Managing the 'Expectations Gap' in Investor Protection: The Sec and the Post-Enron Reform Agenda

Abstract

One of the underlying questions in the aftermath of the Enron and comparable scandals is whether securities regulation failed, and if so, what kind of fix is appropriate. To answer that, we have to confront an apparent "expectations gap" in what the law can accomplish. Some investors (and politicians) seek greater confidence than is practicable, and the SEC has the political incentive to contribute to a mythology of "market integrity" - and then manage the fallout when corruption surfaces. This paper explores the SEC's political situation, and then moves on to discuss various reforms - including some in the recently enacted Sarbanes-Oxley Act - designed to improve investor protection. While some reforms do indeed improve securities regulation at the margin, an expectation gap remains.