Indirect Investor Protection: The Investment Ecosystem and Its Legal Underpinnings

Harvard Law School John M. Olin Center Discussion Paper No. 1046

European Corporate Governance Institute - Law Working Paper No. 594/2021

LawFin Working Paper No. 18

48 Pages Posted: 22 Jun 2021 Last revised: 15 Jul 2021

Date Written: June 20, 2021

Abstract

This paper argues that the key mechanisms protecting retail investors’ financial stake in their portfolio investments are indirect. They do not rely on actions by the investors or by any private actor directly charged with looking after investors’ interests. Rather, they are provided by the ecosystem that investors (are legally forced to) inhabit, as a byproduct of the mostly self-interested, mutually and legally constrained behavior of third parties without a mandate to help the investors (e.g., speculators, activists). This elucidates key rules, resolves the mandatory vs. enabling tension in corporate/securities law, and exposes passive investing’s fragile reliance on others’ trading.

Keywords: Investor Protection, Index Funds, Market Efficiency, Activism, Activist Hedge Fund, Private Equity, Plaintiff Lawyers, Contractarian Model of Corporate Law, Mandatory Law

JEL Classification: G34, G38, K22

Suggested Citation

Spamann, Holger, Indirect Investor Protection: The Investment Ecosystem and Its Legal Underpinnings (June 20, 2021). Harvard Law School John M. Olin Center Discussion Paper No. 1046, European Corporate Governance Institute - Law Working Paper No. 594/2021, LawFin Working Paper No. 18, Available at SSRN: https://ssrn.com/abstract=3707249 or http://dx.doi.org/10.2139/ssrn.3707249

Holger Spamann (Contact Author)

Harvard Law School ( email )

Cambridge, MA 02138
United States

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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