Escaping Entity-Centrism in Financial Services Regulation
Anita K. Krug
University of Washington School of Law
August 20, 2013
Columbia Law Review, Vol. 113, Forthcoming
University of Washington School of Law Research Paper No. 2013-08
In the ongoing discussions about financial services regulation and its proper goals, implementation, and enforcement — encompassing considerations on how best to protect clients and customers and under what circumstances markets function most effectively — one critically important topic has not been recognized, let alone addressed. That topic is what this Article calls the “entity-centrism” of financial services regulation. Laws and rules are entity-centric when they assume that financial services firms are stand-alone entities, operating separately from and independently of any other entity. They are entity-centric, therefore, when the specific requirements and obligations they comprise are addressed only to an abstract and solitary “firm,” with little or no contemplation of affiliates, parent companies, subsidiaries, or multi-entity enterprises. Moreover, regulatory entity-centrism is not an isolated phenomenon, as it permeates the laws and rules that govern a firm’s becoming regulated, the substantive requirements to which the firm must adhere, and the firm’s ultimate insolvency or liquidation. In addition, entity-centrism does not discriminate among financial services activities: it can be discerned in laws and rules covering investment advisers, broker-dealers, futures commission merchants, mutual funds and other registered investment companies, and beyond. In other words, entity-centrism in financial services regulation is pervasive. It is also deeply problematic.
This Article is the first scholarly work to call attention to entity-centrism as manifested in financial services regulation, to show why entity-centrism counters regulatory objectives, and to assess possible explanations for it. The Article does so primarily through evaluating two recent regulatory failures, namely, the bankruptcy of MF Global, a large futures brokerage firm that became insolvent in late 2011, and the Ponzi scheme orchestrated by the Stanford Financial Group, which came to light in 2009. These case studies reveal how entity-focused laws and rules privilege entity boundaries over the various ways in which multiple entities (or entities and individuals) work together as a common enterprise. In particular, they show how entity-centrism, by insisting that the subject and/or beneficiary of regulatory obligations is cohesive and complete in-and-of itself, ignores how the interests that regulation exists to further may be situated outside the entity, leaving those interests unprotected. The case studies also demonstrate that entity-centrism ignores how actors outside the entity may use the entity to manipulate or escape regulatory obligations, again leaving the relevant interests without the protections that regulation contemplates. Accordingly, this Article contends that financial services regulation should look past entity boundaries and that lawmakers and regulators should think more broadly, critically, and creatively to address the persistent and significant regulatory difficulties that entity-centrism has spawned.
Number of Pages in PDF File: 62
Keywords: financial institutions, investment adviser regulation, hedge funds, mutual funds, broker-dealer regulation, financial services, securities regulation
JEL Classification: G20, K22Accepted Paper Series
Date posted: April 2, 2013 ; Last revised: August 21, 2013
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