Reconsidering the Institutional Design of Federal Securities Regulation

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 decisionmaking 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.