Trust and Financial Regulation
Ronald J. Colombo
Hofstra University - Maurice A. Deane School of Law
October 1, 2009
Villanova Law Review, Forthcoming
Hofstra Univ. Legal Studies Research Paper No. 09-22
Trust is a critically important ingredient in the recipes for a successful economy and a well-functioning financial services industry. Due to scandals, ranging in nature from massive incompetence, to massive irresponsibility, to massive fraud, investor trust is in shorter supply as 2009 comes to a close. This is troubling, and commentators, policy makers, and industry leaders have all recognized the need for trust's restoration.
As in times of similar crises, many have turned to law and regulation for the answers to our problems. The imposition of additional regulatory oversight, safeguards, and remedies, some advocate, can help resuscitate investor trust. These advocates have it half right.
For trust is complicated, existing in a variety of forms. Some forms, predicated primarily upon reasoned calculation, respond well to law and regulation. But other forms, predicated primarily upon relationship and emotion, respond poorly to law and regulation. In fact, these latter forms of trust can be seriously harmed by legal intervention. Wise policymakers would carefully assess the nature of whatever particular trust relationship he or she wishes to strengthen before taking action to ostensibly strengthen the trust in that relationship.
This Article applies trust scholarship to examine the current U.S. financial regulatory regime, and proposed reforms thereto. It concludes that, for the most part, the existing financial regulatory regime comports well with our understanding of trust. Unfortunately, current reform proposals comport less well with this understanding.
Number of Pages in PDF File: 77
Keywords: financial regulation, securities regulation, trust
JEL Classification: A14, D00, K22Accepted Paper Series
Date posted: October 5, 2009 ; Last revised: December 16, 2009
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