Retaining Mandatory Securities Disclosure: Why Issuer Choice is Not Investor Empowerment
Merritt B. Fox
Columbia University - Law School
Virginia Law Review, Vol. 85, Pp. 1335-1419, 1999
Recent articles by Professor Roberta Romano and Professors Stephen Choi and Andrew Guzman have proposed that the United States would be better off abandoning its current system of federal mandatory securities disclosure. Under their proposals, any issuer not desiring to be bound by the federal regime would be allowed to select instead the regime of any of the fifty states or any foreign country. This article contends that a switch to issuer choice would likely decrease, not increase, U.S. welfare.
Professor Romano's justification for issuer choice is that it would lead to jurisdictions competing to offer issuers the regulations that maximize share value. Professors Choi and Guzman's justification is that it would lead to a diversity of available regimes and permit each issuer to select the one best suited to its particular needs. Neither of these justifications, however, adequately takes account of the fact that issuer choice would result in each issuer selecting a regime requiring it to disclose at less than the socially optimal level. This result arises because each issuer's private costs of disclosure are greater than the social costs of its disclosure, and the private benefits are less than the social benefits.
This divergence between private and social costs and benefits means that the current system of mandatory disclosure should be retained. This is so unless the proponents of issuer choice can show either that the current system causes issuers to deviate even more (just in the opposite direction) from their optimal disclosure levels than would issuer choice or that issuer choice has some other redeeming feature outweighing its underdisclosure effect. So far they have not done so and a careful analysis of the empirical evidence and the theoretical considerations bearing on these questions strongly suggests that such a showing is not possible.
Date posted: July 9, 2000