Downstream Securities Regulation
Anita K. Krug
University of Washington School of Law
April 2, 2014
Boston University Law Review, Vol. 94, No. 5, p. 1589 (2014)
University of Washington School of Law Research Paper No. 2014-10
Securities regulation wears two hats: Its “upstream” side governs firms in connection with their obtaining financing in the securities markets. That is, it regulates firms’ — issuers’ — offers and sales of securities, whether in public offerings to retail investors or in private offerings to institutional investors. Its “downstream” side, by contrast, governs financial services providers, who assist with investors’ activities in those markets: Their services include providing advice as to securities investments, as investment advisers do; aggregating investors’ assets for purposes of enabling those investors to invest their assets collectively, as mutual funds do; and acting as “middlemen” between buyers and sellers of securities, as broker-dealers do. Yet neither scholars nor policymakers have adequately understood that the regulation of financial services providers under the securities laws is substantively different from the regulation of issuers. They have not, in other words, adequately understood downstream securities regulation.
The problems arising from this oversight are evident in laws and rules designed to protect investors from the excesses of brokerage firms, fraudulent conduct in the mutual fund industry, and hedge-fund managers’ self-interested conduct, as well as in those enacted in the wake of Enron’s bankruptcy and other corporate scandals. Moreover, the harm to investors is real: Brokerage firm customers have struggled for the return of their deposited funds after the firm’s bankruptcy; mutual fund shareholders have suffered from market timing scandals; when tasked with remedying harms to shareholders of financial services firms, the potency of antifraud statutes has been muted. This Article is the first scholarly work to articulate how securities regulation encompasses two distinct spheres of regulation, each of which is based on its own core principles — and, importantly, each of which necessitates its own regulatory approaches. The Article contends that policymakers’ longstanding failure to recognize that securities regulation is bimodal has produced a securities regulatory regime scattershot with flaws and vulnerabilities. Securities regulation could become substantially better with a more complete understanding of how it works — how all parts of it work.
Number of Pages in PDF File: 62
Keywords: securities regulation, corporate law, private funds, mutual funds, broker-dealers, Sarbanes-Oxley, corporate governance, financial services regulation, Securities Act of 1933, Securities Exchange Act of 1934, Investment Advisers Act of 1940, Investment Company Act of 1940
JEL Classification: K20, K22
Date posted: April 5, 2014 ; Last revised: October 23, 2014