There are many visions for the future of securities regulation. One prominent view features significant private contracting for disclosure and fraud protection. Another envisions regulatory competition, enabling companies to choose from among a menu of regulatory regimes provided by different states, nations, or securities exchanges competing for incorporations or listings. This Article demonstrates that these two regulatory regimes rely too heavily upon the reputational constraint, which is insufficient for the significant task of securities regulation. Tenets of behaviorial psychology suggest that self-serving bias and other factors will too often cause managers to choose regulatory regimes that serve their own best interests rather than those of shareholders.
Around the globe, most developed economies have rejected private contracting and regulatory competition in favor of emulating the United States’ current strong-SEC model. An impressive body of transnational empirical evidence supports the viewpoint that the strong-SEC regulatory model is significantly more effective than alternatives at promoting capital markets. This Article explains why the strong-SEC model best facilitates capital market development and economic growth.
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