Investor Opportunity

Academic journal article Fordham Journal of Corporate & Financial Law

Another Role for Securities Regulation: Expanding Investor Opportunity

Article excerpt

Abstract

Securities regulation can be justified on a number of grounds, but furthering the expansion of opportunities for wealth accumulation across sectors of the population has generally not been utilized as an argument for regulation. This article demonstrates how an opportunities-based perspective, informed by the findings from interdisciplinary research, could alter securities policy in four areas: (1) enhancing access to information and financial institutions; (2) requiring disclosures; (3) impacting the behavioral biases of investors; and (4) aligning the incentives of investment professionals to better facilitate the wealth accumulation of their clients. The implications of applying an opportunities-based approach to financial regulation are distinct from those of a public welfare or efficiency approach to regulation. More so than these other approaches, an opportunities-based approach requires an understanding of the empirical realities of investor behavior and yields policy recommendations targeted at increasing opportunities for wealth accumulation for the average investor.

I. INTRODUCTION

To date, commentary on the role of securities regulation has focused on its role vis-à-vis financial markets. Academics have posited that the purpose of securities regulation is to make markets operate more efficiently.1 In general, the goals of securities regulation - when attempting to improve market efficiency - have been consistent with a social welfare approach to government regulation.2

Specific arguments along these lines have prioritized the role of securities regulation in correcting market failures.3 Perhaps the most common market failure discussed in the context of securities regulation is imperfect information.4 The Securities and Exchange Commission ("SEC" or "Commission") has long seen its role as an agency that mitigates information problems by promoting the availability and accuracy of information.5

In addition to imperfect information, some scholars have focused on the other market failures which impact securities markets. For example, some have attempted to model and remedy the problem of systemic risk, a negative externality caused by the trades and investment positions of certain financial players in the market because of the interconnectedness of their own trades.6 Another justification for regulation that has been proposed is minimizing the principal-agent problem,7 which relates to market failures caused by imperfect information and transaction costs. Boosting investor confidence has also been cited as a goal of securities regulation,8 although it is not clear which market failure this goal addresses.

What is missing from an analysis of the role of securities regulation is a social welfare justification that is distinct from market efficacy altogether. While improving the efficiency of markets can improve ,social welfare by facilitating investment decisions that increase investor utility, wealth and investor satisfaction could also be increased for a significant group of investors by considering policy measures that are not traditionally associated with enhancing market efficiency. I evaluate the implications of securities regulatory policy, contending that one of its explicit goals is, and should be, the expansion of opportunities for wealth accumulation across different sectors of the population. Different sectors of the population include distinct groups of investors: those who are wealthy and those who are not; those who delegate their investment decisions and those who do not; those who are well informed about financial institutions and products and those who are not; and, in short, those who are financially sophisticated9 and those who are not.

Expansion of opportunity may appear novel as a goal justifying financial regulation, but it should not. In other areas of government policy, promoting opportunities for different groups has been recognized as a worthy justification for government intervention. …

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