The Case for Investor Ordering
63 Pages Posted: 1 Aug 2017 Last revised: 1 Apr 2018
Date Written: March 28, 2018
Whether corporate arrangements should be mandated by public law or “privately ordered” by corporations themselves has been a foundational question in corporate law scholarship. State corporation laws are generally privately ordered. But a significant and growing number of arrangements are governed by “corporate regulations” created by the U.S. Securities and Exchange Commission (SEC). SEC corporate regulations are invariably mandatory. Whether they should be is the focus of this Article.
This Article contributes to the ongoing debate by showing that whether mandatory or privately-ordered rules are optimal depends on the nature of investors, and their incentives in choosing corporate arrangements. The rise of institutional investors means that investors can now be relied on to choose optimal arrangements, because institutional investors will make informed decisions about corporate arrangements and will internalize their effects on the capital markets.
This Article thus makes the case for a third alternative: “investor ordering.” For all but a few corporate regulations, investor ordering will result in the same or greater aggregate net benefit as mandatory regulations.
The optimality of investor ordering of SEC corporate regulations has important implications. First, the D.C. Circuit’s jurisprudence on cost-benefit analysis will require the SEC to consider investor ordering. In the many cases where investor ordering would be superior to mandatory regulation, were the SEC to nevertheless implement a mandatory regulation, it would be susceptible to invalidation by the D.C. Circuit under the Administrative Procedure Act.
Second, investor ordering substantially reduces the burden of the D.C. Circuit’s recent requirements for SEC cost-benefit analysis. This reduces the overall cost of SEC rule making, or permits the SEC to promulgate more regulations on its fixed budget. It also sidesteps the considerable academic debate about the value of cost-benefit analysis for corporate regulations.
Third, investor ordering reduces the need for retrospective analysis. To the extent retrospective analysis remains necessary, investor ordering makes it more straightforward and also permits lower-cost regulatory experimentation. Investor ordering therefore allows for a more dynamic regulatory system.
These benefits mean that the SEC should implement investor ordering as its default approach for new regulation and for deregulation. This Article considers a number of promising candidates for investor ordering among potential and proposed SEC regulations, and for deregulation of contentious existing SEC regulations. Investor ordering also has important implications for state corporation laws and for federal legislation.
Keywords: Corporate Law, Regulation, Cost Benefit Analysis, Investor Ordering, Private Ordering, Mandatory Rules
JEL Classification: K22, K23, G38
Suggested Citation: Suggested Citation