Redesigning the SEC: Does the Treasury Have a Better Idea?
John C. Coffee Jr.
Columbia Law School; European Corporate Governance Institute (ECGI); American Academy of Arts & Sciences
Hillary A. Sale
Washington University in Saint Louis - School of Law
November 1, 2008
U Iowa Legal Studies Research Paper No. 08-51
Columbia Law and Economics Working Paper No. 342
The 2008 financial crisis has necessarily raised the question of regulatory redesign. Were regulatory failures responsible to any significant degree for the insolvency of the major investment banks? Even prior to the crisis's cresting, the Treasury Department issued a Blueprint in early 2008 concluding that the regulation of financial institutions in the U.S. was overly fragmented. This paper analyses both the Treasury Department's proposals and the role of the SEC in the rapid increase of leverage at major investment banks in the 2005 to 2008 era that led to their insolvency. Finding the SEC to be more competent at consumer protection and antifraud enforcement than at prudential financial regulation, this paper supports a twin peaks model for financial regulation in preference to either a universal regulator or the U.S.'s current system of functional regulation. It disagrees, however, with the Treasury's recommendation of greater reliance on self-regulation and principles over rules, finding that deference to self-regulation was at the heart of the SEC's recent failure in the Consolidated Supervised Entity Program and provides a paradigm of when self-regulation will fail. An alternative (and more modest) proposal is also made to Treasury's proposed preemption of state securities regulation. This article will appear in the 75th Anniversary SEC Symposium in the Virginia Law Review.
Number of Pages in PDF File: 58
JEL Classification: G21, G38
Date posted: December 3, 2008 ; Last revised: March 4, 2010